Northstar Realty Finance 10Q 2008 Q3 Quarterly report

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 September 30, 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 62,989,909 shares outstanding as of November 5, 2008.

Table of Contents

NORTHSTAR REALTY FINANCE CORP.
QUARTERLY REPORT
For the Three and Nine Months Ended September 30, 2008

TABLE OF CONTENTS

Index		Page

Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	3
	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and September 30, 2007	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2008 and September 30, 2007	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and September 30, 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	41
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	66
Item 4.	Controls and Procedures	70
Part II.	Other Information	71
Item 6.	Exhibits	71
Signatures		76

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands)

		September 30, 2008			December 31, 2007

		(unaudited)
ASSETS:
Cash and cash equivalents		$	164,593		$	153,829
Restricted cash			162,288			202,295
Operating real estate—net			1,136,378			1,134,136
Available for sale securities, at fair value	��		391,509			549,522
Collateral held by broker			—			12,746
Real estate debt investments, net			2,005,697			2,007,022
Corporate loan investments			—			457,139
Investments in and advances to unconsolidated ventures			106,007			33,143
Receivables, net of allowance of $0 and $1 in 2008 and 2007, respectively			27,131			32,141
Unbilled rents receivable			7,488			5,684
Derivative instrument, at fair value			42			—
Deferred costs and intangible assets, net			78,014			126,677
Other assets			41,718			78,448

Total assets			4,120,865			4,792,782

LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Mortgage notes and loans payable			908,601			912,365
Exchangeable senior notes, measured at fair value as of September 30, 2008			196,770			172,500
Bonds payable, measured at fair value as of September 30, 2008			860,771			1,654,185
Credit facilities			48,216			501,432
Secured term loans			410,281			416,934
Liability to subsidiary trusts issuing preferred securities, measured at fair value as of September 30, 2008			95,582			286,258
Repurchase obligations			1,540			1,864
Securities sold, not yet purchased, at fair value			—			12,856
Obligations under capital leases			3,561			3,541
Accounts payable and accrued expenses			20,979			34,893
Escrow deposits payable			49,947			65,445
Derivative liability, at fair value			44,902			49,280
Other liabilities			39,385			40,695

Total liabilities			2,680,535			4,152,248
Minority interest in operating partnership			79,347			7,534
Minority interest in joint ventures			101,306			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 September 30, 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 September 30, 2008 and December 31, 2007, respectively			183,505			183,505
Common stock, $0.01 par value, 500,000,000 shares authorized, 62,986,070 and 61,719,469 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively			630			617
Additional paid-in capital			607,573			595,418
Retained earnings (deficit)			494,615			(40,075	)
Accumulated other comprehensive loss			(84,513	)		(179,293	)

Total stockholders' equity			1,259,677			618,039

Total liabilities and stockholders' equity		$	4,120,865		$	4,792,782

See accompanying notes to condensed consolidated financial statements

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands, Except Per Share Data)
(unaudited)

			Three Months Ended September 30, 2008			Three Months Ended September 30, 2007			Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007

Revenues and other income:
Interest income			$	49,783		$	78,082		$	163,373		$	216,286
Interest income—related parties				3,424			3,767			10,767			9,698
Rental and escalation income				29,028			26,674			87,005			67,877
Advisory and management fee income—related parties				1,812			2,441			10,688			5,256
Other revenue				9,493			1,714			14,452			5,275

		Total revenues		93,540			112,678			286,285			304,392
Expenses:
	Interest expense			45,484			65,290			146,306			177,393
	Real estate properties—operating expenses			1,938			2,158			6,023			6,406
	Asset management fees—related parties			853			1,405			3,892			2,868
	Fundraising fees, debt issuance costs and other			—			6,295			4,948			6,295
	Provision for loss on investments			2,450			—			5,700			—
General and administrative:
	Salaries and equity based compensation(1)			9,429			9,525			31,084			27,175
	Auditing and professional fees			963			1,347			4,638			5,558
	Other general and administrative			3,333			3,517			10,744			10,157

		Total general and administrative		13,725			14,389			46,466			42,890
Depreciation and amortization				13,566			9,163			33,481			23,594

		Total expenses		78,016			98,700			246,816			259,446
Income from operations				15,524			13,978			39,469			44,946
Equity in (loss)/earnings of unconsolidated ventures				772			(4,578	)		(4,846	)		(5,162	)
Unrealized gain (loss) on investments and other				245,319			4,416			427,733			(3,762	)
Realized gain on investments and other				6,973			997			14,057			3,524

Income from continuing operations before minority interest				268,588			14,813			476,413			39,546
Minority interest in operating partnership				(27,524	)		(680	)		(47,346	)		(1,835	)
Minority interest in joint ventures				(2,300	)		(215	)		(2,097	)		(351	)

Income from continuing operations				238,764			13,918			426,970			37,360
Income (loss) from discontinued operations, net of minority interest				—			—			—			(56	)

Net income				238,764			13,918			426,970			37,304
Preferred stock dividends				(5,231	)		(5,231	)		(15,693	)		(11,302	)

Net income available to common stockholders			$	233,533		$	8,687		$	411,277		$	26,002

Net income per share from continuing operations (basic/diluted)			$	3.72		$	0.14		$	6.55		$	0.42
Income per share from discontinued operations (basic/diluted)				—			—			—			—

Net income available to common stockholders			$	3.72		$	0.14		$	6.55		$	0.42

Weighted average number of shares of common stock:
	Basic			62,825,383			61,629,938			62,772,013			61,448,490
	Diluted			70,229,958			64,659,852			69,998,215			64,400,903

(1): The three months ended September 30, 2008 and 2007 include $5,439 and $3,948 of equity based compensation expense, respectively. The nine months ended September 30, 2008 and 2007 include $18,396 and $11,837 of equity based compensation expense, respectively.
See accompanying notes to condensed consolidated financial statements

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended September 30, 2008			Three Months Ended September 30, 2007			Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007

Net income/(loss) available to common shareholders	$	233,533		$	8,687		$	411,277		$	26,002
Unrealized gain (loss) on available for sale securities		(3,719	)		(54,620	)		(17,474	)		(96,925	)
Change in fair value of derivatives		(1,418	)		(24,091	)		(3,872	)		7,208
Reclassification adjustment for gains/(losses) included in net income		1,397			9,502			25,160			9,712

Comprehensive Income	$	229,793		$	(60,522	)	$	415,091		$	(54,003	)

See accompanying notes to condensed consolidated financial statements

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands, Except Per Share Data)
(Unaudited)

		Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007

Net cash provided by operating activities		$	72,592		$	78,386
Cash flows from investing activities:
	Acquisition of operating real estate, net		(21,160	)		(606,512	)
	Acquisition of available for sale securities		(55,031	)		(779,821	)
	Proceeds from disposition of securities available for sale		6,115			104,233
	Available for sale securities repayments		2,987			55,702
	Increase in term debt transaction warehouse deposits		—			(18,000	)
	Originations/acquisitions of real estate debt investments		(276,637	)		(1,074,483	)
	Real estate debt investments repayments		266,200			408,755
	Proceeds from sale of real estate debt investments		30,400			—
	Real estate debt investments acquisition costs		(265	)		(3,136	)
	Restricted cash for investment activities		(120,977	)		(121,952	)
	Investment deposits		(749	)		(5,308	)
	Corporate debt investment acquisitions		(16,362	)		(472,588	)
	Proceeds from sale of corporate debt investments		102,575			5,419
	Corporate debt investment repayments		24,985			15,181
	Investment in and advances to unconsolidated ventures		(40,031	)		(28,099	)
	Cash receipts from term debt transaction issuer		—			8,826
	Distributions from unconsolidated ventures		5,850			362
	Proceeds from sale of assets		—			62,821
	Other loans repayments		10,000			—

Net cash used in investing activities			(82,100	)		(2,448,600	)
Cash flows from financing activities:
	Collateral held by broker		12,746			(12,346	)
	Securities sold, not yet purchased		—			28,471
	Settlement of short sale		(12,778	)		(16,352	)
	Collateral held by swap counter party		(4,394	)		—
	Mortgage notes and loan borrowings		—			453,363
	Mortgage principal repayments		(3,764	)		(3,609	)
	Borrowings under credit facilities		37,648			1,524,629
	Repayments on credit facilities		(112,900	)		(643,744	)
	Repurchase obligation borrowings		2,024			23,656
	Repurchase obligation repayments		(2,347	)		(52,985	)
	Proceeds from bonds		77,000			828,300
	Bond repayments		(95,300	)		—
	Bond repurchases		(35,638	)		(113,594	)
	Other loans payable		—			13,300
	Other loans payable repayment		—			(387	)
	Borrowing under secured loan		67,710			107,047
	Secured term loan repayment		(73,277	)		(900	)
	Borrowings from subsidiary trusts issuing preferred securities		—			72,500
	Payment of deferred financing costs		(148	)		(24,146	)
	Capital contributions by joint venture		94,824			2,481
	Distribution to joint venture		(8,746	)		—
	Restricted cash for financing activities		87,403			(2,302	)
	Proceeds from exchangeable senior notes		80,000			172,500
	Proceeds from preferred stock offering		—			190,000
	Proceeds from common stock offering		—			3,740
	Proceeds from dividend reinvestment and stock purchase plan		1,958			—
	Dividends (common and preferred) and distributions		(91,486	)		(80,282	)
	Offering costs		(263	)		(6,714	)

Net cash provided by financing activities			20,272			2,462,626
Net decrease in cash & cash equivalents			10,764			92,412
Cash & cash equivalents—beginning of period			153,829			44,753

Cash & cash equivalents—end of period		$	164,593		$	137,165

See accompanying notes to condensed consolidated financial statements

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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. 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

Wakefield Capital, LLC

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.

On July 9, 2008, Wakefield sold a $100 million convertible preferred equity interest to Inland American Real Estate Trust, Inc. ("Inland American"). The Company received approximately $87.7 million of net proceeds from the transaction. Prior to conversion, the convertible preferred investment will yield a dividend of 10.5%. The convertible preferred equity may be converted or redeemed, at Inland American's option, upon the sale or recapitalization of the Wakefield venture. Wakefield may, at its option, redeem the convertible preferred interests at any time following the first anniversary of the closing, subject to payment of a call premium that declines over time. In addition, at any time after the second anniversary of the closing, Inland American may convert its preferred equity interests into common equity in Wakefield. Based on the initial investment amount and capital accounts of the Wakefield members, the convertible preferred equity interests represent, upon conversion, approximately a 42% common equity ownership interest in Wakefield. Inland American will have the option of contributing additional preferred equity and participating in new Wakefield investment

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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)

opportunities in proportion to its percentage ownership interest, assuming it were to convert its interests to common equity.

The Company controls substantially all major decisions of the joint venture. Accordingly, the joint venture's financial statements are consolidated into the Company's consolidated financial statements and Inland American's and Chain Bridge's capital are treated as minority interests.

Monroe Capital NorthStar Funding, LLC

In March 2007, the Company entered into a joint venture with Monroe Capital Holdco, LLC ("Monroe"), which served as a platform for originating middle-market loans. The joint venture ("Monroe Capital") originated, structured and syndicated middle-market corporate loans, including middle-market loans to highly leveraged borrowers.

On May 7, 2008, the Company completed a recapitalization of this middle-market corporate lending venture. As part of the recapitalization, an institutional money-manager invested approximately $87.2 million of cash equity into the business and the Company contributed $6.8 million of new equity capital and its CLO equity interests. The lender under two consolidated revolving credit facilities totaling $800.0 million of capacity and having $378.0 million of outstanding at May 7, 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 which match funded the underlying assets. The venture was also permitted to sell a portion of the loan collateral and to use the cash to make new corporate loan investments.

In connection with the recapitalization, the Company recognized a $46.0 million realized gain upon the extinguishment of a portion of the debt, a simultaneous $27.1 million cost basis reduction to its investment in the recapitalized venture and a realized loss of $18.9 million related to the sale of certain corporate loans within the portfolio, which were recorded in realized gain (loss) on investments and other in the condensed consolidated statement of operations. The new investor became the controlling manager of the entity and the Company deconsolidated the venture. Additionally, as part of this recapitalization, the Company terminated its joint venture with Monroe Management.

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

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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)

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 included in its annual report on Form 10-K.

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.

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 had the one-time option to elect fair value on January 1, 2008 for its existing financial assets and liabilities. For all new financial instruments, the Company has the one-time option to elect fair value for these financial assets or liabilities on the election date, as defined in SFAS 159. 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 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

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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)

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 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

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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)

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 could have on its financial statements.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission ("SEC") of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The Company is currently evaluating the potential impact that the adoption of SFAS 162 could have on its financial statements.

In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement of the conversion option. FSP APB 14-1 requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity. The liability component of the debt instrument is accreted to par using the effective yield method; accretion is reported as a component of interest expense. The equity component is not subsequently re-valued as long as it continues to qualify for equity treatment. This practice marks a significant change from the current accounting practice for convertible debt instruments in the scope of FSP APB 14-1. Current practice does not require separation of the liability and equity components of such instruments. Separately accounting for these instruments' liability and equity components will results in the recording of more non-cash interest cost over the life of the convertible debt instrument, because of an initial debt discount. Additionally, FSP APB 14-1 precludes the use of the fair value option pursuant to SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company intends to adopt FSP APB 14-1 effective January 1, 2009 and apply its provisions retrospectively to all periods presented in its financial statements. The Company is currently evaluating the impact of the adoption of FSP APB 14-1 on the balance sheet, but has determined that FSP APB 14-1 will result in the Company recognizing additional non-cash interest expense of approximately $0.8 million, $2.1 million and $3.6 million in its 2007, 2008 and 2009 statements of operations, respectively. The 2008 increase in non-cash interest expense will be offset by

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies—(Continued)

a $5.0 million capitalization of financing fees which were expensed upon the election of the fair value option on the convertible debt instruments.

