Northstar Realty Finance 10Q 2008 Q1 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

Commission File Number: 001-32330

NORTHSTAR REALTY FINANCE CORP.
(Exact Name of Registrant as Specified in its Charter)

Maryland
(State or Other Jurisdiction of
Incorporation or Organization)

11-3707493
(IRS Employer
Identification No.)

399 Park Avenue, 18th Floor New York, NY 10022
(Address of Principal Executive Offices, Including Zip Code)

(212) 547-2600
(Registrant's Telephone Number, Including Area Code)

Indicate by the check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

The Company has one class of common stock, par value $0.01 per share, with 62,305,191 shares outstanding as of May 8, 2008.

NORTHSTAR REALTY FINANCE CORP.

QUARTERLY REPORT

For the Three Months Ended March 31, 2008

TABLE OF CONTENTS

Index		Page
Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007	3
	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and March 31, 2007	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2008 and March 31, 2007	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and March 31, 2007	6
	Notes to the Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52
Item 4.	Controls and Procedures	56
Part II.	Other Information	57
Item 6.	Exhibits	57
Signatures		61

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands)

	March 31, 2008			December 31, 2007
	(unaudited)
ASSETS:
Cash and cash equivalents	$	139,485		$	153,829
Restricted cash		188,702			202,295
Operating real estate—net		1,133,284			1,134,136
Available for sale securities, at fair value		453,260			549,522
Collateral held by broker		13,576			12,746
Real estate debt investments, net		2,011,885			2,007,022
Corporate loan investments		430,218			457,139
Investments in and advances to unconsolidated ventures		32,394			33,143
Receivables, net of allowance of $0 and $1 in 2008 and 2007, respectively		24,376			32,141
Unbilled rents receivable		6,448			5,684
Deferred costs and intangible assets, net		89,029			126,677
Other assets		39,561			78,448

Total assets		4,562,218			4,792,782

LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Mortgage notes and loans payable		911,207			912,365
Exchangeable senior notes, measured at fair value as of March 31, 2008		144,546			172,500
Bonds payable, measured at fair value as of March 31, 2008		1,121,174			1,654,185
Credit facilities		462,045			501,432
Secured term loan		423,667			416,934
Liability to subsidiary trusts issuing preferred securities, measured at fair value as of March 31, 2008		135,686			286,258
Repurchase obligations		—			1,864
Securities sold, not yet purchased, at fair value		13,506			12,856
Obligations under capital leases		3,564			3,541
Accounts payable and accrued expenses		33,862			34,893
Escrow deposits payable		60,342			65,445
Derivative liability, at fair value		83,497			49,280
Other liabilities		40,040			40,695

Total liabilities		3,433,136			4,152,248
Minority interest in operating partnership		50,864			7,534
Minority interest in joint ventures		14,920			14,961
Stockholders' Equity:
8.75% Series A preferred stock, $0.01 par value, $25 liquidation preference per share, 2,400,000 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively		57,867			57,867
8.25% Series B preferred stock, $0.01 par value, $25 liquidation preference per share, 7,600,000 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively		183,505			183,505
Common stock, $0.01 par value, 500,000,000 shares authorized, 62,303,625 and 61,719,469 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively		623			617
Additional paid-in capital		602,100			595,418
Retained earnings (deficit)		323,668			(40,075	)
Accumulated other comprehensive loss		(104,465	)		(179,293	)

Total stockholders' equity		1,063,298			618,039

Total liabilities and stockholders' equity	$	4,562,218		$	4,792,782

See accompanying notes to condensed consolidated financial statements

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands, Except Per Share Data)

(Unaudited)

			Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
			(unaudited)
Revenues and other income:
Interest income			$	63,705		$	58,304
Interest income—related parties				3,761			2,965
Rental and escalation income				28,957			19,332
Advisory and management fee income—related parties				2,330			1,421
Other revenue				976			2,232

		Total revenues		99,729			84,254
Expenses:
	Interest expense			54,947			47,557
	Real estate properties—operating expenses			2,048			1,942
	Asset management fees—related parties			2,106			645
	Provision for loan loss			750			—
General and administrative:
	Salaries and equity based compensation(1)			11,730			8,791
	Auditing and professional fees			2,441			2,705
	Other general and administrative			3,883			3,203

		Total general and administrative		18,054			14,699
Depreciation and amortization				9,938			6,590

		Total expenses		87,843			71,433
Income from operations				11,886			12,821
Equity in (loss)/earnings of unconsolidated ventures				(178	)		16
Unrealized gain (loss) on investments and other				212,075			(7,291	)
Realized gain (loss) on investments and other				10			2,541

Income from continuing operations before minority interest				223,793			8,087
Minority interest in operating partnership				(23,044	)		(376	)
Minority interest in joint ventures				(245	)		—

Income from continuing operations				200,504			7,711
Income (loss) from discontinued operations, net of minority interest				—			(48	)

Net income				200,504			7,663
Preferred stock dividends				(5,231	)		(1,313	)

Net income available to common stockholders			$	195,273		$	6,350

Net income per share from continuing operations (basic/diluted)			$	3.14		$	0.10
Income per share from discontinued operations (basic/diluted)				—			—
Gain on sale of discontinued operations and joint venture interest (basic/diluted)				—			—

Net income available to common stockholders			$	3.14		$	0.10

Weighted average number of shares of common stock:
	Basic			62,243,736			61,329,675
	Diluted			69,589,079			64,126,691

(1): The three months ended March 31, 2008 and 2007 include $6,991 and $3,731 of equity based compensation expense, respectively.
See accompanying notes to condensed consolidated financial statements

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
Net income	$	195,273		$	6,350
Unrealized gain (loss) on available for sale securities		(11,544	)		(3,736	)
Change in fair value of derivatives		(5,849	)		(790	)
Reclassification adjustment for gains included in net income		1,255			(16	)

Comprehensive income	$	179,135		$	1,808

See accompanying notes to condensed consolidated financial statements

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands, Except Per Share Data)

(Unaudited)

		Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
		(Unaudited)
Net cash provided by operating activities		$	23,937		$	25,398
Cash flows from investing activities:
	Acquisition of operating real estate, net		(6,476	)		(402,143	)
	Acquisition of available for sale securities		—			(636,024	)
	Proceeds from disposition of securities available for sale		—			46,623
	Available for sale securities repayments		1,543			22,952
	Increase in term debt transaction warehouse deposits		—			(7,000	)
	Acquisitions/originations of real estate debt investments		(58,931	)		(645,222	)
	Real estate debt investments repayments		98,694			86,423
	Intangible asset related to acquisition		—			8,233
	Restricted cash for investment activities		22,836			(149,318	)
	Investing deposits		(3,574	)		(5,903	)
	Corporate debt investment acquisitions		(16,148	)		—
	Proceeds from sale of corporate debt investment		27,420			—
	Corporate debt investment repayment		15,567			—
	Distributions from unconsolidated ventures		462			211
	Other loans repayment		10,000			—

Net cash provided by/(used) in investing activities			91,393			(1,681,168	)
Cash flows from financing activities:
	Collateral held by broker		(830	)		(15,366	)
	Securities sold, not yet purchased		—			28,472
	Settlement of short sale		—			(13,486	)
	Collateral held by swap counter party		(8,867	)		—
	Mortgage notes and loan borrowings		—			301,294
	Mortgage principal repayments		(1,158	)		(1,253	)
	Borrowings under credit facilities		18,369			588,107
	Repayments on credit facilities		(57,756	)		(168,309	)
	Repurchase obligation borrowings		—			22,974
	Repurchase obligation repayments		(1,863	)		(32,983	)
	Proceeds from bonds		33,000			798,960
	Bond repayments		(78,300	)		(18,000	)
	Other loans payable		—			13,300
	Borrowing under secured loan		9,748			—
	Secured term loan repayment		(11,875	)		—
	Borrowings from subsidiary trusts issuing preferred securities		—			37,500
	Payment of deferred financing costs		(3	)		(12,294	)
	Proceeds from preferred stock offering		—			155,000
	Proceeds from dividend reinvestment and stock purchase plan		280			—
	Dividends (common and preferred) and distributions		(30,419	)		(23,828	)
	Offering costs		—			(5,301	)

Net cash (used) in/provided by financing activities			(129,674	)		1,654,787
Net decrease in cash & cash equivalents			(14,344	)		(983	)
Cash & cash equivalents—beginning of period			153,829			44,753

Cash & cash equivalents—end of period		$	139,485		$	43,770

See accompanying notes to condensed consolidated financial statements

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization

NorthStar Realty Finance Corp., a Maryland corporation (the "Company"), is a self-administered and self-managed real estate investment trust ("REIT"), which was formed in October 2003 in order to continue and expand the real estate debt, real estate securities and net lease businesses conducted by NorthStar Capital Investment Corp. ("NCIC"). Substantially all of the Company's assets are held by, and it conducts its operations through, NorthStar Realty Finance Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the "Operating Partnership"). On October 29, 2004, the Company closed its initial public offering (the "IPO") pursuant to which it issued 20,000,000 shares of common stock, with proceeds to the Company of approximately $160.1 million, net of issuance costs of $19.9 million. On November 19, 2004, the Company issued an additional 1,160,750 shares of common stock pursuant to the exercise of the overallotment option by the underwriters of the IPO, with proceeds to the Company of $9.7 million, net of issuance costs of $0.7 million. In connection with the IPO, the Company also issued 50,000 shares of common stock, as partial compensation for underwriting services, to the lead underwriter of the IPO. In addition, 38,886 shares of restricted common stock were granted to the Company's non-employee directors. Simultaneously with the closing of the IPO on October 29, 2004, three majority-owned subsidiaries of NCIC (the "NCIC Contributing Subsidiaries") contributed certain controlling and non-controlling interests in entities through which NCIC conducted its subordinate real estate debt, real estate securities and net lease businesses (collectively the "Initial Investments") to the Operating Partnership in exchange for an aggregate of 4,705,915 units of limited partnership interest in the Operating Partnership (the "OP Units") and approximately $36.1 million in cash (the "Contribution Transactions") and an agreement to pay certain related transfer taxes on behalf of NCIC for approximately $1.0 million. From their inception through October 29, 2004, neither the Company nor the Operating Partnership had any operations.

The combination of the Initial Investments contributed to the Operating Partnership represents the predecessor of the Company (the "Predecessor"). The Company succeeded to the business of the Predecessor upon the consummation of the IPO and the contribution of the initial investments on October 29, 2004. The ultimate owners of the entities which comprise the Predecessor were NCIC and certain other persons who held minority ownership interests in such entities.

Joint Ventures

In May 2006, the Company entered into a joint venture with Chain Bridge Capital LLC to invest in senior housing and healthcare-related net leased assets, called Wakefield. In connection with the formation of the venture, Chain Bridge contributed substantially all of its assets to Wakefield for its $15.1 million membership interest in the joint venture.

At March 31, 2008, the Company and Chain Bridge had equity of $197.2 million and $12.7 million, respectively. The Company controls all major decisions; accordingly, the joint venture's financial statements are consolidated into the Company's consolidated financial statements and Chain Bridge's capital is treated as minority interest.

In March 2007, the Company entered into a joint venture with Monroe Capital Holdco, LLC, or "Monroe," which serves as a platform for originating middle-market loans. The joint venture originates, structures, and syndicates middle-market corporate loans, including middle-market loans to highly

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization (Continued)

leveraged borrowers. As of March 31, 2008, the Company owned a 95% controlling interest in the joint venture, which is consolidated in the consolidated financial statements and Monroe's capital is treated as minority interest. As of March 31, 2008, the Company and Monroe had equity capital of $54.0 million and $2.2 million, respectively.

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying condensed consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in the Company's December 31, 2007 consolidated financial statements.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries which are either majority-owned or controlled by the Company or variable interest entities ("VIE") where the Company is the primary beneficiary in accordance with the provisions of FIN 46(R)-6. All significant intercompany balances have been eliminated in consolidation.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that could affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Financial Instruments

Fair Value Measurements

Fair value is used to measure many of the Company's financial instruments. In accordance with provisions of SFAS No. 157 "Fair Value Measurements" ("SFAS 157") the fair value of these financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).

Fair Value Option

In accordance with SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), the Company has the one-time option to elect fair value for its financial assets and liabilities. The changes in the fair value of these instruments are recorded in unrealized gain (loss) on investments and other in the condensed consolidated statements of operations.

Available for Sale Securities

The Company determines the appropriate classification of its investment in securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities for which the Company does not have the intent or the ability to hold to maturity are classified as available for sale securities. The Company has designated its investments in the equity notes of unconsolidated securitizations ("equity notes") as available for sale securities as they meet the definition of a debt instrument due to their redemption provisions in accordance with the provisions of EITF 99-20. The Company's investments in the equity notes are relatively illiquid and their value must be estimated by management.

The Company carries its available for sale securities at fair market value with the net unrealized gains or losses reported as a component of other comprehensive income; however available for sale securities for which the Company has elected the fair value option under SFAS 159 are carried at fair value with the net unrealized gains or losses reported in the condensed consolidated statements of operations.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS 141(R), "Business Combinations" (SFAS 141(R)). This Statement replaces SFAS 141, "Business Combinations", and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, "Accounting for Income Taxes", to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS 142, "Goodwill and Other Intangible Assets", to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the potential impact that the adoption of SFAS 141(R) could have on its financial statements.

In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 amends Accounting Research Bulletin 51, "Consolidated Financial Statements", to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the potential impact that the adoption of SFAS 160 could have on its financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 will be effective for the Company on January 1, 2009. The Company is currently evaluating the potential impact that the adoption of SFAS 161 will have on its financial condition, results of operations and disclosures.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments

The Company adopted the provisions of SFAS 157 and 159 effective as of January 1, 2008 and elected to apply the fair value option to the following financial assets and liabilities existing at the time of adoption:

•: Available for sale securities that serve as collateral for the Company's term debt transactions;
•: N-Star IV, VI, VII and VIII bonds payable;
•: Liabilities to subsidiary trusts issuing preferred securities; and
•: Exchangeable senior notes.

The Company has elected the fair value option for these financial instruments for the purpose of enhancing the transparency of its financial condition.

Fair Value Measurements

SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. In addition, SFAS 157 requires an issuer to incorporate changes in its own credit spreads when determining the fair value of its liabilities.