In October 2008, the FASB issued Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active ("FSP 157-3"). FSP 157-3 clarifies the application of SFAS 157, which the Company adopted as of January 1, 2008, in cases where a market is not active. The Company has considered the guidance provided by FSP 157-3 in its determination of estimated fair values as of September 30, 2008, and the impact was not material.

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
•: 7.25% exchangeable senior notes.

During the second quarter 2008, the Company elected the fair value option for its 11.50% exchangeable senior notes issued in May 2008 and its equity investment in its corporate lending business.

The Company has elected the fair value option for the above 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments—(Continued)

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, beneficial interest in securitizations 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments—(Continued)

Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 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	$	—	$	172,588	$	87,986	$	260,574
	Real estate term debt—N-Star(1)		—		—		13,023		13,023
	Real estate term debt—Third party		—		—		2,150		2,150
	REIT debt		—		66,293		900		67,193
	Term debt equity—N-Star		—		—		40,736		40,736
	Trust preferred securities		—		—		7,833		7,833
Derivative asset			—		42		—		42
Corporate lending investment			—		—		47,275		47,275

	Total assets	$	—	$	238,923	$	199,903	$	438,826

Liabilities:
Exchangeable senior notes		$	—	$	196,770	$	—	$	196,770
N-Star IV,VI, VII and VIII bonds payable(1)			—		—		860,771	$	860,771
Liability to subsidiary trusts issuing preferred securities			—		—		95,582		95,582
Derivative liability			—		44,902		—		44,902

	Total liabilities	$	—	$	241,672	$	956,353	$	1,198,025

(1): Markets have become relatively inactive for these securities and as a result the balances have been transferred from Level 2 to Level 3.

As of September 30, 2008, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

The following table presents additional information about the Company's available for sale securities, liabilities to subsidiary trusts issuing preferred securities and corporate lending investment

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments—(Continued)

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		Corporate lending investment		N-Star Bonds Payable		Liability to subsidiary trusts issuing preferred securities

Beginning balance:			$	80,851	$	—	$	—	$	168,454
	Total transfers into Level 3			125,208		79,583		1,138,919
	Total losses (realized or unrealized):					—		—
		Included in earnings		46,030		32,308		—		—
		Included in other comprehensive loss		7,401		—		—		—
	Total gains (realized or unrealized):			—		—		—		—
		Included in earnings		—		—		278,148		72,872
		Included in other comprehensive loss		—		—		—		—

Ending balance			$	152,628	$	47,275	$	860,771	$	95,582

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			$	46,030	$	32,308	$	278,148	$	72,872

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.

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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:

Financial Instruments, at Fair Value		September 30, 2008		December 31, 2007

Assets:
Available for sale securities:
	CMBS	$	260,574	$	342,353
	Real estate term debt—N-Star		11,079		18,507
	Real estate term debt—Third party		2,150		12,159
	REIT debt		67,193		80,292
	Trust preferred securities		7,833		12,264
Corporate lending investment			47,275		—

	Total assets	$	396,104	$	465,575

Liabilities:(1)
Exchangeable senior notes			196,770		172,500
N-Star IV,VI, VII and VIII bonds payable			860,771		1,654,185
Liability to subsidiary trusts issuing preferred securities			95,582		286,258

	Total liabilities	$	1,153,123	$	2,112,943

(1): Liabilities are carried at historical amortized cost 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 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments—(Continued)

option for these instruments did not change their carrying value and resulted in a reclassification from accumulated other comprehensive income to retained earnings.

(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 amounts of available for sale securities and liabilities, for which the fair value option has been elected:

		Fair Value at September 30, 2008		Amount Due Upon Maturity		Difference

Assets:
Available for sale securities:
	CMBS	$	260,574	$	490,032	$	(229,458	)
	Real estate term debt—N-Star		11,079		38,448		(27,369	)
	Real estate term debt—Third party		2,150		16,576		(14,426	)
	REIT debt		67,193		84,183		(16,990	)
	Trust preferred securities		7,833		15,000		(7,167	)

	Total assets	$	348,829	$	644,239	$	(295,410	)

Liabilities:
Exchangeable Senior Notes			196,770		252,500		(55,730	)
N-Star IV,VI, VII and VIII bonds payable			860,771		1,573,285		(712,514	)
Liability to subsidiary trusts issuing preferred securities			95,582		286,258		(190,676	)

	Total Liabilities	$	1,153,123	$	2,112,043	$	(958,920	)

At September 30, 2008, the basis in our corporate lending investment was $79.6 million. We have elected the fair market value option pursuant to SFAS 159 for this investment which is accounted for under the equity method of accounting. The fair market value of our investment at September 30, 2008 was $47.3 million.

For the three and nine months ended September 30, 2008, the Company recognized a net gain of $252.4 million and a net gain of $434.3 million, respectively, as the result of the change in fair value of financial assets and liabilities for which the fair value option was elected, which is recorded as unrealized gain (loss) on investments and other in the Company's condensed consolidated statement of operations.

4. Operating Real Estate

The Company made the following acquisitions from January 1, 2008 through September 30, 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Operating Real Estate—(Continued)

On September 25, 2008, JPMorgan Chase & Co. ("JPMorgan") announced that it had acquired substantially all of the assets and liabilities of Washington Mutual Bank, FA ("WaMu") from the Federal Deposit Insurance Corp. JPMorgan is entitled to a 90-day period from the WaMu acquisition date to decide whether they will accept or reject the terms of the lease. During the third quarter 2008, the Company added its net leased asset comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and 100% leased to WaMu to its watch list. As of September 30, 2008 the buildings had a combined $54.6 million net book value and were financed with a non-recourse $43.0 million first mortgage loan. The assets are also financed with a $9.7 million mezzanine loan which is collateral for one of the Company's securities term financings. The Company's potential loss if the lease is rejected would be the value of the Company's mezzanine loan and residual equity interest, which totals $15.2 million at September 30, 2008.

Discontinued Operations

The condensed consolidated statement of operations for the nine months ended September 30, 2007, includes results of operations of real estate assets sold or held for sale. These assets include two assisted care living facilities which were sold in April 2007. There were no discontinued operations for the three and nine months ended September 30, 2008 and for the three months ended September 30, 2007.

The following table summarizes income from discontinued operations and related gain on sale of discontinued operations, each net of minority interest, for the nine months ended September 30, 2007 (in thousands):

			Nine months Ended September 30, 2007

Revenue:
	Rental and escalation income		$	38

		Total revenue		38
Expenses:
	General and administrative expenses			1
	Interest expense			20
Depreciation and amortization				31

		Total expenses		52
Loss from discontinued operations				(14	)
Loss on disposition of discontinued operations				(45	)

Loss from discontinued operations, before minority interest				(59	)
Minority interest				3

Loss from discontinued operations, net of minority interest			$	(56	)

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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

The following is a summary of the Company's available for sale securities at September 30, 2008 and December 31, 2007 (in thousands):

September 30, 2008	Carrying Value		SFAS 159 Transition Adjustment			Losses in Accumulated OCI			Unrealized Loss on Investments			Estimated Fair Value(1)

CMBS	$	453,850	$	(64,442	)	$	—		$	(128,834	)	$	260,574
Real estate term debt—N-Star		50,527		(17,616	)		(12,369	)		(7,519	)		13,023
Real estate term debt—Third party		16,130		(3,896	)		—			(10,084	)		2,150
REIT debt		82,691		(2,276	)		—			(13,222	)		67,193
Term debt equity		69,357		—			(28,621	)					40,736
Trust preferred securities		15,000		(2,736	)					(4,431	)		7,833

Total	$	687,555	$	(90,966	)	$	(40,990	)	$	(164,090	)	$	391,509

(1): Approximately $282.0 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.