Fair Value Hierarchy

In accordance with SFAS 157, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded on the condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1.	Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives, most U.S. government and agency securities, and certain other sovereign government obligations).
Level 2.	Financial assets and liabilities whose values are based on the following:
	a)	Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
	b)	Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

	c)	Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
	d)	Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain mortgage loans).
Level 3.	Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans and long-dated or complex derivatives, including certain foreign exchange options and long-dated options on gas and power).

As required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2008 by level within the fair value hierarchy (in thousands):

		Assets and Liabilities at Fair Value
		Level 1		Level 2		Level 3		Total
Assets:
Available for sale securities:
CMBS		$	—	$	277,821	$	—	$	277,821
Real estate term debt			—		25,827		—		25,827
REIT debt			—		73,808		—		73,808
Term debt equity			—		—		40,881		40,881
Corporate CLO			—		—		26,215		26,215
Trust preferred securities			—		—		8,708		8,708

	Total assets	$	—	$	377,456	$	75,804	$	453,260

Liabilities:
Exchangeable senior notes		$	—	$	144,546	$	—	$	144,546
N-Star IV, VI, VII and VIII bonds payable			—		1,121,174		—		1,121,174
Liability to subsidiary trusts issuing preferred securities			—		—		135,686		135,686
Securities sold, not yet purchased			13,506		—		—		13,506
Derivative liability			—		83,497		—		83,497

	Total liabilities	$	13,506	$	1,349,217	$	135,686	$	1,498,409

As of March 31, 2008, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

The following table presents additional information about available for sale securities and liabilities to subsidiary trusts issuing preferred securities which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value (in thousands):

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):

			Available for sale securities		Liability to subsidiary trusts issuing preferred securities
Beginning balance:			$	90,577	$	168,454
	Total losses (realized or unrealized):
		Included in earnings		3,557		—
		Included in other comprehensive loss		11,216		—
	Total gains (realized or unrealized):
		Included in earnings		—		32,768
		Included in other comprehensive loss		—		—

Ending balance			$	75,804	$	135,686

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at the reporting date			$	3,557	$	32,768

Fair Value Option

SFAS 159 provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. SFAS 159 permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

The following table sets forth the Company's financial instruments for which the fair value option was elected:

		March 31, 2008		December 31, 2007
Assets:
Available for sale securities:
	CMBS	$	277,821	$	342,353
	Real estate term debt		22,567		30,666
	REIT debt		73,808		80,292
	Trust preferred securities		8,708		12,264

	Total assets	$	382,904	$	465,575

Liabilities:(1)
Exchangeable senior notes			144,546		172,500
N-Star IV, VI, VII and VIII bonds payable			1,121,174		1,654,185
Liability to subsidiary trusts issuing preferred securities			135,686		286,258

	Total liabilities	$	1,401,406	$	2,112,943

(1): Liabilities were not carried at fair value as of December 31, 2007.

The following table presents a summary of existing eligible financial assets and financial liabilities for which the fair value option was elected on January 1, 2008 and the cumulative-effect adjustment to retained earnings recorded in connection with the initial adoption of SFAS No. 159.

	Carrying Value at January 1, 2008		Transition Adjustment to Retained Earnings (Gain)/Loss			Carrying Value at January 1, 2008 (After adoption of SFAS 159)
Assets:
Available for sale securities(1)	$	465,575	$	90,966		$	465,575
Liabilities:
Exchangeable senior notes		172,500		(26,824	)		145,676
N-Star IV, VI, VII and VIII bonds payable		1,654,185		(196,209	)		1,457,976
Liability to subsidiary trusts issuing preferred securities		286,258		(117,804	)		168,454

Cumulative gain upon the adoption of SFAS 159(2)			$	(249,871	)

(1): Prior to January 1, 2008, available for sale securities were carried at fair value with the change in fair value recorded in other comprehensive income. Accordingly, the election of the fair value option for these instruments did not change their carrying value and resulted in a reclassification from accumulated other comprehensive income to retained earnings.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

(2): The $249.9 million transition adjustment to retained earnings does not include the write-off of $34.6 million of deferred costs associated with exchangeable senior notes, N-Star bonds payable and liability to subsidiary trusts issuing preferred securities.

The following table presents the difference between fair values and the aggregate contractual principal amounts of assets and liabilities, for which the fair value option has been elected:

		Fair Value at March 31, 2008		Principal Amount Due Upon Maturity		Difference
Assets:
Available for sale securities:
CMBS		$	277,821	$	425,748	$	(147,927	)
Real estate term debt			22,567		55,030		(32,463	)
REIT debt			73,808		84,183		(10,375	)
Trust preferred securities			8,708		15,000		(6,292	)

	Total assets	$	382,904	$	579,961	$	(197,057	)

Liabilities:
Exchangeable Senior Notes			144,546		172,500		(27,954	)
N-Star IV, VI, VII and VIII bonds payable			1,121,174		1,608,885		(487,711	)
Liability to subsidiary trusts issuing preferred securities			135,686		286,258		(150,572	)

	Total Liabilities	$	1,401,406	$	2,067,643	$	(666,237	)

For the three months ended March 31, 2008, the Company recognized a net gain, which is recorded as unrealized gain (loss) on investments and other in the Company's condensed consolidated statement of operations, of $244.3 million as the result of the change in fair market value of financial assets and liabilities for which the fair value option was elected.

4. Operating Real Estate

The Company made the following acquisitions from January 1, 2008 through March 31, 2008:

A $4.0 million acquisition of four skilled nursing facilities totaling 40,369 square feet located in Ohio and Wisconsin, in January 2008. The properties are net leased to a single tenant under a lease that expires in December 2017. The acquisition was purchased with cash.

Discontinued Operations

The condensed consolidated statement of operations for the three months ended March 31, 2007, includes results of operations of real estate assets sold or held for sale. These assets include two assisted care living facilities which were held for sale on March 31, 2007. There were no discontinued operations for the three months ended March 31, 2008.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Operating Real Estate (Continued)

The following table summarizes income from discontinued operations and related gain on sale of discontinued operations, each net of minority interest, for the three months ended March 31, 2007 (in thousands):

			Three months Ended March 31, 2007
Revenue:
	Rental and escalation income		$	38
	Interest and other			—

		Total revenue		38
Expenses:
	Real estate property operating expenses			—
	General and administrative expenses			1
	Interest expense			15
Depreciation and amortization				27

		Total expenses		43
Income (loss) from discontinued operations				(5	)
Gain (loss) on disposition of discontinued operations				(45	)

Income (loss) from discontinued operations, before minority interest				(50	)
Minority interest				2

Income (loss) from discontinued operations, net of minority interest			$	(48	)

5. Available for Sale Securities

The following is a summary of the Company's available for sale securities at March 31, 2008 and December 31, 2007 (in thousands):

March 31, 2008	Carrying Value		SFAS 159 Transition Adjustment			Losses in Accumulated OCI			Unrealized Gain on Investments		Unrealized Loss on Investments			Estimated Fair Value(1)
CMBS	$	405,254	$	(64,442	)	$	—		$	194	$	(63,185	)	$	277,821
Real estate term debt		65,214		(21,512	)		(9,780	)		688		(8,783	)		25,827
REIT debt		82,568		(2,276	)		—			—		(6,484	)		73,808
Term debt equity		68,315		—			(27,434	)		—		—			40,881
Corporate CLO		49,788		—			(23,573	)		—		—			26,215
Trust preferred securities		15,000		(2,736	)		—			—		(3,556	)		8,708

Total	$	686,139	$	(90,966	)	$	(60,787	)	$	882	$	(82,008	)	$	453,260

(1): Approximately $328.1 million of these investments serve as collateral for the Company's only consolidated securities term debt transaction and the balance is financed under other borrowing facilities.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Available for Sale Securities (Continued)

At March 31, 2008, the maturities of the available for sale securities ranged from three to 45 years.

December 31, 2007	Carrying Value		Gains in Accumulated OCI		Losses in Accumulated OCI			Estimated Fair Value(1)
CMBS	$	419,835	$	987	$	(73,253	)	$	347,569
Real estate term debt		52,178		—		(21,512	)		30,666
REIT debt		82,568		—		(2,276	)		80,292
Term debt equity		67,825		—		(22,960	)		44,865
Corporate CLO		50,697		—		(16,831	)		33,866
Trust preferred securities		15,000		—		(2,736	)		12,264

Total	$	688,103	$	987	$	(139,568	)	$	549,522

(1): Approximately $405.0 million of these investments serve as collateral for the Company's only consolidated securities term debt transaction issuance and the balance is financed under other borrowing facilities.

6. Real Estate Debt Investments

At March 31, 2008 and December 31, 2007, the Company held the following real estate debt investments (in thousands):

March 31, 2008		Carrying Value(1)		Allocation by Investment Type		Average Fixed Rate		Average Spread Over LIBOR		Number of Investments
Whole loans, floating rate		$	1,109,842	55.2	%	—	%	3.08	%	61
Whole loans, fixed rate			64,538	3.2		9.74		—		7
Subordinate mortgage interests, floating rate			159,445	7.9		—		3.48		12
Mezzanine loans, floating rate			491,613	24.4		—		4.66		15
Mezzanine loan, fixed rate			163,057	8.1		11.19		—		14
Other loans—floating			16,624	0.8		—		1.60		2
Other loans—fixed			6,766	0.4		5.53		—		1

	Total/Weighted average	$	2,011,885	100.0	%	10.63	%	3.54	%	112

(1): Approximately $1.3 billion of these investments serve as collateral for the Company's three real estate debt term debt transactions and the balance is financed under other borrowing facilities. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $509.6 million related to these

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Real Estate Debt Investments (Continued)

investments, of which a minimum of $295.0 million is expected to be funded within the Company's existing term debt transactions and require no additional capital from the Company.

December 31, 2007		Carrying Value(1)		Allocation by Investment Type		Average Fixed Rate		Average Spread Over LIBOR		Number of Investments
Whole loans, floating rate		$	1,082,399	53.9	%	—	%	3.09	%	59
Whole loans, fixed rate			80,371	4.0		10.17		—		10
Subordinate mortgage interests, floating rate			158,347	7.9		—		3.72		13
Mezzanine loans, floating rate			505,227	25.3		—		4.59		16
Mezzanine loan, fixed rate			157,092	7.8		11.16		—		16
Other loans—floating			16,653	0.8		—		1.60		2
Other loans—fixed			6,933	0.3		5.53		—		1

	Total/Weighted average	$	2,007,022	100.0	%	10.67	%	3.56	%	117

(1): Approximately $1.3 billion of these investments serve as collateral for the Company's three real estate debt term debt transactions and the balance is financed under other borrowing facilities. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $564.5 million related to these investments, of which a minimum of $284.1 million is expected to be funded within the Company's existing term debt transactions and require no additional capital from the Company.

The Company has identified one real estate debt investment as a variable interest in a VIE and has determined that the Company is not the primary beneficiary of this VIE and as such the VIE should not be consolidated in the Company's consolidated financial statements. The Company's maximum exposure to loss would not exceed the carrying amount of its investment of $34.9 million. For all other investments, the Company has determined that these investments are not VIEs and, as such, the Company has continued to account for all real estate debt investments as loans.

As of March 31, 2008 and December 31, 2007, all loans were current on principal and interest payments in accordance with the terms of the loan agreement.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Real Estate Debt Investments (Continued)

Contractual maturities of real estate debt investments at March 31, 2008 are as follows:

Years Ending December 31:		Initial Maturity		Maturity Including Extensions
2008 (remainder)		$	389,048	$	611
2009			567,403		103,789
2010			491,303		287,063
2011			216,071		661,685
2012			174,024		641,452
Thereafter			187,300		330,549

	Total	$	2,025,149	$	2,025,149

Actual maturities may differ from contractual maturities because certain borrowers have the right to prepay with or without prepayment penalties. The contractual amounts differ from the carrying amounts due to unamortized origination fees and costs and unamortized premiums and discounts being reported as part of the carrying amount of the investment. Maturity Including Extensions assumes that all loans with extension options will qualify for extension at initial maturity according to the conditions stipulated in the related loan agreements.

7. Corporate Loan Investments

At March 31, 2008, the Company held the following corporate debt investments (dollars in thousands):

March 31, 2008		Carrying Value(1)		Allocation by Investment Type		Average Spread Over LIBOR/Prime		Number of Investments
First Lien note		$	405,988	94.4	%	3.08	%	95
Second Lien note			24,230	5.6		5.97		8

	Total/Weighted average	$	430,218	100.0	%	3.24	%	103

(1): These investments serve as collateral for the MC Facility and the MC VFCC Facility. The Company has future funding commitments totaling $14.0 million related to these investments.

8. Investment in and Advances to Unconsolidated Ventures

The Company has non-controlling, unconsolidated/uncombined ownership interests in entities that are accounted for using the equity method. Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated percentage interests, if any, in such entities as a result of preferred returns and allocation formulas as described in such agreements.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment in and Advances to Unconsolidated Ventures (Continued)

CS/Federal Venture

In February 2006, the Company, through a joint venture with an institutional investor, acquired a portfolio of three adjacent class A office/flex buildings located in Colorado Springs, Colorado for $54.3 million. The joint venture financed the transaction with two non-recourse, first mortgage loans totaling $40.0 million and the balance in cash. The loans mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%. The Company contributed $8.4 million for a 50% interest in the joint venture and incurred $0.3 million in costs related to its acquisition, which are capitalized to the investment account. These costs will be amortized over the useful lives of the assets held by the joint venture. The Company accounts for its investment under the equity method of accounting. At March 31, 2008 and December 31, 2007, the Company had an investment in CS/Federal of approximately $7.6 million and $7.8 million, respectively.

Monroe Capital Management Advisors, LLC

In March 2007, the Company entered into a joint venture with Monroe Management, a Chicago-based firm, and acquired a 49.9% non-controlling interest in Monroe Management. Monroe Management originates, structures and syndicates middle-market corporate loans for Monroe Capital and provides asset management services. The Company accounts for its investment in the management company under the equity method of accounting. At March 31, 2008 the Company's carrying value of its investment was zero.

NorthStar Realty Finance Trusts

The Company owns all of the common stock of NorthStar Realty Finance Trusts I through VIII (collectively, the "Trusts"). The Trusts were formed to issue preferred securities. Under the provisions of FIN 46(R)-6, the Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result, the Company did not consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting. At March 31, 2008 and December 31, 2007, the Company had an investment in the Trusts of approximately $3.8 million.