At September 30, 2008, the maturities of the available for sale securities ranged from two to 44 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—N-Star		36,123		—		(17,616	)		18,507
Real estate term debt—Third party		16,055		—		(3,896	)		12,159
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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Real Estate Debt Investments

At September 30, 2008 and December 31, 2007, the Company held the following real estate debt investments (in thousands):

September 30, 2008		Carrying Value(1)

Whole loans, floating rate		$	1,039,124	51.8	%	—	%	3.26	%	53
Whole loans, fixed rate			55,732	2.8		9.39		—		7
Subordinate mortgage interests, floating rate			224,260	11.2		—		6.25		15
Mezzanine loans, floating rate			500,676	25.0		—		4.50		16
Mezzanine loan, fixed rate			162,903	8.1		11.26		—		15
Other loans—floating			16,609	0.8		—		1.60		2
Other loans—fixed			6,393	0.3		5.53		—		1

	Total/Weighted average		2,005,697	100.0	%	10.64	%	3.97	%	109

(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 $363.5 million related to these investments, of which a minimum of $195.5 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)

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Real Estate Debt Investments—(Continued)

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 $26.2 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 September 30, 2008 and December 31, 2007, all loans were current on principal and interest payments in accordance with the terms of the loan agreement. However, for the three and nine months ended September 30, 2008, the Company recorded a credit loss provision of $3.3 million, partially offset by the reversal a $0.8 million reserve taken during the first quarter of 2008, and $5.7 million, respectively, related to loans on its watch list. Contractual maturities of real estate debt investments at September 30, 2008 are as follows:

Years Ending December 31:		Initial Maturity		Maturity Including Extensions

2008 (remainder)		$	123,861	$	18,611
2009			755,252		61,385
2010			550,132		288,786
2011			215,703		628,824
2012			192,201		682,178
Thereafter			191,166		348,531

	Total	$	2,028,315	$	2,028,315

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 September 30, 2008, the Company held no corporate debt investments as a result of the recapitalization and deconsolidation of the Monroe joint venture. See Note 1 for additional information.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Corporate Loan Investments—(Continued)

At December 31, 2007, the Company held the following corporate debt investments (dollars in thousands):

December 31, 2007	Carrying Value(1)

First lien note	$	421,973	92.3	%	2.96	%	100
Second lien note		35,166	7.7		6.02		8

Total/Weighted average	$	457,139	100.0	%	3.19	%	108

(1): Approximately $366.8 million and $90.3 million of these investments served as collateral for our MC Facility and our MC VFCC Facility, respectively, and the Company had future funding commitments totaling $14.3 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.

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 $38.0 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 September 30, 2008 and December 31, 2007, the Company had an investment in CS/Federal of approximately $7.4 million and $7.8 million, respectively. The Company recognized equity in earnings of $0.1 million for each of the three months ended September 30, 2007 and 2008. The Company recognized equity in earnings $0.3 million for each of the nine months ended September 30, 2007 and 2008.

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 originated, structured and syndicated middle-market corporate loans for Monroe Capital

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

and provided asset management services. On May 7, 2008, the Company terminated its joint venture with Monroe Management upon the completion of the recapitalization of Monroe Capital. See Note 1 for additional information.

G-NRF, LTD

On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market corporate lending platform. Upon completion of the recapitalization transaction, the new investor became the controlling manager of the assets and the Company deconsolidated the joint venture. The Company currently uses the equity method of accounting to account for the recapitalized joint venture and has elected the fair value option under SFAS 159 for its equity investment. As of September 30, 2008, the fair market value of the Company's investment in the corporate lending venture was $47.3 million. For the three months ended September 30, 2008, the Company recognized equity in earnings of $0.9 million and an unrealized gain of $0.2 million related to the fair value adjustment on its equity investment. For the period from May 8, 2008 to September 30, 2008, the Company recognized equity in earnings of $1.3 million and an unrealized loss of $32.3 million related to the fair value adjustment on its equity investment. See Note 1 for additional information.

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 September 30, 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.

During the second quarter 2008, the Company invested an additional $16.0 million in the Securities Fund. Additionally, during the second quarter 2008, the Company sold 67% of its N-Star IX advisory fee income stream to the Securities Fund for $8.8 million. The Securities Fund owns all of the equity in the N-Star IX term financing but the Company retained the advisory fees when N-Star IX was sold to the Securities Fund at its inception. The Company recognized $4.8 million of advisory fee

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

income from the sale and deferred the remaining $4.0 million, which represented the Company's ownership interest in the Securities Fund. The deferred advisory fee income will be recognized into income as the fees are earned. For the three and nine months ended September 30, 2008, the Company recognized $0.1 million in additional income from the amortization of deferred advisory fee income. At September 30, 2008, the Company had invested a total of $47.9 million in the Securities Fund and the carrying value of its investment was $33.8 million, representing a 46.0% interest.

In the third quarter 2008, the Securities Fund filed a claim against Lehman Brothers for $6.8 million (plus damages) to recover cash collateral held by Lehman Brothers. On September 30, 2008, the Securities Fund decided to record a reserve of $3.4 million against the $6.8 million cash collateral receivable.

For the three months ended September 30, 2008, the Company recognized equity in earnings of $0.5 million. The Company also earned $0.1 million of management fees from the Securities Fund for the three months ended September 30, 2008. For the nine months ended September 30, 2008, the Company recognized equity in loss of $5.1 million. The Company also earned $0.4 million of management fees from the Securities Fund for the nine months ended September 30, 2008.

LandCap Investment

On October 5, 2007, the Company entered into a 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 and accounts for its investment under the equity method of accounting. At September 30, 2008 the Company's investment in LandCap is carried at $13.7 million, which includes the Company's contributions to LandCap of $5.6 million and $11.3 million made during the second and third quarters of 2008, respectively, less the Company's $3.2 million share of LandCap's losses from the cumulative general and administrative expenses since inception. For the three and nine months ended September 30, 2008, the Company recognized equity in loss of $0.8 million and $2.5 million, respectively. At September 30, 2008, LandCap has made investments totaling $39.1 million. In addition, the Company advanced approximately $2.6 million under a $2.8 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.

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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 September 30, 2008 and December 31, 2007 (in thousands):

				Interest Rate	Maximum Amount Available		Contractual Balance at September 30, 2008		Balance at December 31, 2007

Credit Facilities
	MC Facility(1)	3/31/2008	3/31/2008	LIBOR + 0.75%	$	—	$	—	$	374,459
	MC Facility VFCC(1)	7/29/2008	7/29/2010	Commercial Paper Rate + 0.75%		—		—		71,037
	JP Facility	8/8/2009	8/8/2010	LIBOR + 1.25% to 1.80%		350,000		48,216		55,936

Total Credit Facilities						350,000		48,216		501,432
Term Loans
	WA Term Loan(2)	11/6/2009	11/6/2010	LIBOR + 2.00%		471,744		279,655		308,588
	Euro—note	11/6/2009	11/6/2010	3 month Euribor + 2.0%		106,387		106,387		108,346
	LB Term Loan	2/9/2009	2/9/2012	LIBOR + 1.50%		24,238		24,239		—

Total Credit Facilities & Term Loans						952,369		458,497		918,366

Mortgage notes payable (non-recourse)
	Chatsworth	5/1/2015		5.65%				43,001		43,219
	Salt Lake City	9/1/2012		5.16%				15,958		16,231
	EDS	10/8/2015		5.37%				47,872		48,371
	Executive Center	1/1/2016		5.85%				51,480		51,480
	Green Pond	4/11/2016		5.68%				17,395		17,480
	Indianapolis	2/1/2017		6.06%				28,553		28,600
	Wakefield GE	8/30/2010		6.93%				67,501		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%				1,868		1,887
	Wakefield—Lancaster	6/1/2037		6.40%				2,612		2,636
	Wakefield—Marysville	6/1/2037		6.40%				1,677		1,693
	Wakefield—Washington	10/1/2038		6.65%				1,980		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%				33,415		33,500
	DSG	10/11/2016		6.17%				34,346		34,648
	Keene	2/1/2016		5.85%				6,815		6,882
	Fort Wayne	1/1/2015		6.41%				3,499		3,555
	Portland	6/17/2014		7.34%				4,866		4,984
	Milpitas	3/6/2017		5.95%				22,655		22,959
	Fort Mill	4/6/2017		5.63%				27,700		27,700
	Reading	1/1/2015		5.58%				14,212		14,387
	Reading	1/1/2015		6.00%				5,000		5,000
	Alliance	12/6/2017		6.48%				23,848		24,032
Mezzanine loan payable (non-recourse)
	Chatsworth	5/1/2014		6.64%				9,664		10,692
	Fort Mill	4/6/2017		6.21%				3,044		3,208
Exchangeable Senior Notes(3)		6/15/2027		7.25%				172,500		172,500
Exchangeable Senior Notes ("NNN Notes")(3)		6/15/2013		11.50%				80,000		—
Repurchase obligations		Varies		LIBOR varies				1,540		1,864
Bonds payable(3)
	N-Star IV	7/1/2040		LIBOR + 0.62% (average spread)				292,500		300,000
	N-Star VI	6/1/2041		3 month LIBOR + 0.56% (average spread)				269,700		310,500
	N-Star VII	6/22/2051		LIBOR + 0.36% (average spread)				504,300		510,800
	N-Star VIII	2/1/2041		LIBOR + 0.57% (average spread)				506,785		532,885
Liability to subsidiary trusts issuing preferred securities(3)(4)
	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				30,100		30,100
				2.70%
	Trust VI	12/30/2036		3 month LIBOR				25,100		25,100
				2.90%
	Trust VII	4/30/2037		3 month LIBOR				37,600		37,600
				2.50%
	Trust VIII	7/30/2037		3 month LIBOR				35,100		35,100
				2.70%

							$	3,480,681	$	3,945,538

(1): Refer to Note 1 for details on the termination of these facilities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings—(Continued)

(2): The Company had an additional $192.3 million of availability under the revolving component of the term loan.
(3): 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
(4): 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 September 30, 2008 (in thousands):

	Total		Mortgage and Mezzanine Loans		Credit Facilities		Secured Term Loan(1)		Liability to Subsidiary Trusts Issuing Preferred Securities(2)		Exchangeable Senior Notes(2)		Repurchase Obligations		Bonds Payable(1)

2008	$	1,522	$	1,522	$	—	$	—	$	—	$	—	$	—	$	—
2009		470,842		10,805		48,216		410,281		—		—		1,540		—
2010		96,765		96,765		—		—		—		—		—		—
2011		14,330		14,330		—		—		—		—		—		—
2012		164,036		164,036		—		—		—		—		—		—
Thereafter		2,733,186		621,143		—		—		286,258		252,500		—		1,573,285

Total	$	3,480,681	$	908,601	$	48,216	$	410,281	$	286,258	$	252,500	$	1,540	$	1,573,285

(1): $386.0 million of the secured term loan balance may be extended for one year and the remaining balance of $24.2 million may be extended for three years at the Company's option, subject to certain conditions.
(2): 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 September 30, 2008, the Company was in compliance with all covenants under its borrowings.

Bonds Payable Repurchases

During the second quarter 2008, the Company repurchased $7.1 million of Class B, AA rated notes and $8.0 million of Class J, BBB rated notes of N-Star VIII, $5.0 million of Class B, AA rated notes and $4.5 million of Class C, single A rated notes of N-Star VI, $6.5 million of Class C, single A rated notes of N-Star VII and $3.5 million of Class C, single A rated notes of N-Star IV for approximately $20.6 million. The Company recorded a realized gain of $7.1 million in connection with the repurchase of notes.

During the third quarter 2008, the Company repurchased approximately $33.0 million of its bonds, which consisted of $7.0 million of Class H, BBB rated notes, $7.0 million of Class J, BBB rated notes, $5.0 million of Class B, AA rated notes, $5.0 million of Class A2, AAA rated notes of N-Star VIII, $4.0 million of Class D, BBB rated notes of N-Star IV and 5.0 million of Class J, BB rated notes of N-Star IX for approximately $16.2 million. The Company recorded a realized gain of $7.1 million in connection with the repurchase of notes.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings—(Continued)

Exchangeable Senior Notes

In May 2008, NRFC NNN Holdings, LLC ("Triple Net Holdings"), a wholly-owned subsidiary of the Company issued $80.0 million of 11.50% exchangeable senior notes (the "NNN Notes") due in 2013. The NNN Notes were offered in accordance with Rule 144A under the Securities Act of 1933, as amended. The NNN Notes pay interest semi-annually on June 15 and December 15, at a rate of 11.50% per annum, and mature on June 15, 2013. The NNN Notes have an initial exchange rate representing an exchange price of approximately $12.00 per share of the Company's common stock, subject to adjustment under certain circumstances. The NNN Notes are senior unsecured obligations of Triple Net Holdings and may be exchangeable upon the occurrence of specified events, and at any time on or after March 15, 2013, and prior to the close of business on the second business day immediately preceding the maturity date, into cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, if any, at the Company's option. The NNN Notes are redeemable, at the Company's option, on and after June 15, 2011. The Company may be required to repurchase the NNN Notes upon the occurrence of certain events. The net proceeds from the offering were approximately $71.4 million, after deducting a $4.6 million security deposit representing one semi-annual interest payment, and fees and expenses. The proceeds of the offering will be used for general corporate purposes.

The Company has elected the SFAS 159 fair value option for the NNN Notes. Changes in fair value of the NNN Notes will be recognized in earnings as they occur.