NorthStar Real Estate Securities Opportunity Fund

In July 2007, the Company closed on $109.0 million of equity capital for its Securities Fund, an investment vehicle in which the Company conducts most of its real estate securities investment business.

The Company is the manager and general partner of the Securities Fund. The Company receives base management fees ranging from 1.0% to 2.0% per annum on third-party capital and is entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary depending on the investor capital lockup periods.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment in and Advances to Unconsolidated Ventures (Continued)

During the first quarter 2008, the Securities Fund made all cash deposits that it was obligated to make under its $250 million warehouse agreement maturing May 1, 2008. Subsequently during the quarter, the lender made additional margin calls as a result of declining values of the securities financed under the warehouse. The Securities Fund was under no obligation to make further collateral deposits and determined not to do so, which triggered the lender's right to take control of the collateral. As of March 31, 2008, the lender had not liquidated the collateral and the Securities Fund estimated that it could recover $1.0 million of its deposits based on the market values of the underlying securities. During the first quarter 2008, the Securities Fund also monetized investment positions which were established to hedge its exposure to declining values in the warehouse securities, thereby offsetting the recognized loss from the warehouse. The net realized gain, as of March 31, 2008, resulting from the two transactions was $11.3 million, of which $3.3 million represents the Company's share of the realized gain. The actual amount of cash deposits recovered from the lender upon liquidation of the collateral, if any, will be based on proceeds received on sale of the securities, which are controlled by the lender.

At March 31, 2008, the Company had invested a total of $32.4 million in the Securities Fund and the carrying value of its investment was $22.2 million, representing a 30% interest. The Company also had advanced $10.0 million to the Securities Fund under a revolving credit agreement, which was paid in full as of March 31, 2008. For the three months ended March 31, 2008, the Company recognized equity in loss of $0.6 million, of which $4.4 million represented an unrealized loss on the mark-to-market adjustment of the securities in the Securities Fund. The Company also earned $0.1 million of management fees from the Securities Fund for the three months ended March 31, 2008.

The Company accounts for its investment under the equity method of accounting. The Company retains the investment company accounting of the Securities Fund when recording its share of the earnings or loss of the Securities Fund.

LandCap Investment

On October 5, 2007, the Company entered into a 50-50 joint venture with Whitehall Street Global Real Estate Limited Partnership 2007, to form LandCap Partners, which is referred to as LandCap. LandCap seeks to opportunistically invest in single family residential land through land loans, lot option agreements and select land purchases. The venture is managed by professionals who have extensive experience in the single family housing sector. The Company has sole discretion with respect to funding its portion of any investment decisions relating to LandCap, has made no investments to date and accounts for its investment under the equity method of accounting. At March 31, 2008 the Company's investment in LandCap is carried at a $1.3 million loss, which represents the Company's share of LandCap's cumulative general and administrative expenses since inception. In addition, the Company advanced approximately $1.3 million under a $2.5 million loan agreement to LandCap, which bears interest at a fixed rate of 12% and was included in other assets in the condensed consolidated balance sheets.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings

The following is a table of the Company's outstanding borrowings as of March 31, 2008 and December 31, 2007 (in thousands):

		Initial Stated Maturity	Maximum Maturity Including Extensions	Interest Rate	Maximum Amount Available		Contractual Balance at March 31, 2008		Balance at December 31, 2007
Credit Facilities
	Unsecured Facility	11/3/2009	11/3/2009	LIBOR + 2.00% to 2.50%	$	100,000	$	—	$	—
	MC Facility(1)	3/31/2008	3/31/2008	LIBOR + 0.75%		400,000		358,147		374,459
	MC VFCC Facility(1)	7/29/2008	7/29/2010	Commercial Paper Rate + 0.75%		400,000		65,177		71,037
	JP Facility	8/7/2008	8/7/2010	LIBOR + 0.05% to 1.75%		350,000		38,722		55,936

Total Credit Facilities						1,250,000		462,046		501,432
Term Loans
	WA Term Loan	11/6/2009	11/6/2010	LIBOR + 2.00%		463,669		306,731		308,588
	Euro—note	11/6/2009	11/6/2010	3 month Euribor + 2.0%		116,935		116,935		108,346

Total Credit Facilities & Term Loans					$	1,830,604		885,712		918,366

Mortgage notes payable (non-recourse)
	Chatsworth	5/1/2015		5.65%				43,143		43,219
	Salt Lake City	9/1/2012		5.16%				16,139		16,231
	EDS	10/8/2015		5.37%				48,203		48,371
	Executive Center	1/1/2016		5.85%				51,480		51,480
	Green Pond	4/11/2016		5.68%				17,480		17,480
	Indianapolis	2/1/2017		6.06%				28,600		28,600
	Wakefield GE	8/30/2010		6.93%				67,586		67,586
	Wakefield—Park National	1/11/2014		5.94%				33,300		33,300
	Wakefield—GE—WLK	1/11/2017		6.49%				160,000		160,000
	Wakefield—GE—Tusc & Harmony	1/11/2017		6.59%				7,875		7,875
	Wakefield—Harmony FNMA	2/1/2017		6.39%				75,000		75,000
	Wakefield—Grove City	2/1/2038		5.45%				1,881		1,887
	Wakefield—Lancaster	6/1/2037		6.40%				2,628		2,636
	Wakefield—Marysville	6/1/2037		6.40%				1,689		1,693
	Wakefield—Washington	10/1/2038		6.65%				1,990		1,995
	Wakefield—Miller Merril	6/30/2012		7.07%				116,000		116,000
	Wakefield—ARL Mob Wachovia	5/11/2017		5.89%				3,412		3,412
	Wakefield—Ascend Colonial	5/31/2012		7.52%				6,500		6,500
	Wakefield—Colonial Dova	8/31/2012		7.32%				6,500		6,500
	Wakefield—Colonial 6 Alfs	11/1/2012		6.98%				19,653		19,653
	Wakefield—St Francis	9/31/2010		LIBOR + 2.00%				11,400		11,400
	Aurora	7/11/2016		6.22%				33,500		33,500
	DSG	10/11/2016		6.17%				34,545		34,648
	Keene	2/1/2016		5.85%				6,859		6,882
	Fort Wayne	1/1/2015		6.41%				3,537		3,555
	Portland	6/17/2014		7.34%				4,944		4,984
	Milpitas	3/6/2017		5.95%				22,857		22,959
	Fort Mill	4/6/2017		5.63%				27,700		27,700
	Reading	1/1/2015		5.58%				14,329		14,387
	Reading	1/1/2015		6.00%				5,000		5,000
	Alliance	12/6/2017		6.48%				23,970		24,032
Mezzanine loan payable (non-recourse)
	Chatsworth	5/1/2014		6.64%				10,355		10,692
	Aurora	5/11/2012		7.37%				—		—
	Fort Mill	4/6/2017		6.21%				3,152		3,208
Exchangeable Senior Notes(2)		6/15/2027		7.25%				172,500		172,500
Repurchase obligations		See Repurchase Obligations below		LIBOR varies				—		1,864

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

Bonds payable(2)
	N-Star IV	7/1/2040	LIBOR + 0.62% (average spread)		300,000		300,000
	N-Star VI	6/1/2041	3 month LIBOR + 0.56% (average spread)		283,200		310,500
	N-Star VII	6/22/2051	LIBOR + 0.34% (average spread)		510,800		510,800
	N-Star VIII	2/1/2041	LIBOR + 0.58% (average spread)		514,885		532,885
	Abacus NS2	8/28/2046	LIBOR + 4.41% (average spread)		—		—
Liability to subsidiary trusts issuing preferred securities(2)(3)
	Trust I	3/30/2035	8.15%		41,240		41,240
	Trust II	6/30/2035	7.74%		25,780		25,780
	Trust III	1/30/2036	7.81%		41,238		41,238
	Trust IV	6/30/2036	7.95%		50,100		50,100
	Trust V	9/30/2036	3 month LIBOR 2.70%		30,100		30,100
	Trust VI	12/30/2036	3 month LIBOR 2.90%		25,100		25,100
	Trust VII	4/30/2037	3 month LIBOR 2.50%		37,600		37,600
	Trust VIII	7/30/2037	3 month LIBOR 2.70%		35,100		35,100

				$	3,864,562	$	3,945,538

(1): Refer to Note 18 for details on the refinancing of these facilities.
(2): Contractual amounts due may differ from the carrying value on the condensed consolidated balance sheets due to the fair value accounting option under SFAS 159. See Note 3
(3): The liability to subsidiary trusts for Trusts I, II, III and IV have a fixed interest rate for the first ten years after which the interest rate will float and reset quarterly at rates ranging from LIBOR plus 2.70% to 3.25%. The Company entered into interest rate swap agreements on Trusts V, VI, VII and VIII which fix the interest rates for 10 years at 8.16%, 8.02%, 7.60% and 8.29%, respectively.

Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of March 31, 2008 (in thousands):

	Total		Mortgage and Mezzanine Loans		Credit Facilities		Secured Term Loan		Liability to Subsidiary Trusts Issuing Preferred Securities(1)		Exchangeable Senior Notes(1)		Bonds Payable(1)
2008	$	466,175	$	4,130	$	462,045	$	—	$	—	$	—	$	—
2009		434,472		10,805		—		423,667		—		—		—
2010		96,765		96,765		—		—		—		—		—
2011		14,330		14,330		—		—		—		—		—
2012		164,036		164,036		—		—		—		—		—
Thereafter		2,688,784		621,141		—		—		286,258		172,500		1,608,885

Total	$	3,864,562	$	911,207	$	462,045	$	423,667	$	286,258	$	172,500	$	1,608,885

(1): Scheduled principal payments may differ from the carrying value on the condensed consolidated balance sheets due to the fair value accounting option under SFAS 159. See Note 3.

At March 31, 2008, the Company was in compliance with all covenants under its borrowings.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

10. Related Party Transactions

Advisory Fees

The Company has agreements with each of N-Star I, N-Star II, N-Star III, N-Star V and N-Star IX to perform certain advisory services. The Company earned total fees of approximately $2.2 million and $1.4 million for the three months ended March 31, 2008 and 2007, respectively.

The Company has an agreement with the Securities Fund to receive base management fees ranging from 1.0% to 2.0% per year on third-party capital. For the three months ended March 31, 2008, the Company earned $0.1 million in management fees.

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc. to perform certain management services. Wakefield Capital Management Inc. is owned by the partners who own Chain Bridge. The Company incurred $0.9 million and $0.6 million in management fees for the three months ended March 31, 2008 and 2007, respectively, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations.

The Company entered into a management agreement in March 2007 with Monroe Management to perform certain management services, as described in Note 8. The Company has incurred $1.2 million in management fees for the three months ended March 31, 2008, which is recorded in asset management fees-related parties in the condensed consolidated statement of operations.

11. Equity Based Compensation

Omnibus Stock Incentive Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests ("LTIP Units") or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company and, prior to October 29, 2005, employees pursuant to the shared facilities and services agreement. An aggregate of 8,933,038 shares of common stock of the Company are currently reserved and authorized for issuance under the Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. As of March 31, 2008, the Company has issued an aggregate of 7,307,156 LTIP Units, net of forfeitures, and 325,459 shares of common stock pursuant to the Stock Incentive Plan. Of the 7,307,156 LTIP Units, 5,009,706 vest to the individual recipient at a rate of one-twelfth of the total amount granted as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29, July 29, or October 29 for the three-year vesting period so long as the recipient continues to be an eligible recipient, and 2,297,450 vest over 16 consecutive quarters with the first quarter being January 29, 2008. In addition, the LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of the grant.

The Company has recognized compensation expense of $4.9 million and $2.1 million related to the amortization of awards granted under this plan for the three months ended March 31, 2008 and 2007, respectively. As of March 31, 2008, there were approximately 5,491,515 unvested LTIP Units and 7,007 LTIP Units were forfeited during the period. The related compensation expense to be recognized over

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

11. Equity Based Compensation (Continued)

the remaining vesting period of all of the Company's LTIP grants is $52.4 million, provided there are no forfeitures.

Long-Term Incentive Bonus Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (the "Incentive Bonus Plan"), in order to retain and provide incentive to officers and certain key employees of the Company, co-employees of the Company and NCIC and employees of NCIC who will provide services to the Company pursuant to the shared facilities and services agreement. Up to 2.5% of the Company's total capitalization as of consummation of the IPO is available to be paid under the Incentive Bonus Plan in cash, shares of common stock of the Company or other share-based form at the discretion of the compensation committee of the Company's Board of Directors, if certain return hurdles are met.

An aggregate of 698,142 shares of common stock of the Company were reserved and authorized for issuance under the Incentive Bonus Plan, subject to equitable adjustment upon the occurrence of certain corporate events. All units under the plan were allocated to employees of the Company. The Company's compensation committee has established the return hurdle for these performance periods as an annual return on paid in capital as defined in the plan, equal to or greater than 12.5%. If the Company achieves these return hurdles, the vested awards may be paid in cash, shares of common stock, LTIP Units or other share based form.

The Company achieved the performance hurdles for both performance periods in 2006 and 2007 and all units reserved under this plan were granted to each of the participants that was an employee at the conclusion of the last performance period in November 2007. The Company has recognized zero and $0.7 million of compensation expense in the condensed consolidated financial statements for the three months ended March 31, 2008 and 2007, respectively.