Term Loan

In June 2008, a wholly owned subsidiary of the Company entered into a $24.2 million term loan agreement with an investment bank (the "LB Term Loan"). The collateral for the LB Term Loan is a $44.0 million mezzanine loan position and the Company has guaranteed 50% of such amount. The LB Term Loan matures in February 2009 and bears interest at a spread of 1.50% over one-month LIBOR. Both the LB Term Loan and the mezzanine loan collateral have three one-year extension options. The LB Term Loan contains certain covenants including, among others, financial covenants of a minimum tangible net worth and a minimum debt-to-equity ratio.

Unsecured Revolving Line of Credit

On May 28, 2008, the Company voluntarily terminated the Revolving Credit Agreement, dated November 3, 2006 with KeyBanc Capital Markets and Bank of America, N.A. (the "Credit Agreement") in order to permit the issuance of the NNN Notes, given certain restrictive covenants set forth in the Credit Agreement. The Credit Agreement had a November 2009 expiration and no amounts were outstanding under the Credit Agreement at the time of termination.

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. During the second quarter 2008, the Company sold 67% of its

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

10. Related Party Transactions—(Continued)

advisory fee income stream, pursuant to its agreement with N-Star IX, to the Securities Fund for $8.8 million. Advisory and management fee income—related parties for the nine months ended September 30, 2008 includes $4.8 million of additional income as a result of the sale. The Company deferred the remaining $4.0 million, which represents the Company's ownership interest in the Securities Fund. The deferred advisory fee income will be recognized into income as the fees are earned. The Company earned total fees on these agreements of approximately $1.7 million and $2.2 million for the three months ended September 30, 2008 and 2007, respectively and $10.3 million and $5.0 million for the nine months ended September 30, 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 and nine months ended September 30, 2008, the Company earned $0.1 million and $0.4 million, respectively, in management fees. For each of the three and nine months ended September 30, 2007, the Company earned $0.2 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 $0.8 million in management fees for the three months ended September 30, 2008 and 2007, respectively, and $2.6 million and $2.2 million in management fees for the nine months ended September 30, 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 1. On May 7, 2008, the Company terminated its management agreement with Monroe Management. The Company incurred $0.5 million in management fees for the three months ended September 30, 2007, and $1.3 million and $0.7 million in management fees for the nine months ended September 30, 2008 and 2007, respectively, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations.

Legacy Fund

In September 2008, the Company and a major financial institution, as co-lenders, amended an existing loan agreement with a subsidiary of Legacy Partners Realty Fund I, LLC (the "Legacy Fund"), as borrower, to extend the loan maturity in exchange for an extension fee, a partial principal repayment of the loan and a guaranty by the borrower of certain additional obligations. One of the Company's directors, Preston Butcher, is the chairman of the Board of Directors and chief executive officer and owns a significant interest in Legacy Partners Commercial, LLC, which indirectly owns an equity interest in, and owns the manager of, the Legacy Fund. The loan is included in real estate debt investments in the consolidated balance sheets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

10. Related Party Transactions—(Continued)

Hard Rock Hotel Loan

In August 2008, the Company purchased from Credit Suisse ("CS"), a $30.0 million junior participation in the financing provided by CS in connection with the acquisition of 11.05 acres of land immediately adjacent to the Hard Rock Hotel and Casino in Las Vegas by a joint venture between DLJ Merchant Banking Partners and the Morgans Hotel Group, or Morgans, which is the minority interest in the joint venture. David Hamamoto, the Company's president and chief executive officer, is the chairman of the board of Morgans. The loan is included in real estate debt investments in the consolidated balance sheets.

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 September 30, 2008, the Company has issued an aggregate of 7,308,642 LTIP Units, net of forfeitures of 60,198 LTIP Units. An aggregate of 544,785 LTIP Units were converted to commons stock and 374,020 shares of common stock were issued pursuant to the Stock Incentive Plan. Of the 7,308,642 LTIP Units, 4,790,391 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, 2,347,450 vest over 16 consecutive quarters with the first quarter being January 29, 2008 and 170,801 are subject to no vesting requirements. 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 $5.2 million and $3.9 million for the three months ended September 30, 2008 and 2007, respectively and $15.3 million and $11.8 million for the nine months ended September 30, 2008 and 2007, respectively, related to the amortization of awards granted under this plan. As of September 30, 2008, there were approximately 4,717,926 unvested LTIP Units and 55,520 LTIP Units were forfeited during the period. The related compensation expense to be recognized over the remaining vesting period of all of the Company's LTIP grants is $42.1 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation—(Continued)

and provide incentive to officers and certain key employees of the Company, among others. 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 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%.

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, in the condensed consolidated financial statements, $1.0 million and $2.2 million in compensation expense for the three and nine months ended September 30, 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).

In April 2008, the Company's head of its real estate securities business left the Company. As a result, his employment agreement with the Company was terminated effective April 11, 2008. He was not entitled to any severance, bonus or other payments or awards as a result of his departure. However, pursuant to his Outperformance Bonus Plan, he 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.

The Company has recorded compensation expense under this plan of zero and $0.2 million for the three months ended September 30, 2008 and 2007, respectively, and zero and $1.2 million for the nine months ended September 30, 2008 and 2007, respectively.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation—(Continued)

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 and $0.9 million for each of the nine months ended September 30, 2008 and 2007, respectively.

The status of all of the Company's LTIP grants as of September 30, 2008 and December 31, 2007 are as follows (units in thousands):

	September 30, 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		2,558			8.59		3,826			12.25
Converted to common stock		(582	)		9.51		(20	)		9.0
Forfeited		(55	)		9.42		(5	)		16.48

Ending balance(2)		7,405		$	10.64		5,484		$	11.47

(1): Reflects balance at January 1, 2008 for the quarter ended September 30, 2008 and January 1, 2007 for the year ended December 31, 2007.
(2): Reflects balance at September 30, 2008 and December 31, 2007, respectively.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity

In April 2007, the Company implemented a Dividend Reinvestment and Stock Purchase Plan, or the Plan, pursuant to which it registered with the Securities and Exchange Commission and reserved for issuance 15,000,000 shares of its common stock. Under the terms of the Plan, stockholders who participate in the Plan may purchase shares of the Company's common stock directly from it, in cash investments up to $10,000. At the Company's sole discretion, it 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 the Company's stock. The Company expects to use the proceeds from any dividend reinvestments or stock purchases for general corporate purposes.

In May 2008, the Company entered into an equity distribution agreement with Wachovia Capital Markets, LLC ("Wachovia"). In accordance with the terms of the agreement, the Company may offer and sell up to 10,000,000 shares of its common stock from time to time through Wachovia. Wachovia will receive a commission from the Company of up to 2.5% of the gross sales price of all shares sold through it under the equity distribution agreement.

Common Stock

In May 2008, the Company issued 37,812 shares of common stock with a fair value at the date of grant of $0.4 million to its Board of Directors as part of their annual grants.

For the three and nine months ended September 30, 2008, the Company issued a total of zero and 224,434 shares of common stock, respectively, related to employee compensation arrangements and employee separation agreements.