Employee Outperformance Plan

In connection with the employment agreement of the Company's head of its real estate securities business, he was eligible to receive incentive compensation equal to 15% of the annual net profits from the Company's real estate securities business in excess of a 12% return on invested capital (the annual bonus participation amount). During the term of the employment agreement, the Company had the option of terminating this incentive compensation arrangement by paying an amount based on a multiple of the estimated annual bonus participation amount. If the Company exercised this buyout option, the fixed amount due for terminating this arrangement would vest ratably and be paid in four installments over a three-year period with 25% paid on termination. If the Company's head of its real estate securities business voluntarily terminated his employment with the Company prior to any exercise of the Company's buyout option, he would be eligible to receive future annual payments based on the future real estate securities annual net profits in excess of the 12% return hurdle on invested capital. The Company has recorded compensation expense under this plan of zero and $0.6 million for the three months ended March 31, 2008 and 2007, respectively. See Note 18 for additional information related to the Company's head of its real estate securities business' terminated employment agreement.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

11. Equity Based Compensation (Continued)

2006 Outperformance Plan

In January 2006, the Compensation Committee of the Board of Directors approved the NorthStar Realty Finance Corp. 2006 Outperformance Plan (the "2006 Outperformance Plan"), a long-term compensation program to further align the interests of the Company's stockholders and management. Under the 2006 Outperformance Plan, award recipients will share in a "performance pool" if the Company's total return to stockholders for the period from January 1, 2006 (measured based on the average closing price of the Company's common stock for the 20 trading days prior to January 1, 2006) to December 31, 2008 exceeds a cumulative total return to stockholders of 30%, including both share price appreciation and dividends paid. The size of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum dilution cap equal to $40 million, exclusive of accrued dividends. Each employee's award under the 2006 Outperformance Plan will be designated as a specified percentage of the aggregate performance pool. Assuming the 30% benchmark is achieved, the performance pool that is established under the 2006 Outperformance Plan will be allocated among the Company's employees in accordance with the percentage specified in each employee's award agreement. Although the amount of the awards earned under the 2006 Outperformance Plan will be determined when the performance pool is established, not all of the awards vest at that time. Instead, 50% of the awards vest on December 31, 2008 and 25% of the awards vest on each of the first two anniversaries thereafter based on continued employment. The Company recorded the compensation expense for the 2006 Outperformance Plan in accordance with SFAS 123 (R) "Stock Based Compensation." The fair value of the 2006 Outperformance Plan on the date of adoption was determined by the Company to be $4.1 million. In connection with its determination, the Company retained a firm that had experience in appraising similar plans and considered such appraisal in its determination of the fair value of the 2006 Outperformance Plan. The Company will amortize 50% of the value into compensation expense over the first three years of the plan, 25% will be amortized over four years and the remaining 25% over five years. The Company recorded compensation expense of $0.3 million for each of the three months ended March 31, 2008 and 2007.

The status of our LTIP grants as of March 31, 2008 and December 31, 2007 is as follows (Units in thousands):

	March 31, 2008				December 31, 2007
	LTIP Grants		Weighted Average Grant Price		LTIP Grants		Weighted Average Grant Price
Balance at beginning of year(1)	5,484		$	11.47	1,683		$	9.44
Granted	2,508			8.55	3,826			12.25
Converted to common stock	(325	)		9.48	(20	)		9.0
Forfeited	(7	)		12.52	(5	)		16.48

Ending balance(2)	7,660		$	10.60	5,484		$	11.47

(1): Reflects balance at January 1, 2008 for the quarter ended March 31, 2008 and January 1, 2007 for the year ended December 31, 2007.
(2): Reflects balance at March 31, 2008 and December 31, 2007, respectively.

12. Stockholders' Equity

Common Stock

For the three months ended March 31, 2008, the Company issued a total of 224,434 shares of common stock related to employee compensation arrangements and employee separation agreements.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

12. Stockholders' Equity (Continued)

Dividends

On January 22, 2008, the Company declared a dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock to stockholders of record as of February 5, 2008. The dividends were paid on February 15, 2008.

Earnings Per Share

Earnings per share for the three months ended March 31, 2008 and 2007 is computed as follows (in thousands):

		For the Three Months Ended March 31,
		2008		2007
Numerator (Income)
*Basic Earnings*
Net income available to common stockholders		$	195,273	$	6,350
Effect of dilutive securities
	Income allocated to minority interest		23,044		376

*Dilutive net income available to stockholders*		$	218,317	$	6,726

Denominator (Weighted Average Shares)
*Basic Earnings:*
Shares available to common stockholders			62,244		61,329
Effect of dilutive securities:
OP/LTIP units			7,345		2,797

*Dilutive Shares*			69,589		64,126

13. Minority Interest

Operating Partnership

Minority interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership held by limited partners (the "Unit Holders"). Income allocated to the minority interest is based on the Unit Holders ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total OP Units outstanding. The issuance of additional shares of beneficial interest (the "Common Shares" or "Share") or OP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option of the Company, it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders' equity and minority interest in the accompanying condensed consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of March 31, 2008 and December 31, 2007, minority interest related to the aggregate limited partnership units of 7,858,964 and 5,683,118, represented an 11.20% and 8.43% interest in the Operating Partnership, respectively.

Joint Ventures

In May 2006, the Company formed the Wakefield joint venture with Chain Bridge. The joint venture is consolidated in the condensed consolidated financial statements and Chain Bridge's capital is

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

13. Minority Interest (Continued)

treated as minority interest. Income allocated to minority interest for the three months ended March 31, 2008 was $0.1 million.

In March 2007, the Company formed a joint venture with Monroe. The joint venture is consolidated in the consolidated financial statements and Monroe's capital is treated as minority interest. Income allocated to minority interest for the three months ended March 31, 2008 was $0.2 million.

14. Risk Management and Derivative Activities

Derivatives

The Company uses derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap agreements and the primary objective is to minimize interest rate risks associated with the Company's investment and financing activities. The counterparties of these arrangements are major financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties; however, the Company does not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings. The objective in using interest rate derivatives is to add stability to interest expense and to manage exposure to interest rate movements.

In January 2008, the Company adopted SFAS 159 and elected the fair value option for its bonds payable and its liability to subsidiary trusts issuing preferred securities. Under SFAS 159, the changes in fair value of these financial instruments are now recorded in earnings. As a result of this election, the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting, in accordance with SFAS 133 "Derivatives and Hedging Activity", since the underlying debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings. For the three months ended March 31, 2008, the Company recorded, in earnings, a mark-to-market unrealized loss of $30.3 million and a $1.2 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps.

The following tables summarize the Company's derivative financial instruments as of March 31, 2008 and December 31, 2007 (in thousands):

	Notional Amount		Fair Value Net Asset/ (Liability)			Range of Fixed LIBOR	Range of Maturity
Interest rate swaps and basis swaps
As of March 31, 2008	$	793,957	$	(83,497	)	4.18%–5.63%	March 2010–August 2018
As of December 31, 2007		856,306		(49,280	)	4.18%–6.61%	March 2008–August 2018

Credit Risk Concentrations

Concentration of credit risk arise when a number of borrowers, tenants or issuers related to the Company's investments are engaged in similar business activities or located in the same geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential concentrations of credit risks. Approximately 18.7% of the Company's rental and escalation revenue for the three months ended March 31, 2008 is generated from one tenant

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

14. Risk Management and Derivative Activities (Continued)

in the Company's healthcare net lease portfolio. The Company believes the remainder of its net lease portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

15. Off Balance Sheet Arrangements

Term Debt Transactions

The Company has interests in four term debt transactions, N-Star I, N-Star II, N-Star III and N-Star V, which are structured as collateralized debt obligations and whose term notes are primarily collateralized by investment grade real estate securities. The Company generally purchases the preferred equity or the income notes of each term debt transaction, which are the equity securities of the term debt issuances, and, with the exception of N-Star I, all of the below investment grade term debt notes of each term debt transaction. In addition, the Company earns a fee of 0.35% of the outstanding principal balance of the assets backing each of these term debt issuances as an annual collateral management fee. The Company's interest in each of the four term debt transactions is accounted for as a single debt security available for sale pursuant to EITF 99-20.

The following tables describe certain terms of the collateral for and the notes issued by N-Star I, N-Star II, N-Star III and N-Star V at March 31, 2008 and December 31, 2007 (in thousands):

		Collateral—March 31, 2008						Term Notes—March 31, 2008
Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate		Weighted Average Expected Life (years)	Outstanding Term Notes(1)		Weighted Average Interest Rate at 3/31/08		Stated Maturity
N-Star I(2)		8/21/03	$	319,906	6.45	%	4.40	$	300,729	6.17	%	8/01/2038
N-Star II		7/01/04		334,764	6.21		4.74		298,702	5.49		6/01/2039
N-Star III		3/10/05		404,682	5.90		4.88		358,810	5.53		6/01/2040
N-Star V		9/22/05		495,971	5.68		6.84		456,319	4.83		9/05/2045

	Total		$	1,555,323	6.01	%	5.37	$	1,414,560	5.43	%

(1): Includes only notes held by third parties.
(2): The Company has an 83.3% interest.

		Collateral—December 31, 2007						Term Notes—December 31, 2007
Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate		Weighted Average Expected Life (years)	Outstanding Term Notes(1)		Weighted Average Interest Rate at 12/31/07		Stated Maturity
N-Star I(2)		8/21/03	$	320,583	6.58	%	4.64	$	301,406	6.24	%	8/01/2038
N-Star II		7/01/04		335,301	6.24		4.73		306,110	5.75		6/01/2039
N-Star III		3/10/05		404,772	6.30		5.20		358,892	5.84		6/01/2040
N-Star V		9/22/05		495,971	5.87		7.09		456,319	5.07		9/05/2045

	Total		$	1,556,627	6.21	%	5.59	$	1,422,727	5.66	%

(1): Includes only notes held by third parties.
(2): The Company has an 83.3% interest.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

15. Off Balance Sheet Arrangements (Continued)

Equity Notes of Collateralized Loan Obligations

In December 2006, the Company acquired 40% of the residual equity interests in a Collateralized Loan Obligation ("CLO") originated by Monroe Capital, LLC, a specialty finance company, for $16.7 million. The CLO includes collateral of approximately $400 million backed primarily by first lien senior secured loans. The Company also acquired a 12.5% and 33.5% residual equity interest in two third party CLO's. The equity interests are currently yielding an internal rate of return ranging from approximately 15% to 18%. The CLOs were determined to be variable interest entities under Fin 46(R)-6 and the Company was determined not to be the primary beneficiary; therefore, the financial statements of the CLOs are not consolidated into the condensed consolidated financial statements of the Company. The Company's residual combined equity interests are accounted for as debt securities available for sale pursuant to EITF 99-20. The combined fair market value was $21.8 million and $28.6 million at March 31, 2008 and December 31, 2007, respectively.

The Company's potential loss in its off balance sheet investments is limited to the carrying value of its investment, which was $87.4 million, and $102.5 million, at March 31, 2008 and December 31, 2007, respectively.

16. Segment Reporting

The Company's real estate debt segment is focused on originating, structuring and acquiring senior and subordinate debt investments secured primarily by commercial real estate properties. The Company generates revenues from this segment by earning interest income from its debt investments and its operating expenses consist primarily of interest costs from financing the assets. This segment generates income from operations by earning a positive spread between the yield on its assets and the interest cost of its debt. The Company evaluates performance and allocates resources to this segment based upon its contribution to income from continuing operations.

The Company's operating real estate segment is focused on acquiring commercial real estate facilities located throughout the U.S. that are primarily leased under long-term triple-net leases to corporate tenants. Triple-net leases generally require the lessee to pay all costs of operating the facility, including taxes and insurance and maintenance of the facility. The Company's net-leased facilities are currently located in New York, Ohio, California, Utah, Pennsylvania, New Jersey, Indiana, Illinois, New Hampshire, Massachusetts, Kansas, Maine, South Carolina, Michigan, Colorado, North Carolina, Florida, Washington, Oregon, Wisconsin, Georgia, Oklahoma, Nebraska, Tennessee, Texas and Kentucky. Revenues from these assets are generated from rental income received from lessees of the facilities, and operating expenses, which include interest costs related to financing the assets, operating expenses, real estate taxes, insurance, ground rent and repairs and maintenance. The segment generates income from operations by leasing these facilities at a higher rate than the costs of owning and financing the assets.

The Company's real estate securities segment is focused on investing in a wide range of commercial real estate debt securities, including commercial mortgage-backed securities ("CMBS"), REIT unsecured debt, credit tenant loans and unsecured subordinate securities of commercial real estate companies. The Company generates revenues from this segment by earning interest income and advisory fees from owning and managing these investments. Its operating expenses consist primarily of interest costs from financing its securities. The segment generates income from operations by earning advisory fees and a positive spread between the yield on its assets and the interest cost of its debt.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

16. Segment Reporting (Continued)

The Company's corporate loan segment is focused on originating, structuring and acquiring secured first and second lien loans to middle-market companies. The Company generates revenues from this segment by earning interest income from its debt investments and its operating expenses consist primarily of interest costs from financing the assets. This segment generates income from operations by earning a positive spread between the yield on its assets and the interest cost of its debt. The Company evaluates performance and allocates resources to this segment based upon its contribution to income from continuing operations.

The following table summarizes segment reporting for the three months ended March 31, 2008 and 2007 (in thousands):

		Real Estate Debt		Operating Real Estate			Real Estate Securities			Corporate Loans		Unallocated(1)			Consolidated Total
Total revenues for the three months ended
	March 31, 2008	$	44,628	$	29,111		$	14,849		$	10,866	$	275		$	99,729
	March 31, 2007		41,230		20,313			20,161			—		2,550			84,254
Income (loss) from continuing operations before minority interest for the three months ended
	March 31, 2008		234,366		(1,886	)		(27,252	)		4,502		14,063			223,793
	March 31, 2007		15,983		(514	)		2,247			—		(9,629	)		8,087
Net income (loss) for the three months ended
	March 31, 2008		209,628		(1,687	)		(24,375	)		4,027		12,911			200,504
	March 31, 2007		15,983		(561	)		2,247			—		(10,006	)		7,663
Total assets as of
	March 31, 2008	$	2,259,695	$	1,260,214		$	482,696		$	505,677	$	53,936		$	4,562,218

(1): Unallocated includes corporate level interest income, interest expense and general & administrative expenses.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

17. Supplemental Disclosure of Non-Cash Investing and Financing Activities

A summary of non-cash investing and financing activities for the three months ended March 31, 2008 and 2007 is presented below (in thousands):

	March 31,
	2008			2007
The acquisition of available for sale securities with warehouse deposit	$	—		$	24,203
Real estate debt investment pay-down due from servicer		(1,525	)		(37,820	)
Write-off of deferred financing cost in connection with FAS 159 implementation		34,605			—
Initial mark-to-market adjustment in connection with FAS 159 implementation		(340,835	)		—
Elimination of available for sale securities due to acquisition of consolidated liabilities		—			(5,317	)
Reduction of mortgage notes and loans payable due to acquisition of consolidated asset and release of mortgage escrow		—			1,066
Elimination of bonds payable due to acquisition of consolidated assets		—			(23,750	)
Allocation of purchase price of operating real estate to deferred cost		—			(15,703	)

18. Subsequent Events

Securities Fund

On April 10, 2008, the Company contributed an additional $16.0 million to the Securities Fund and increased its ownership interest to approximately 45%.