For the three and nine months ended September 30, 2008, the Company sold a total of 12,100 shares and 114,100 shares, respectively, of common stock related to its equity distribution agreement with Wachovia raising net proceeds of approximately $0.1 million and $0.6 million, net of $2,497 and $28,199, respectively, in commissions.

For the three and nine months ended September 30, 2008, the Company sold a total of 34,301 and 98,151 shares of common stock, respectively, pursuant to the Plan, raising net proceeds of approximately $0.2 million and $0.8 million, respectively.

Dividends

On January 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 February 15, 2008 to stockholders of record as of the close of business on February 5, 2008.

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.

On July 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

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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 were paid on August 15, 2008 to the stockholders of record as of the close of business on August 5, 2008.

Earnings Per Share

Earnings per share for the three and nine months ended September 30, 2008 and 2007 is computed as follows (in thousands):

		For the Three Months Ended September 30,				For the Nine Months Ended September 30,

		2008		2007		2008		2007
Numerator (Income)
*Basic Earnings*
Net income available to common stockholders		$	233,533	$	8,687	$	411,277	$	26,002
Effect of dilutive securities
	Income allocated to minority interest		27,524		680		47,346		1,835

*Dilutive net income available to stockholders*		$	261,057	$	9,367	$	458,623	$	27,837

Denominator (Weighted Average Shares)
*Basic Earnings:*
Shares available to common stockholders			62,825		61,630		62,772		61,449
Effect of dilutive securities:
OP/LTIP units			7,405		3,030		7,226		2,952

*Dilutive Shares*			70,230		64,660		69,998		64,401

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 September 30, 2008 and December 31, 2007, minority interest related to the aggregate limited partnership units of 7,404,575 and 5,683,118, represented a 10.52% and 8.43% interest in the Operating Partnership, respectively.

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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)

Joint Ventures

In May 2006, the Company formed the Wakefield joint venture with Chain Bridge. On July 9, 2008, Wakefield sold a $100 million convertible preferred equity interest to Inland American Real Estate Trust, Inc. The joint venture is consolidated in the condensed consolidated financial statements and Inland American's and Chain Bridge's capital are treated as minority interests. Income allocated to minority interest for the three and nine months ended September 30, 2008 was $2.3 million and $2.1 million, respectively. Income allocated to minority interest for the three and nine months ended September 30, 2007 was $0.2 million and $0.4 million, respectively.

In March 2007, the Company formed a joint venture with Monroe. On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market corporate lending venture. Upon completion of the recapitalization transaction, the Company deconsolidated the venture. Monroe Capital's equity is no longer a component of minority interest. Loss allocated to minority interest prior to the recapitalization of Monroe Capital was $0.3 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 and it monitors their financial condition; however, the Company currently does not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings and financial support from the U.S. Government. 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 September 30, 2008, the Company recorded, in earnings, a mark-to-market unrealized loss of $1.8 million and a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps. For the nine months ended September 30, 2008, the Company recorded, in earnings, a mark-to-market unrealized gain of $8.3 million and a $4.1 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps.

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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)

The following tables summarize the Company's derivative financial instruments as of September 30, 2008 and December 31, 2007 (in thousands):

				Range of Fixed LIBOR	Range of Maturity

Interest rate swaps and basis swaps
As of September 30, 2008	1,495,212	(44,860	)	3.02% - 5.96%	October 2009 - August 2018
As of December 31, 2007	856,306	(49,280	)	4.18% - 6.61%	February 2008 - August 2018

Credit Risk Concentrations

Concentrations 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. The Company has no one borrower or one tenant that generates 10% or more of its total revenue. However, approximately 17.7% and 11.2% of the Company's rental and escalation revenue for the nine months ended September 30, 2008 is generated from two tenants 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.

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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)

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 September 30, 2008 and December 31, 2007 (in thousands):

		Collateral—September 30, 2008									Term Notes—September 30, 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			Stated Maturity
N-Star I(2)			8/21/03	$	301,735		6.64	%		4.14	$	282,732		6.21	%		8/01/2038
N-Star II			7/01/04		331,878		6.22			4.77		295,931		5.60			6/01/2039
N-Star III			3/10/05		404,771		5.90			4.25		358,676		5.14			6/01/2040
N-Star V			9/22/05		509,722		5.49			6.22		456,319		4.74			9/05/2045

	Total			$	1,548,106		5.98	%		4.99	$	1,393,658		5.32	%

(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			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.

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 CLOs. The Company determined the CLOs to be variable interest entities under FIN 46(R)-6 and that it was not the primary beneficiary; therefore, the financial statements of the CLOs were not consolidated into the condensed consolidated financial statements of the Company. On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market

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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)

corporate lending venture and contributed its CLO equity interests into the recapitalized entity. See Note 1 for additional information.

The Company's potential loss in its off balance sheet investments is limited to the carrying value of its investment, which is $53.8 million and $78.1 million at September 30, 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.

On May 7, 2008, the Company completed a recapitalization of its middle-market corporate lending venture. Upon completion of the recapitalization transaction, the Company deconsolidated the venture and now uses the equity method of accounting for the investment. As a result, and as of May 7, 2008, the corporate loan segment is no longer a reportable segment of the Company. Its current investment is included in corporate.

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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 following table summarizes segment reporting for the three and nine months ended September 30, 2008 and 2007 (in thousands):

		Real Estate Debt		Operating Real Estate			Real Estate Securities		Corporate(1)			Consolidated Total

Total revenues for the three months ended
	September 30, 2008	$	42,001	$	38,108		$	13,083	$	348		$	93,540
	September 30, 2007		56,356		27,529			16,095		12,698			112,678
Income (loss) from continuing operations before minority for the three months ended
	September 30, 2008		186,356		4,273			38,604		39,355			268,588
	September 30, 2007		17,119		(2,741	)		4,862		(4,427	)		14,813
Net income (loss) for the three months ended
	September 30, 2008		166,977		3,819			34,536		33,432			238,764
	September 30, 2007		17,119		(2,822	)		4,862		(5,241	)		13,918
Total revenue for the nine months ended
	September 30, 2008		130,202		96,313			47,096		12,674			286,285
	September 30, 2007		150,907		70,752			64,080		18,653			304,392
Income (loss) from continuing operations before minority interest for the nine months ended
	September 30, 2008		412,730		1,903			40,573		21,207			476,413
	September 30, 2007		56,927		(2,273	)		13,789		(28,897	)		39,546
Net income (loss) for the nine months ended
	September 30, 2008		369,215		2,712			36,295		18,748			426,970
	September 30, 2007		56,927		(2,495	)		13,789		(30,917	)		37,304
Total assets as of
	September 30, 2008	$	2,304,804	$	1,258,527		$	405,118	$	152,416		$	4,120,865

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

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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 nine months ended September 30, 2008 and 2007 is presented below (in thousands):

	September 30,

	2008			2007
The acquisition of available for sale securities with warehouse deposit	$	—		$	(21,898	)
Real estate debt investment pay-down due from servicer		18,000			25,587
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		—			(5,398	)
Reduction of mortgage notes and loans payable due to acquisition of consolidated asset and release of mortgage escrow		—			1,485
Elimination of bonds payable due to acquisition of consolidated assets		—			(7,250	)
Allocation of purchase price of operating real estate to deferred cost		(272	)		(30,287	)
Minority interest buy-out		(1,566	)		—
Assumption of loan in connection with acquisition of operating real estate		—			19,480
Deed in lieu of foreclosure of operating real estate		—			7,525
Contribution of book value of assets to unconsolidated joint venture		112,097			—
Reclassification of prior-year construction in progress		(4,409	)		—
Write-off of deferred lease cost, tenant improvements and below market lease adjustments related to lease termination		(3,456	)		—

18. Subsequent Events

Dividends

On October 8, 2008, the Company declared a dividend of $0.36 per share of common stock. On October 21, 2008, the Company declared a dividend of $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends will be paid on November 15, 2008 to the stockholders of record as of the close of business on November 4, 2008.