Jean-Michel Wasterlain

Jean-Michel Wasterlain, an Executive Vice President, left the Company as of April 11, 2008. As a result, Mr. Wasterlain's employment agreement with the Company was terminated effective April 11, 2008. Mr. Wasterlain was not entitled to any severance, bonus or other payments or awards as a result of his departure. However, pursuant to Mr. Wasterlain's Outperformance Bonus Plan, Mr. Wasterlain is deemed to have a vested interest in, and may continue to receive the following: (i) 20% of the bonus participation amount relating to fee streams and securities investments that were made in the 12 months prior to April 11, 2008; (ii) 40% of the bonus participation amount relating to fee streams and securities investments that were made more than 12 months and less than 24 months prior to April 11, 2008; (iii) 60% of the bonus participation amount relating to fee streams and securities investments that were made more than 24 months and less than 36 months prior to April 11, 2008; (iv) 80% of the bonus participation amount relating to fee streams and securities investments that were made more than 36 months and less than 48 months prior to April 11, 2008; and (v) 100% of the bonus participation amount relating to fee streams and securities investments that were made more than 48 months prior to April 11, 2008.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

18. Subsequent Events (Continued)

Dividends

On April 22, 2008, the Company declared a cash dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on May 15, 2008 to the stockholders of record as of the close of business on May 5, 2008.

Monroe Capital

On May 7, 2008, the Company completed a recapitalization of its middle market corporate lending venture known as Monroe Capital. As part of the recapitalization, a money-manager invested approximately $87.2 million of cash equity capital into the business, the Company contributed $6.8 million and the lender, under two consolidated revolving credit facilities totaling $800 million of capacity and having $423 million of outstanding at March 31, 2008, which we refer to as the MC Facility and the MC VFCC Facility, extinguished a portion of the outstanding debt balance and refinanced the remaining indebtedness in the form of a private CLO match funding the underlying assets. The Company also contributed its CLO equity interests into the recapitalized entity. Upon completion of the recapitalization transaction, the new investor became the manager of the assets and the Company deconsolidated the venture and prospectively will use the equity method of accounting for the investment. As part of this recapitalization, the Company terminated its joint venture with Monroe Management.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and notes thereto included in this report.

Forward-Looking Statements

This report contains information that may constitute "forward-looking statements." Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "seek," "anticipate," "estimate," "believe," "could," "project," "predict," "continue" or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward looking statements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

Factors that could have a material adverse effect on our operations and future prospects are set forth in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, and those described from time to time in our future reports filed with the Securities and Exchange Commission. The factors set forth in the Risk Factors section could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.

Introduction

We primarily derive revenues from interest income on the real estate debt investments that we originate with borrowers or acquire from third parties, our corporate loan investments and our real estate securities in which we invest. We generate rental income from our net lease investments. We also generate interest revenues from our ownership interest in non-consolidated securities term debt transaction issuances and advisory fee income and income from our unconsolidated ventures. Other income comprises a much smaller and more variable source of revenues and is generated principally from fees associated with early loan repayments and gains/losses from sales of securities.

We primarily derive income through the difference between the interest and rental income we are able to generate from our investments and the cost at which we are able to obtain financing for our investments. In order to protect this difference, or "spread", we seek to match-fund our investments using secured sources of long-term financing such as term debt transaction financings, mortgage financings and long-term unsecured subordinate debt. Match-funding means that we try to obtain debt with maturities equal to our asset maturities and borrow funds at interest rate benchmarks similar to our assets. Match-funding results in minimal impact to spread when interest rates are rising and falling and minimizes refinancing risk since our asset maturities match those of our debt.

Profitability and Performance Metrics

We calculate several metrics to evaluate the profitability and performance of our business.

•: Adjusted funds from operations: ("AFFO") (see "Non-GAAP Financial Measures—Funds from Operations and Adjusted Funds from Operations for a description of this metric).
•: Return on Equity ("ROE"), before and after general and administrative expenses. We calculate return on equity using AFFO, inclusive and exclusive of general and administrative expenses,

divided by average common book equity during the period as a measure of the profitability generated by our assets and company on common stockholders' equity invested.

•: Assets Under Management ("AUM") growth is a key driver of our ability to grow our earnings.

Credit Risk Management is our ability to manage our assets in a manner that preserves principal and income and minimizes credit losses that would decrease income.

Corporate Expense Management influences the profitability of our business. We must balance making appropriate investments in our infrastructure and employees with a recognition that our accounting, finance, legal and risk management infrastructure does not directly generate quantifiable revenues for us. We frequently refer to general and administrative expenses, excluding stock-based compensation expense, divided by total revenues as a measure of our efficiency in managing expenses.

Availability and cost of capital will impact our profitability and earnings since we must raise new capital to fund a majority of our AUM growth.

Outlook and Recent Trends

In early 2007, the subprime residential lending and single family housing markets began to experience significant default rates, declining real estate values and increasing backlog of housing supply, and other lending markets experienced higher volatility and decreased liquidity resulting from the poor credit performance in the residential lending markets. The residential sector capital markets issues quickly spread more broadly into the asset-backed commercial real estate, corporate and other credit and equity markets even though underlying fundamentals outside of the residential real estate sector continued to show strong performance and credit metrics. Although we do not have any direct subprime exposure or direct exposure to the single family mortgage market, the factors described above have resulted in substantially reduced mortgage loan originations and securitizations, and caused more generalized credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors, continue to find it difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt. The U.S. Federal Reserve, or the "Federal Reserve," has responded to these conditions by lowering the federal funds rate from a high of 5.25% in September 2007 to as low as 2.00% as of May 8, 2008; however, many economists believe that the U.S. economy is either near or in a recession.

Low interest rates are generally good for commercial real estate values because the discount rate applied to underlying cash flows should be lower, and low rates are also good for loan credit because debt service costs are lower while underlying values are supported. Notwithstanding liquidity infusion by the Federal Reserve, capital markets conditions remain challenging.

Weaker macroeconomic conditions combined with the continued lack of liquidity in the U.S. commercial real estate market continue to pressure underlying real estate values. Property types most directly and immediately impacted by these weaker conditions include residential condominium projects in markets which experienced a high level of development during the residential market boom, such as in South Florida, Las Vegas and areas of California. Multi-family properties located in nearby areas have generally been impacted by the oversupply of condominiums because many of these projects are being converted into competing rental properties. Two of our assets, which are first mortgages totaling $35.1 million, have multi-family rental collateral properties located in South Florida and are experiencing weak operating performance due to conversions of condominiums to rental properties. Also, hotels are generally most immediately impacted by changing economic conditions because revenues are generated on a nightly basis, based on room rates and occupancy. The next most sensitive real estate class to changing economic conditions is retail, followed by office and industrial properties. Office, industrial and retail property types have longer-term, multi-year leases and therefore reset to market on a lagging basis. The degree to which commercial real estate values are impacted by weaker

economic conditions will be determined primarily by the length that such conditions exist and the severity of contraction.

Credit spreads on commercial mortgages (i.e., the interest rate spread over given benchmarks such as LIBOR or U.S. Treasury securities) are significantly influenced by: (a) supply and demand for such mortgage loans; (b) perceived risk of the underlying real estate collateral cash flow; and (c) capital markets execution for the sale or financing of such commercial mortgage assets. In the case of (a), the number of potential lenders in the market place and the amount of funds they are willing to devote to commercial mortgage assets will impact credit spreads. As liquidity increases, spreads on equivalent commercial mortgage loans will decrease. Conversely, a lack of liquidity will result in credit spreads increasing. During periods of volatility, the number of lenders participating in the market may change at an accelerated pace. Further, many lenders depend on the capital markets in order to finance their portfolio of commercial loans. Lenders are forced to increase the credit spread at which they are willing to lend as liquidity in the capital market decreases. As the market tightens, many warehouse lenders have requested additional collateral or repayments with respect to their loans in order to maintain margins that are acceptable to them.

For existing loans, when credit spreads widen, the fair value of these existing loans decreases. If a lender were to originate a similar loan today, such loan would carry a greater credit spread than the existing loan. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed, the fair value of the loan may be negatively impacted by the incremental interest foregone from the widened credit spread. Accordingly, when a lender wishes to sell or finance the loan, the reduced value of the loan will impact the total proceeds that the lender will receive.

We responded to these difficult conditions by decreasing investment activity when we observed deteriorating residential market conditions. We expect credit to continue to be challenging well into 2008 and believe we have the resources to quickly identify potential issues and to act aggressively to protect our invested capital.

Approximately $4.0 billion of our term debt transaction liabilities (including the off-balance sheet and on-balance sheet financings) are in their reinvestment periods which means when the underlying assets repay we are able to reinvest the proceeds in new assets without having to repay the liabilities. Because credit spreads are currently much wider than when we issued these liabilities, we currently expect to earn a higher return on equity on capital which is repaid and reinvested in this market. Approximately $389.0 million of our funded loan commitments have their initial maturity date in 2008; however, all of the loans contain extension options of at least six months (many subject to performance criteria) so it is difficult to estimate how much capital from initial maturities or prepayments may be recycled into higher earning investments in 2008.

Although lower overall interest rates should cushion declines in real estate values and mitigate credit pressures, lower floating interest rates result in lower overall earnings for us. This holds true even when the underlying asset is perfectly match funded with similar debt because we do not finance 100% of the asset. Because portions of all of our assets, which are predominantly floating rate, are funded with equity, lower interest rates result in lower earnings. Furthermore, lower market liquidity levels tend to decrease prepayment activity which may result in lower other income and early recognition of loan discounts and fees compared to prior periods, as well as defer our ability to reinvest proceeds in new, higher yielding assets without having to repay the liabilities. Additionally, decreasing real estate values and weaker collateral operating performance due to economic conditions may result in our recognizing higher credit loss reserve levels than in the past.

Our near-term business plan assumes that we are able to recycle equity capital from lower return-generating assets, such as our net leased healthcare portfolio, and that we are able to reinvest these proceeds in a current market that we believe can provide a greater level of returns due to a lack of

liquidity and competition. Our plan also assumes that we can successfully continue to generate other income levels consistent with or greater than in the past, given our larger asset base, and can manage credit so that future credit losses, while higher than prior periods, will not be significantly greater than in the past. Our future level of earnings and dividends in this low interest rate and liquidity environment is dependent upon our ability to successfully execute these plans.

We believe that in the longer term, liquidity and attractive pricing could return to the commercial real estate finance markets but that in the near term, new financing sources must be developed in order to attractively finance new investment activity. We believe these sources will include term loans from financial institutions and life companies, more restrictive commercial real estate finance structures, which may not permit reinvestment from asset repayments, and financing provided by motivated sellers of assets.

Investors are encouraged to read the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2007.

Risk Management

We conduct a quarterly comprehensive credit review, resulting in an individual risk rating being assigned to each asset. This review is designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis as an "early warning system." Based on the quarterly reviews, assets are put on an internal "Watch List" if we believe there is greater near-term risk that we could lose invested capital and/or there is a situation at the underlying collateral which requires intensive risk management and portfolio management resources. A Watch List asset does not necessarily mean it is non-performing or that there has been an impairment to our loan basis, but indicates our view that the risk of the asset becoming non-performing or impaired is much greater than in the overall portfolio. As of March 31, 2008, we had six assets on our Watch List totaling $96.6 million, which represents approximately 2.1% of total assets.

As of March 31, 2008, no assets were delinquent on required principal or interest payments according to the underlying loan terms and no assets were considered non-performing. During the first quarter we took a $750,000 credit loss provision for a $19.5 million first mortgage loan secured by two multi-family properties located in San Antonio, Texas. The loan is paying current; however, in our opinion the borrower does not have adequate financial resources to continue to invest in the asset to maintain its value and we are working with the borrower on a plan to potentially foreclose on and to sell the collateral to a more financially capable owner/operator.

Critical Accounting Policies

The following is a summary of our critical accounting policies. Refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2007 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting policies" for a full discussion of our critical accounting policies.

Valuation of Financial Instruments

Proper valuation of financial instruments is a critical component of our financial statement preparation. We adopted the provisions of SFAS No. 157 "Fair Value Measurements" ("SFAS 157") effective January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date (i.e., the exit price).

We have categorized our financial instruments, based on the priority of the inputs to the valuation technique, into a three level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1.	Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives, most U.S. Government and agency securities, and certain other sovereign government obligations).
Level 2.	Financial assets and liabilities whose values are based on the following:
	a)	Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
	b)	Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
	c)	Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
	d)	Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain mortgage loans).
Level 3.	Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans, and long-dated or complex derivatives including certain foreign exchange options and long dated options on gas and power).

The fair value of our financial instruments are based on observable market prices when available. Such prices are based on the last sales price on the date of determination, or, if no sales occurred on such day, at the "bid" price at the close of business on such day and if sold short at the "asked" price at the close of business on such day. Interest rate swap contracts are valued based on market rates or prices obtained from recognized financial data service providers. Generally these prices are provided by a recognized financial data service provider.

We have valued our financial instruments, in the absence of observable market prices, using the valuation methodologies described below applied on a consistent basis. For some financial instruments little market activity may exist; management's determination of fair value is then based on the best information available in the circumstances, and may incorporate management's own assumptions and involves a significant degree of management's judgment.

Investments for which market prices are not observable are generally investments in equity or income notes of term debt transactions, equity interests in collateralized loan obligations and trust preferred securities. Fair values of these investments are determined by reference to market rates or prices provided by the underwriters of the structured securities or cash flow models utilizing an internal rate of return provided by the underwriters of the term debt or CLO transaction. An analysis is applied

to the estimated future cash flows using various factors depending on the investments, including various reinvestment parameters.

Liabilities for which market prices are not generally observable include our liability to subsidiary trusts issuing preferred securities. The fair value of these debt instruments are based upon an analysis of other instruments issued by us that are currently actively traded including our preferred stock and exchangeable senior notes. An analysis is performed on the implied credit spreads that could be observed for these instruments. We believe that the credit spreads for our preferred stock and exchangeable senior notes are valid proxies for those of the liability to subsidiary trusts issuing preferred securities because they share many of the same structural and credit features. However, in deriving appropriate credit spreads for the liability to subsidiary trusts issuing preferred securities on the basis of observed credit spreads for preferred stock and exchangeable senior notes, several adjustments are made to reflect the differences between these instruments and the liability to subsidiary trusts issuing preferred securities.

We also adopted SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159") effective January 1, 2008 and we have elected to fair value certain financial instruments. The change in fair value of these instruments is recorded in unrealized gain (loss) on investments and other in the condensed consolidated statement of operations. See Note 3 to the condensed consolidated financial statements for further information.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS 141(R), "Business Combinations" ("SFAS 141(R)"). This Statement replaces SFAS 141, "Business Combinations", and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, "Accounting for Income Taxes", to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS 142, "Goodwill and Other Intangible Assets", to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently assessing the potential impact that the adoption of SFAS 141(R) could have on our financial statements.

consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently assessing the potential impact that the adoption of SFAS 160 could have on our financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 is effective for us on January 1, 2009. We are currently evaluating the impact that the adoption of SFAS 161 will have on our financial condition, results of operations, and disclosures.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2008 to Three Months Ended March 31, 2007

Revenues

Interest Income

Interest income for the three months ended March 31, 2008 totaled $63.7 million, representing an increase of $5.4 million, or 9%, compared to $58.3 million for the three months ended March 31, 2007. The increase was attributable to the full quarter benefit in 2008 of the $1.3 billion of investments acquired in the first quarter of 2007. We also originated and acquired commercial real estate debt, commercial real estate securities and corporate debt subsequent to March 31, 2007 that had a net book value of $1.2 billion. The interest income from these investments was partially offset by approximately $844.5 million of investment repayments subsequent to March 31, 2007, resulting in a net increase to interest income of approximately $17.0 million. In addition, as a result of the sale of certain assets to the Securities Fund and the lower average LIBOR rate of approximately 200 basis points, there was an offsetting decrease in interest income of approximately $11.6 million quarter over quarter.

Interest Income—Related Parties

Interest income from related parties for the three months ended March 31, 2008 totaled $3.8 million, representing an increase of $0.8 million, or 27%, compared to $3.0 million for the three months ended March 31, 2007. The increase is attributable to increases in our investments in the non-investment grade note classes of our unconsolidated term debt transactions. All of our real estate securities term debt transactions completed since 2006 in which we retain the equity notes have been accounted for as on-balance sheet financings.

Rental and Escalation Income

Rental and escalation income for the three months ended March 31, 2008 totaled $29.0 million, representing an increase of $9.7 million, or 50%, compared to $19.3 million for the three months ended March 31, 2007. The increase was primarily attributable to net lease property acquisitions by our Wakefield joint venture. These acquisitions collectively contributed $7.1 million of additional rental income. Other net lease properties acquired during the three months ended, or subsequent to, March 31, 2007, contributed additional rental and escalation income of $2.3 million and rent increases at various properties, which are based on CPI indices, resulted in additional rental income of $0.3 million for the three months ended March 31, 2008.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the three months ended March 31, 2008 totaled $2.3 million, representing an increase of approximately $0.9 million, or 64%, compared to $1.4 million for the three months ended March 31, 2007. The majority of the increase was attributable to the advisory fees earned on N-Star IX of $0.8 million, which were formerly eliminated in consolidation and fees earned on the Securities Fund of $0.1 million. In July 2007, we sold our equity interest in N-Star IX to the Securities Fund. As a result of the sale, N-Star IX is no longer consolidated into our financial statements, but we continue to earn management fees from the financing.

Other Revenue

Other revenue for the three months ended March 31, 2008 totaled $1.0 million, representing a decrease of $1.2 million, or 55%, compared to $2.2 million the three months ended March 31, 2007. Other revenue for three months ended March 31, 2008 consisted primarily of $0.3 million in prepayment penalties, $0.3 million of exit fees, $0.2 million in unused credit line fees, $0.1 million in

draw fees and $0.1 million miscellaneous other revenue. Other revenue for the three months ended March 31, 2007 included $1.0 million of recurring income from premiums received on credit default swaps related to Abacus NS2, $0.3 million related to a one-time consent fee on the early repayment of one of our real estate securities investments, $0.7 million in prepayment penalties and loan assumption fees from loans in our real estate debt portfolio and $0.2 million of net expense reimbursements from tenants in our net lease portfolio.

Expenses

Interest Expense

Interest expense for the three months ended March 31, 2008 totaled $54.9 million, representing an increase of $7.3 million, or 15%, compared to $47.6 million for the three months ended March 31, 2007. Interest expense for the three months ended March 31, 2008 includes the impact of the June 2007 closing of our $172.5 million exchangeable senior notes offering and the March 2007 and June 2007 private placement of $72.7 million of trust preferred debt resulting in additional interest expense of approximately $4.1 million, additional mortgage loans payable due to acquisitions in our net lease portfolio resulting in $5.2 additional interest expense, increased term loan balance resulting in $3.1 million additional interest expense, the addition of $423.3 million in financing from our MC Facility and our MC VFCC Facility resulting in $5.0 million additional interest expense and the full quarter impact of the Euro-note resulting in $2.0 million additional interest expense. These increases were partially offset by the sale of N-Star IX to the Securities Fund, decreasing interest expense by $3.8 million, the paydown of repurchase obligations resulting in decreased interest expense of $1.1 million, and decreased interest expense of $7.4 million on N-Star IV, VI, VII and VIII bonds payable due to debt paydowns decreases in LIBOR and the effect of net settlements on interest rate swaps being recorded in unrealized gain (loss) on investments and other as the result of the SFAS 159 election on the underlying debt.

Real Estate Properties—Operating Expenses

Real estate property operating expenses for three months ended March 31, 2008 totaled $2.0 million, representing an increase of $0.1 million, or 5%, compared to $1.9 million for three months ended March 31, 2007. The increase was attributable to net lease property acquisitions.

Asset Management Fees—Related Party

Advisory fees for related parties for the three months ended March 31, 2008 totaled $2.1 million, representing an increase of $1.5 million, or 250%, compared to $0.6 million for the three months ended March 31, 2007. The increase was primarily attributable to our Monroe Management joint venture, which was formed in March 2007 and increased fees in our Wakefield joint venture resulting from healthcare property acquisitions. We incurred $1.3 million of advisory fees to Monroe Management for the three months ended March 31, 2008 and $0.8 million and $0.6 million of advisory fees to Wakefield Capital Management for the three months ended March 31, 2008 and 2007, respectively.

Provision for Loan Loss

Provision for loan loss for the three months ended March 31, 2008 totaled $0.8 million. The provision for loan loss was taken against a $19.5 million first mortgage asset backed by two multi-family properties. There was no provision for loan loss for the three months ended March 31, 2007.

General and Administrative

General and administrative expenses for the three months ended March 31, 2008 totaled $18.1 million, representing an increase of $3.4 million, or 23%, compared to $14.7 million for the three

months ended March 31, 2007. The primary components of our general and administrative expenses were the following:

Salaries and equity-based compensation for the three months ended March 31, 2008 totaled $11.7 million, representing an increase of approximately $2.9 million, or 33%, compared to $8.8 million, for the three months ended March 31, 2007. The increase was attributable to a $3.3 million increase related to equity-based compensation, which was partially offset by a $0.4 million decrease related to salaries due to lower staffing levels resulting from decreased investment activity. The $3.3 million increase in equity-based compensation expense was attributable to an increase of approximately $2.7 million of vesting of equity-based awards issued under our 2004 Omnibus Stock Incentive Plan relating to grants issued in the fourth quarter 2007 and first quarter 2008, an increase of $0.8 million in additional equity-based compensation granted in connection with employee compensation arrangements and an increase of $1.1 million in connection with employee separation agreements. The increase was offset by a decrease of $0.7 million relating to the Long Term Incentive Bonus Plan, which was fully vested as of September 30, 2007, and a decrease in equity-based compensation expense of $0.6 million related to our Employee Outperformance Plan.

Auditing and professional fees for the three months ended March 31, 2008 totaled $2.4 million, representing a decrease of $0.3 million, or 11%, compared to $2.7 million for the three months ended March 31, 2007. The decrease was primarily attributable to lower legal fees for general corporate work and investment activities, recruiting fees, and fees related to agreed upon procedures in connection with term debt transactions.

Other general and administrative expenses for the three months ended March 31, 2008 totaled $3.9 million, representing an increase of approximately $0.7 million, or 22%, compared to $3.2 million for the three months ended March 31, 2007. The increase was primarily attributable to increases in legal fees and other costs related to investment initiatives not ultimately consummated during the three months ended March 31, 2008.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended March 31, 2008 totaled $9.9 million, representing an increase of $3.3 million, or 50%, compared to $6.6 million for the three months ended March 31, 2007. This increase was primarily attributable to $319.4 million of net lease acquisitions made subsequent to March 31, 2007.

Equity in (Loss) Earnings of Unconsolidated Ventures

Equity in (loss) earnings for the three months ended March 31, 2008 totaled a loss of $0.2 million, representing a decrease of $0.2 million, compared to earnings of $16,000 for the three months ended March 31, 2007. In July 2007, we closed our Securities Fund, retaining a 25.7% interest that was accounted for under the equity method of accounting. For the three months ended March 31, 2008, we recognized equity in loss of $0.6 million from the Securities Fund, of which $4.4 million was the unrealized loss related to the mark-to-market adjustment on the securities in the Securities Fund, and equity in loss of $0.5 million on the LandCap joint venture. The losses were partially offset by our investment in Monroe Management, which we recognized $0.9 million equity in earnings for the three months ended March 31, 2008.

Unrealized Gain (Loss) on Investments and Other

Unrealized gain (loss) on investments and other increased by approximately $219.4 million for the three months ended March 31, 2008 to a gain of $212.1 million, compared to a loss of $7.3 million for the three months ended March 31, 2007. The unrealized gain on investments for the three months ended March 31, 2008 consisted primarily of unrealized gains related to SFAS 159 mark-to-market

adjustments of $103.5 million on N-Star VIII bonds payable, $76.5 million on N-Star IV bonds payable, $64.9 million on N-Star VII bonds payable, $46.7 million on N-Star VI bonds payable, $32.8 million on liability to subsidiary trusts issuing preferred securities and $1.1 million on exchangeable senior notes, offset partially by unrealized losses related to SFAS 159 mark-to-market adjustments of $73.9 million on N-Star VII available for sale securities, $7.7 million on N-Star IV available for sale securities and $31.5 million on interest rate swaps as a result of these swaps no longer qualifying for hedge accounting under SFAS 133. The unrealized loss on investment for the three months ended March 31, 2007 consisted of a $3.9 million mark-to-market loss on a term debt transaction warehouse agreement as a result of a decline in the fair market value of collateral held in the warehouses, and a $4.1 million mark-to-market loss on credit default swaps. Both mark-to-market adjustments resulted from credit spread widening in the commercial real estate securities markets precipitated by credit issues in the residential sub-prime lending markets. This negative adjustment was slightly offset by a $0.6 million unrealized gain related to the ineffective portion of one of our interest rate swaps in N-Star IX.

Realized Gain on Investments and Other

The realized gain of $10,000 for the three months ended March 31, 2008 is comprised of a $117,000 gain on foreign currency translation on our Euro-note, partially offset by a loss of $107,000 on the sale of two corporate loan investments. The realized gain of $2.5 million for the three months ended March 31, 2007 represented the increase in fair value related to the net carry of securities during the warehouse period of $1.3 million which was realized at the close of N-Star IX and a gain of $1.5 million on the early redemption of REIT debt securities in N-Star VII, partially offset by a realized loss of $0.3 million on the closing of short securities position.

Income from Discontinued Operations, Net of Minority Interest

Income from discontinued operations represents the operations of properties sold or held for sale during the period. In 2007, our Wakefield venture sold two assisted care living facilities, which were held for sale at March 31, 2007 and closed in April 2007. Accordingly, these operations were reclassified to income from discontinued operations. We had no discontinued operations for the three months ended March 31, 2008.

Liquidity and Capital Resources

We require significant capital to fund our investment activities and operating expenses. Our capital sources may include cash flow from operations, borrowings under revolving credit facilities, financings secured by our assets such as first mortgage and term debt transaction financings, long-term senior and subordinate corporate capital such as senior notes, trust preferred securities and perpetual preferred and common stock.

Our total available liquidity at March 31, 2008 was approximately $312.1 million, including $139.5 million of unrestricted cash and cash equivalents, $72.6 million of cash in our term debt transactions, which is available for reinvestment within the term debt transaction, and $100.0 million of available undrawn liquidity under our unsecured credit facility.

We expect to meet our long term liquidity requirements, including the repayment of debt and our investment funding needs, through existing cash resources and additional borrowings, the issuance of debt and/or equity securities and the liquidation or refinancing of assets at maturity. We believe that the value of the net lease portfolio is, and will continue to be, sufficient to allow us to refinance the mortgage debt on this portfolio at maturity.

As a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where we do not receive corresponding cash, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT

distribution requirements of the Internal Revenue Code and to avoid federal income tax and the non deductible excise tax.

These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital committed to our operations; however, we believe that our existing capital resources and financing will enable us to meet current non-discretionary capital requirements. We believe that our existing sources of funds will be adequate for purposes of meeting our short-term liquidity needs. Our ability to meet a long-term (beyond one year) liquidity requirement is subject to obtaining additional debt and equity financing. Any decision by our lenders and investors to provide us with financing will depend upon a number of factors, such as our compliance with the terms of its existing credit arrangements, our financial performance, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders' and investors' resources and policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities.

Dividend Reinvestment and Stock Purchase Plan

Effective as of April 27, 2007, we implemented a Dividend Reinvestment and Stock Purchase Plan, or the Plan, pursuant to which we registered and reserved for issuance 15,000,000 shares of our common stock. Under the terms of the Plan, stockholders who participate in the Plan may purchase shares of our common stock directly from us, in cash investments up to $10,000. At our sole discretion, we may accept optional cash investments in excess of $10,000 per month, which may qualify for a discount from the market price of 0% to 5%. Plan participants may also automatically reinvest all or a portion of their dividends for additional shares of our stock. We expect to use the proceeds from any dividend reinvestments or stock purchases for general corporate purposes.

During the three months ended March 31, 2008, we issued a total of approximately 34,243 common shares pursuant to the Plan for a gross sales price of approximately $0.3 million.

Cash Flows

The net cash flow provided by operating activities of $23.9 million, decreased by $1.5 million for the three months ended March 31, 2008 from $25.4 million for the three months ended March 31, 2007. This was primarily due to the lower libor rates which decreased interest income generated from our asset base.

The net cash flow provided by investing activities was $91.4 million for the three months ended March 31, 2008 compared to the net cash used by investing activities of $1.7 billion of cash used in investing activities for the three months ended March 31, 2007. The primary source of the cash provided by investing activities in 2008 was a result of the payoffs and principal paydowns of our real estate debt investments and corporate loan investments combined with decreased investment activity.

The net cash flow used in financing activities was $129.7 million for the three months ended March 31, 2008 compared to $1.6 billion of cash provided by financing activities for the three months ended March 31, 2007. The primary source of cash flow used in financing activities was the paydown of our bonds, credit facilities, and secured term loan as a result of principal paydowns of our assets.

Contractual Obligations and Commitments

As of March 31, 2008, we had the following contractual commitments and commercial obligations (in thousands):

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1–3 years		3–5 years		After 5 Years
Mortgage notes	$	897,700	$	2,918	$	104,012	$	174,222	$	616,548
Mezzanine loan payable		13,507		1,212		3,558		4,144		4,593
Exchangeable senior notes		172,500		—		—		—		172,500
Bonds payable		1,608,885		—		—		—		1,608,885
Credit facilities		462,045		462,045		—		—		—
Secured term loan		423,667		—		423,667		—		—
Liability to subsidiary trusts issuing preferred securities		286,258		—		—		—		286,258
Capital leases(1)		16,973		355		974		982		14,662
Operating leases		80,575		4,146		11,260		10,983		54,186
Placement fees		2,228		1,620		608		—		—
Outstanding unfunded commitments(2)		523,574		378,959		130,642		4,498		9,475

Total contractual obligations	$	4,487,912	$	851,255	$	674,721	$	194,829	$	2,767,107

(1): Includes interest on the capital leases.
(2): Our future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaled $523.6 million, of which a minimum of $295.0 million will be funded within our existing term debt transactions. Fundings are categorized by estimated funding period. We expect that our secured credit facility lenders generally will advance a majority of future fundings that are not otherwise funded within our term debt transactions. Assuming lenders will advance 75% of the $228.6 million of our future funding commitments outside of the term debt transactions, our equity requirement would be approximately $57.2 million. Based on these assumptions, we believe we have adequate liquidity to meet our existing future funding commitments.

Our debt obligations contain covenants that are both financial and non-financial in nature. Significant financial covenants include a requirement that we maintain a minimum tangible net worth, a minimum level of liquidity and a minimum fixed charge coverage ratio. As of March 31, 2008, we were in compliance with all financial and non-financial covenants in our debt agreements.

Off-Balance Sheet Arrangements

Term Debt Issuances

The terms of the portfolio of real estate securities held by the term debt transactions are structured to be matched with the terms of the non-recourse term debt liabilities. These term debt liabilities are repaid with the proceeds of the principal payments on the real estate securities collateralizing the term debt liabilities when these payments are actually received. There is no refinancing risk associated with the term debt liabilities, as principal is only due to the extent that it has been collected on the underlying real securities and the stated maturities are noted above. Term debt transactions produce a relatively predictable income stream based on the spread between the interest earned on the underlying securities and the interest paid on the term debt transaction liabilities. This spread may be reduced by credit losses on the underlying securities or by hedging mismatches. Our term debt transactions have not incurred any losses on any of their securities investments from the date

of purchase through March 31, 2008. We receive quarterly cash distributions from N-Star I and monthly cash distributions from N-Star II, N-Star III and N-Star V, each representing our proportionate share of the residual cash flow from the term debt transactions, as well as collateral advisory fees and interest income on the unrated income notes of the term debt transactions.

The following tables describe certain terms of the collateral for and the notes issued by term debt transactions at March 31, 2008 (dollars in thousands):

								Term Notes—March 31, 2008
		Collateral—March 31, 2008						Term Notes—March 31, 2008
		Collateral—March 31, 2008								Weighted Average Interest Rate at 3/31/08
Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate		Weighted Average Expected Life (years)	Outstanding Term Notes(1)		Weighted Average Interest Rate at 3/31/08		Stated Maturity
N-Star I(2)		8/21/03	$	319,906	6.45	%	4.40	$	300,729	6.17	%	8/01/2038
N-Star II		7/01/04		334,764	6.21		4.74		298,702	5.49		6/01/2039
N-Star III		3/10/05		404,682	5.90		4.88		358,810	5.53		6/01/2040
N-Star V		9/22/05		495,971	5.68		6.84		456,319	4.83		9/05/2045

	Total		$	1,555,323	6.01	%	5.37	$	1,414,560	5.43	%

(1): Includes only notes held by third parties.
(2): We have an 83.3% interest.

Any potential losses in our off balance sheet term debt transactions is limited to the carrying value of our investment of $68.6 million at March 31, 2008.

CLO Equity Notes

We own a 40% residual equity interests in a CLO originated by Monroe Capital, LLC. The CLO includes collateral of approximately $400 million backed primarily by first lien senior secured loans. We also acquired a 12.5% and 33.5% residual equity interest in two third party CLOs. Based on the projected future cash flows, the equity interests are yielding an internal rate of return ranging from approximately 15% to 18%. The CLOs were determined to be variable interest entities under Fin 46(R)-6 and we were determined not to be the primary beneficiary, therefore, the financial statements are not consolidated into our condensed consolidated financial statements. Our residual equity interests are accounted for as debt securities available for sale pursuant to EITF 99-20. The fair market value was $21.8 million at March 31, 2008.

NorthStar Real Estate Securities Opportunity Fund

In July 2007, we closed on $109.0 million of equity capital for its Securities Fund, an investment vehicle in which we intend to prospectively conduct our real estate securities investment business.

We are the manager and general partner of the Securities Fund. We will typically receive base management fees ranging from 1.0% to 2.0% per annum on third-party capital, and we are entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary depending on the investor capital lockup periods.

collateral. As of March 31, 2008, the lender had not liquidated the collateral and the Securities Fund estimated that it could recover $1.0 million of its deposits based on the market values of the underlying securities. During the first quarter 2008, the Securities Fund also monetized investment positions which were established to hedge its exposure to declining values in the warehouse securities, thereby offsetting the recognized loss from the warehouse. The net realized gain, as of March 31, 2008, on the two transactions was $11.3 million, of which $3.4 million represents our share of the realized gain. The actual amount of cash deposits recovered from the lender upon liquidation of the collateral, if any, will be based on proceeds received on sale of the securities, which are controlled by the lender.

At March 31, 2008, we had invested a total of $32.4 million and the carrying value of our investment was $22.2 million, representing a 30% interest in the Securities Fund. We also had advanced $10.0 million to the Securities Fund under a revolving credit agreement which was paid in full as of March 31, 2008. For the three months ended March 31, 2008, we recognized equity in loss of $0.6 million, of which $4.4 million represented an unrealized loss on the mark-to-market adjustment of the securities in the Securities Fund. We also earned $0.1 million of management fees from the Securities Fund for the three months ended March 31, 2008.

Recent Developments

Securities Fund

On April 10, 2008, we contributed an additional $16.0 million to the Securities Fund and increased our ownership interest to approximately 45%.

Jean-Michel Wasterlain

Jean-Michel Wasterlain, an Executive Vice President of the Company, left the Company as of April 11, 2008. As a result, Mr. Wasterlain's employment agreement with the Company was terminated effective April 11, 2008. Mr. Wasterlain was not entitled to any severance, bonus or other payments or awards as a result of his departure. However, pursuant to Mr. Wasterlain's Outperformance Bonus Plan, Mr. Wasterlain is deemed to have a vested interest in, and may continue to receive the following: (i) 20% of the bonus participation amount relating to fee streams and securities investments that were made in the 12 months prior to April 11, 2008; (ii) 40% of the bonus participation amount relating to fee streams and securities investments that were made more than 12 months and less than 24 months prior to April 11, 2008; (iii) 60% of the bonus participation amount relating to fee streams and securities investments that were made more than 24 months and less than 36 months prior to April 11, 2008; (iv) 80% of the bonus participation amount relating to fee streams and securities investments that were made more than 36 months and less than 48 months prior to April 11, 2008; and (v) 100% of the bonus participation amount relating to fee streams and securities investments that were made more than 48 months prior to April 11, 2008.

Dividends

On April 22, 2008, we declared a dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on May 15, 2008 to the stockholders of record as of the close of business on May 5, 2008.

Monroe Capital

On May 7, 2008, we completed a recapitalization of our middle market corporate lending venture known as Monroe Capital. As part of the recapitalization, a money-manager invested approximately $87.2 million of cash equity capital into the business, we contributed $6.8 million and the lender, under two consolidated revolving credit facilities totaling $800 million of capacity and having $423 million of outstanding at March 31, 2008, extinguished a portion of the outstanding debt balance and refinanced the remaining indebtedness in the form of a private collateralized loan obligation match funding the underlying assets. We also contributed our ownership CLO equity interests into the recapitalized entity. Upon completion of the recapitalization transaction, the new investor became the manager of the assets and we deconsolidated the venture and prospectively will use the equity method of accounting for the investment. As part of this recapitalization, we terminated our joint venture with Monroe Management.

Inflation

Our leases for tenants of operating real estate are generally either:

•: net leases where the tenants are responsible for all or a significant portion of the real estate taxes, insurance and operating expenses and the leases provide for increases in rent either based on changes in the Consumer Price Index, or CPI, or pre-negotiated increases; or
•: operating leases which provide for separate escalations of real estate taxes and operating expenses over a base amount, and/or increases in the base rent based on changes in the CPI.

We believe that most inflationary increases in expenses will be offset by the expense reimbursements and contractual rent increases described above to the extent of occupancy.

We believe that the risk associated with an increase in market interest rates on the floating rate debt used to finance our investments in our term debt transactions and our direct investments in real estate debt, will be largely offset by our strategy of matching the terms of our assets with the terms of our liabilities and through our use of hedging instruments.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

Management believes that funds from operations, or FFO, and adjusted funds from operations, or AFFO, each of which are non-GAAP measures, are additional appropriate measures of the operating performance of a REIT and NorthStar in particular. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (NAREIT), as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of depreciable properties, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, and after adjustments for unconsolidated/uncombined partnerships and joint ventures. AFFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company's cash flow generated by operations.

We calculate AFFO by subtracting from (or adding) to FFO:

•: normalized recurring expenditures that are capitalized by us and then amortized, but which are necessary to maintain our properties and revenue stream, e.g., leasing commissions and tenant improvement allowances;
•: an adjustment to reverse the effects of the straight-lining of rents and fair value lease revenue under SFAS 141;
•: the amortization or accrual of various deferred costs including intangible assets and equity based compensation; and

•: an adjustment to reverse the effects of non-cash unrealized gains/(loss).

Our calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. Our management utilizes FFO and AFFO as measures of our operating performance, and believes they are also useful to investors, because they facilitate an understanding of our operating performance after adjustment for certain non-cash expenses, such as real estate depreciation, which assumes that the value of real estate assets diminishes predictably over time and, in the case of AFFO, equity based compensation. Additionally, FFO and AFFO serve as measures of our operating performance because they facilitate evaluation of our company without the effects of selected items required in accordance with GAAP that may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our investors with an additional useful measure to compare our financial performance to certain other REITs.

Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO and AFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

Set forth below is a reconciliation of FFO and AFFO to net income from continuing operations before minority interest for the three months ended March 31, 2008 and 2007 (in thousands):

	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
Funds from Operations:
Income from continuing operations before minority interest	$	223,793		$	8,087
Minority interest in joint ventures		(245	)		—

Income from continuing operations before minority interest in operating partnership		223,548			8,087
Adjustments:
Preferred dividend		(5,231	)		(1,313	)
Depreciation and amortization		9,938			6,590
Funds from discontinued operations		—			22
Real estate depreciation and amortization—unconsolidated ventures		247			249

Funds from Operations	$	228,502		$	13,635

Adjusted Funds from Operations:
Funds from Operations	$	228,502		$	13,635
Straight-line rental income, net		(757	)		(324	)
Straight-line rental income, discontinued operations		—			10
Straight-line rental income, unconsolidated ventures		(46	)		(60	)
Amortization of equity-based compensation		6,991			3,731
Fair value lease revenue (SFAS 141 adjustment)		(306	)		(176	)
Unrealized(gains)/losses from mark-to-market adjustments		(214,558	)		8,010
Unrealized losses from mark-to-market adjustments, unconsolidated ventures		4,355			—

Adjusted Funds from Operations	$	24,181		$	24,826

Return on Average Common Book Equity

We calculate return on average common book equity ("ROE") on a consolidated basis and for each of our major business lines. We believe that ROE provides a good indication of the performance of the Company and our business lines because we believe it provides the best approximation of cash returns on common equity invested. Management also uses ROE, among other factors, to evaluate profitability and efficiency of equity capital employed, and as a guide in determining where to allocate capital within its business. ROEs may fluctuate from quarter to quarter based upon a variety of factors, including the timing and amount of investment fundings, repayments and asset sales, capital raised and leverage used, and the yield on investments funded.

Return on Average Common Book Equity (including and excluding G&A and one-time items)
(dollars in thousands)

			Three Months Ended March 31, 2008				Annualized March 31, 2008(2)		Year Ended December 31, 2007
Adjusted Funds from Operations (AFFO)			$	24,181		[A]	$	96,724	$	95,683
Plus: Fund Raising Fees and Other Joint Venture Costs				—						6,295

AFFO, excluding Fund Raising Fees and Other Joint Venture Costs				24,181		[B]		96,724		101,978
Plus: General & Administrative Expenses				18,054						56,561
Plus: General & Administrative Expenses from Unconsolidated Ventures				595						4,810
Less: Equity-Based Compensation and Straight-Line Rent included in G&A				6,995						16,214

AFFO, excluding G&A				35,835		[C]		143,340		147,135
Average Common Book Equity & Operating Partnership Minority Interest(1)		[D]	$	628,494					$	442,018
	Return on Average Common Book Equity (including G&A)	[A]/[D]		15.4	%					21.6	%
	Return on Average Common Book Equity (excluding Fund Raising and Other Joint Venture Costs)	[B]/[D]		15.4	%					23.1	%
	Return on Average Common Book Equity (excluding G&A)	[C]/[D]		22.8	%					33.3	%

(1): Average Common Book Equity & Operating Partnership Minority Interest computed using beginning and ending of period balances. ROE will be impacted by the timing of new investment closings and repayments during the quarter.
(2): Annualized numbers are calculated by taking the current quarter amounts and multiplying by four.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to loss resulting from changes in interest rates and asset prices. We are subject to credit risk and interest rate risk with respect to our investments in real estate debt, real estate securities and net leased real estate. The primary market risk that we are exposed to is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our interest rate risk sensitive assets, liabilities and related derivative positions are generally held for non-trading purposes. At March 31, 2008, a hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $32.1 million, offset by an increase in our interest expense of approximately $25.4 million on our variable rate liabilities.

Real Estate Debt

We invest in real estate debt which are generally instruments secured by commercial and multifamily properties, including first lien mortgage loans, junior participations in first lien mortgage loans, second lien mortgage loans, mezzanine loans, and preferred equity interests in borrowers who own such properties. We generally hold these instruments for investment rather than trading purposes. These investments are either floating or fixed rate. The interest rates on our floating rate investments

typically float at a fixed spread over an index such as LIBOR. These instruments typically reprice every 30 days based upon LIBOR in effect at that time. Given the frequent and periodic repricing of our floating rate investments, changes in interest rates are unlikely to materially affect the value of our floating rate portfolio. Changes in short-term rates will, however, affect earnings from our investments. Increases in LIBOR will increase the interest income received by us on our investments and therefore increase our earnings. Decreases in LIBOR have the opposite effect.

We also invest in fixed rate investments. The value of these investments may be affected by changes in long-term interest rates. To the extent that long-term interest rates increase, the value of long-term fixed rate assets is diminished. Any fixed rate real estate debt investments which we hold would be similarly impacted. We do not generally seek to hedge this type of risk unless the asset is leveraged as we believe the costs of such a hedging transaction over the term of such an investment would generally outweigh the benefits. If fixed rate real estate debt is funded with floating rate liabilities, we typically convert the floating rate to fixed through the use of interest rate swaps, caps or other hedges. Because the interest rates on our fixed rate investments are generally fixed through maturity of the investment, changes in interest rates do not affect the income we earn from our fixed rate investments.

In our real estate debt business we are also exposed to credit risk, which is the risk that the borrower under our loan agreements cannot repay its obligations to us in a timely manner. While we have not experienced a payment default as of the date of this Quarterly Report on Form 10-Q, our position in the capital structure may expose us to losses as a result of such default in the future. In the event that the borrower cannot repay our loan, we may exercise our remedies under the loan documents, which may include a foreclosure against the collateral if we have a foreclosure right as a real estate debtholder under the loan agreement. The real estate debt that we intend to invest in will often allow us to demand foreclosure as a real estate debtholder if our loan is in default. To the extent the value of our collateral exceeds the amount of our loan (including all debt senior to us) and the expenses we incur in collecting on our loan, we would collect 100% of our loan amount. To the extent that the amount of our loan plus all debt senior to our position exceeds the realizable value of our collateral, then we would incur a loss. We also incur credit risk in our periodically scheduled interest payments which may be interrupted as a result of the operating performance of the underlying collateral.

We seek to manage credit risk through a thorough financial analysis of a transaction before we make such an investment. Our analysis is based upon a broad range of real estate, financial, economic and borrower-related factors which we believe are critical to evaluating the credit risk inherent in a transaction.

We expect our investments to be denominated in U.S. dollars or, if they are denominated in another currency, to be converted back to U.S. dollars through the use of currency swaps. It may not be possible to eliminate all of the currency risk as the payment characteristics of the currency swap may not exactly match the payment characteristics of the investments.

Real Estate Securities

In our real estate securities business, we mitigate credit risk through credit analysis, subordination and diversification. The CMBS we invest in are generally junior in right of payment of interest and principal to one or more senior classes, but benefit from the support of one or more subordinate classes of securities or other form of credit support within a securitization transaction. The senior unsecured REIT debt securities we invest in reflect comparable credit risk. Credit risk refers to each individual borrower's ability to make required interest and principal payments on the scheduled due dates. We believe that these securities offer attractive risk-adjusted returns with reasonable long-term principal protection under a variety of default and loss scenarios. While the expected yield on these

securities is sensitive to the performance of the underlying assets, the more subordinated securities and certain other features of a securitization, in the case of mortgage backed securities, and the issuer's underlying equity and subordinated debt, in the case of REIT securities, are designed to bear the first risk of default and loss. The real estate securities portfolios of our investment grade term debt transactions are diversified by asset type, industry, location and issuer. We further minimize credit risk by monitoring the real estate securities portfolios of our investment grade term debt transactions and the underlying credit quality of their holdings.

The real estate securities underlying our investment grade term debt transactions are also subject to spread risk. The majority of these securities are fixed rate securities, which are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. In other words, their value is dependent on the yield demanded on such securities by the market, based on their credit relative to U.S. Treasuries. An excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these securities, resulting in the use of a higher or "wider" spread over the benchmark rate (usually the applicable U.S. Treasury security yield) to value these securities. Under these conditions, the value of our real estate securities portfolio would tend to decrease. Conversely, if the spread used to value these securities were to decrease or "tighten," the value of our real estate securities would tend to increase. Such changes in the market value of our real estate securities portfolio may affect our net equity or cash flow either directly through their impact on unrealized gains or losses on available for sale securities by diminishing our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital.

Returns on our real estate securities are sensitive to interest rate volatility. If interest rates increase, the funding cost on liabilities that finance the securities portfolio will increase if these liabilities are at a floating rate or have maturities shorter than the assets.

Our general financing strategy focuses on the use of "match-funded" structures. This means that we seek to align the maturities of our debt obligations with the maturities of our investments in order to minimize the risk of being forced to refinance our liabilities prior to the maturities of our assets, as well as to reduce the impact of fluctuating interest rates on earnings. In addition, we generally match interest rates on our assets with like-kind debt, so that fixed rate assets are financed with fixed rate debt and floating rate assets are financed with floating rate debt, directly or through the use of interest rate swaps, caps or other financial instruments or through a combination of these strategies. Our investment grade term debt transactions utilize interest rate swaps to minimize the mismatch between their fixed rate assets and floating rate liabilities.

Our financing strategy is dependent on our ability to place the match-funded debt we use to finance our real estate securities at spreads that provide a positive arbitrage. If spreads on the bonds issued by term debt transactions widen or if demand for these liabilities ceases to exist, then our ability to execute future term debt transaction financings will be severely restricted.

Interest rate changes may also impact our net book value as our investments in debt securities are marked-to-market each quarter with changes in fair value reflected in other comprehensive income (a separate component of owners' equity). Generally, as interest rates increase, the value of fixed rate securities within the term debt transaction, such as CMBS, decreases and as interest rates decrease, the value of these securities will increase. These swings in value have a corresponding impact on the value of our investment in the term debt transaction. Within the term debt transaction, we seek to hedge against changes in cash flows attributable to changes in interest rates by entering into interest rate swaps/caps and other derivative instruments. Such derivatives are typically designated as cash flow hedge relationships according to SFAS No. 133.

Net Lease Properties

Our ability to manage the interest rate risk and credit risk associated with the assets we acquire is integral to the success of our net lease properties investment strategy. Although we may, in special situations, finance our purchase of net lease assets with floating rate debt, our general policy will be to mitigate our exposure to rising interest rates by financing our purchases with fixed rate mortgages. We seek to match the term of fixed rate mortgages to our expected holding period for the underlying asset. Factors we consider to assess the expected holding period include, among others, the primary term of the lease as well as any extension options that may exist.

In order to ensure that we have as complete an understanding as possible of a tenant's ability to satisfy its obligations under its lease, we undertake a rigorous credit evaluation of each tenant prior to executing sale/leaseback or net lease asset acquisitions. This analysis includes an extensive due diligence investigation of the tenant's business as well as an assessment of the strategic importance of the underlying real estate to the tenant's core business operations. Where appropriate, we may seek to augment the tenant's commitment to the facility by structuring various credit enhancement mechanisms into the underlying leases. These mechanisms could include security deposit requirements or affiliate guarantees from entities we deem to be creditworthy.

Corporate Lending

Credit risk management for the corporate loan portfolio begins with an assessment of the credit risk of a borrower which is based on its financial position. As part of the overall credit risk assessment of a borrower, each corporate loan transaction is assigned a risk rating that is subject to approval based on defined credit approval process. Our credit rating criteria for each loan rating focuses on three factors, which are credit, collateral, and financial performance. Subsequent to loan origination, risk ratings are monitored on an ongoing basis. If necessary, risk ratings are adjusted to reflect changes in the borrower's financial condition, cash flow or financial situation. We use risk rating to measure and evaluate concentrations within portfolios. In making decisions regarding credit, we consider risk rating, collateral, industry and single name concentration limits.

We use a variety of tools to continuously monitor a borrower's or counterparty's ability to perform under its obligations. Additionally, we utilize syndication of exposure to other entities, loan sales and other risk mitigation techniques to manage the size and risk profile of the loan portfolio.

Derivatives and Hedging Activities

We use derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap agreements and the primary objective is to minimize interest rate risks associated with the our investment and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties; however, we do not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings. The objective in using interest rate derivatives is to add stability to interest expense and to manage exposure to interest rate movements.

In January 2008, we adopted SFAS 159 and elected the fair value option for our bonds payable and our liability to subsidiary trusts issuing preferred securities. Under SFAS 159, the changes in fair value of these financial instruments are now recorded in earnings. As a result of this election, the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting, in accordance with SFAS 133 "Derivatives and Hedging Activity", since the underlying debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the life of the swap or the associated debt with current

mark-to-market unrealized gains or losses recorded in earnings. For the three months ended March 31, 2008, we recorded, in earnings, a mark-to-market unrealized loss of $30.3 million and a $1.2 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps.

The following tables summarize our derivative financial instruments as of March 31, 2008 (in thousands).

		Notional Amount		Fair Value		Range of Strike Rate		Range of Maturity
Interest rate swaps and basis swaps		793,957		(83,497	)	4.18%–5.63%		March 2010–August 2018

Item 4. Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act), under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in our periodic reports.

Internal Control over Financial Reporting

Changes in internal control over financial reporting. There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

(a): Exhibits

Exhibit Number		Description of Exhibit
3.1		Articles of Amendment and Restatement of NorthStar Realty Finance Corp., as filed with the State Department of Assessments and Taxation of Maryland on October 20, 2004 (incorporated by reference to Exhibit 3.1 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
3.2		Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
3.3		Amendment No. 1 to the Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 27, 2005)
3.4		Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.75% Series A Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.'s Registration Statement on Form 8-A, dated September 14, 2006)
3.5		Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.'s Registration Statement on Form 8-A, dated February 7, 2007)
3.6		Articles Supplementary Classifying and Designating Additional Shares of NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.6 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
10.1		Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of October 19, 2004, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.1 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.2		NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.3		LTIP Unit Vesting Agreement under the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRF Employee, LLC (incorporated by reference to Exhibit 10.10 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.4		Form of Vesting Agreement for Units of NRF Employee, LLC, each dated as of October 29, 2004, between NRF Employee, LLC and certain employees and co-employees of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.11 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.5		Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.7(a) to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))

10.6		NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.13 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.7		Form of Notification under NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.14 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.8		Form of Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.15 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
10.9		Junior Subordinated Indenture, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.31 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)
10.10		Amended and Restated Trust Agreement, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and Andrew Richardson, David Hamamoto and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.32 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)
10.11		Amendment No. 1 to Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of March 14, 2006, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.34 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)
10.12		Junior Subordinated Indenture, dated as of August 1, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.39 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.13		Amended and Restated Trust Agreement, dated as of August 1, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.40 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.14		Second Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of September 14, 2006 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed September 14, 2006)
10.15		Junior Subordinated Indenture, dated as of October 6, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.42 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)

10.16		Amended and Restated Trust Agreement, dated as of October 6, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.43 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.17		Revolving Credit Agreement, dated as of November 3, 2006, between NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, NRFC Sub-REIT Corp., NS Advisors, LLC, Keybanc Capital Markets and Bank of America, N.A. (incorporated by reference to Exhibit 10.44 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.18		Third Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of February 7, 2007 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed February 9, 2007)
10.19		Junior Subordinated Indenture, dated as of March 30, 2007, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.46 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007)
10.20		Amended and Restated Trust Agreement, dated as of March 30, 2007, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.47 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007)
10.21		Form of NorthStar Realty Finance Corp. 2006 Outperformance Plan Award Agreement (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to Form S-8 filed on April 13, 2007)
10.22		Amendment No. 1 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to Form S-8 filed on April 13, 2007)
10.23		Amendment No. 2 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 3 to Form S-8 filed on June 6, 2007)
10.24		Junior Subordinated Indenture, dated as of June 7, 2007, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.52 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
10.25		Amended and Restated Trust Agreement, dated as of June 7, 2007, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.53 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)

10.26		Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership, dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-146679))
10.27		Master Repurchase Agreement, dated as of August 8, 2007, by and among NRFC JP Holdings, LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.56 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
10.28		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and David T. Hamamoto (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.29		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Andrew C. Richardson (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.30		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel R. Gilbert (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.31		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Richard J. McCready (incorporated by reference to Exhibit 99.4 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.32		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel Raffe (incorporated by reference to Exhibit 99.5 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.33		Credit Agreement, dated as of November 6, 2007, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings X, LLC, NRFC WA Holdings XII, LLC, NorthStar Realty Finance Corp., NorthStar Realty Finance L.P. and Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.53 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)
10.34		Limited Guaranty Agreement, dated as of November 6, 2007, by and among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.54 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)
31.1		Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		NORTHSTAR REALTY FINANCE CORP.
Date: May 9, 2008		By:	/s/ DAVID T. HAMAMOTO David T. Hamamoto Chief Executive Officer

By:

/s/ ANDREW C. RICHARDSON

Andrew C. Richardson
Chief Financial Officer

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NORTHSTAR REALTY FINANCE CORP. QUARTERLY REPORT For the Three Months Ended March 31, 2008
TABLE OF CONTENTS
NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in Thousands)
NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands, Except Per Share Data) (Unaudited)
NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands, Except Per Share Data) (Unaudited)
NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands, Except Per Share Data) (Unaudited)
NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Amount in Thousands, Except per Share Data (Unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS
Return on Average Common Book Equity (including and excluding G&A and one-time items) (dollars in thousands)

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 6. Exhibits

SIGNATURES

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Northstar Realty Finance (NRF) Inactive 10-Q2008 Q1 Quarterly report

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