JP Facility

On October 7, 2008, the Company and a subsidiary entered into Amendment No. 1 (the "Amendment") to the Master Repurchase Agreement (as amended, the "Facility") with JPMorgan

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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)

Chase Bank, N.A. ("JPMorgan"). The Facility had approximately $50.4 million outstanding on the amendment date and such amounts bear interest at spreads of 1.25% to 1.80% over one-month LIBOR. Advance rates for the assets currently financed under the Facility range from 55% to 80% of the value of the collateral for which the advance is made. Interest rates and advance rates on future borrowings under the Facility will be determined by JPMorgan. Pursuant to the Amendment, the maximum amount outstanding under the Facility shall not exceed $150 million and the Company has agreed to guaranty the outstanding amount under the Facility. The term of the Facility will expire on August 8, 2010, subject to renewal by JPMorgan on August 8, 2009.

Stock Repurchase Program

On October 8, 2008, the Company's Board of Directors authorized a stock repurchase program of up to 10,000,000 shares of the Company's outstanding common stock, or approximately 16% of the Company's outstanding common stock. Stock repurchases under this program will be made from time to time through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. As of November 6, 2008, the Company had not repurchased any shares under the authorization.

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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 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).

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•: 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. Other lending markets also 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. 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, virtually no availability of debt capital in the securitization market, and a severe contraction in available credit.

During the third quarter 2008, financial institutions became increasingly loath to lend cash to peer institutions, even on a very short-term basis, as lack of transparency regarding asset quality reduced confidence in counterparty creditworthiness. Despite liquidity infusions from government-sponsored central banks worldwide, the cost of capital increased dramatically, and even the most liquid markets such as the commercial paper market experienced enormous outflows of capital. Those institutions deemed by the market to be most at risk for credit issues, principally those with large real estate and mortgage portfolios, experienced massive withdrawals from customer brokerage and deposit accounts. These institutions also became unable to transact in the capital markets because few participants were willing to take their counterparty risk, thereby resulting in their insolvency (most notably Lehman Brothers Holding, Inc). The U.S. Government reacted to the rapid deterioration in the financial system by passing the Emergency Economic Stabilization Act of 2008 (the "Act") in early October. The Act authorized and provided funds to the U.S. Treasury Department to acquire financial assets from institutions as a buyer of last resort in order to enable these institutions to reduce their exposure to troubled assets and to regain market confidence. Since that time, the U.S. has committed to make up to $250 billion of direct equity investments into banking institutions and announced a program to purchase commercial paper from corporations. At this time it is unclear whether these actions will have a positive impact on the credit markets. Most experts forecast poor economic conditions through 2009 caused by higher unemployment, reduced consumer and business spending, scarcity of credit and a need for banks and consumers to deleverage after years of plentiful and cheap debt capital.

As a result of the enormous credit market disruptions and negative economic outlook, most financial industry participants, including commercial real estate lenders and investors, continue to find it difficult to obtain cost-effective debt and equity capital to fund new investment activity or to refinance maturing debt. In addition, most economic measures indicate the U.S. and other major

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economic regions worldwide are entering a recession. 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 and cash flows.

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. We have $91.7 million of loans backed by residential condominium properties of which 83.1% are located in New York City, a market that has not experienced severe oversupply. We own six first mortgage assets totaling $151.5 million having multi-family rental collateral properties located in South Florida that are experiencing weak operating performance due to overbuilding and weak economic conditions in these markets. 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 and the level of credit losses in our asset base will be determined primarily by the length that such conditions exist and the severity of the contraction.

Due to the liquidity crisis, our primary short-term lending and borrowing benchmark rates, one-month and three-month LIBOR, rose during the quarter and exceeded 4.0%, even though the Fed Funds target rate is currently at a low 1.0%. These LIBOR indices have recently decreased but the spread between LIBOR and the Fed Funds target remains very high by historical standards. Rising LIBOR increases earnings from our loans and securities whose interest payments are based on a floating rate index, but adversely impacts commercial real estate values and credit. Higher interest rates result in a greater discount rate applied to underlying real estate cash flows and therefore generate lower implied values. Higher interest rates also result in greater debt service costs, lower debt service coverage and more quickly depleted interest reserves for loans that rely on interest reserves to service debt while the collateral properties are being repositioned by our borrowers.

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.

Our real estate securities investments could also be negatively impacted by weaker rental market conditions. Within the underlying loan pools, any slowdown in economic conditions would likely reduce tenants' ability to make rent payments in accordance with the terms of their leases. Additionally, to the extent that market rental rates are reduced, property-level cash flows would likely be negatively affected as existing leases renew at lower rates. Finally, declining occupancy rates could also impact cash flow and reduce borrowers' ability to service their outstanding loans.

Our net leased assets could be adversely impacted by a weaker economy as well. Corporate space needs may contract resulting in lower lease renewal rates and longer releasing periods when leases are not renewed. Poor economic conditions may negatively impact the creditworthiness of our tenants which could result in their inability to meet the contractual terms of their leases.

We responded to these difficult conditions by decreasing investment activity when we observed deteriorating market conditions. We expect credit to continue to be challenging throughout the

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remainder of 2008 and into 2009 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) currently permit reinvestment of capital proceeds which means when the underlying assets repay we are able to reinvest the proceeds in new assets without having to repay the liabilities. We expect very few loan repayments in the fourth quarter due to the scarcity of debt capital. Approximately $756 million of our funded loan commitments have their initial maturity date in 2009; however, most of the loans contain extension options of at least nine months (many subject to performance criteria) so it is difficult to estimate how much capital, if any, from initial maturities or prepayments may be recycled into higher earning investments for 2009.

Our near-term business plan assumes that we manage our current asset base to maximize earnings, minimize credit losses and maintain liquidity levels that provide us the flexibility to potentially make selective new investments when we believe the opportunity is exceptional. 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. Furthermore, we may allocate a portion of our available investment capital to our LandCap joint venture, and have a $175 million discretionary commitment along with an equal amount committed by Goldman, Sachs' Whitehall funds. The venture's investment strategy to take advantage of distress in the residential markets will likely involve making investments in non-performing loans backed by residential land and equity interests in residential lots. These investments potentially are not expected to generate meaningful current returns for several years and a majority of our returns will likely be realized upon disposition or resolution of the assets. Because the capital we raise has a current pay requirement, including our equity, there will likely be a timing difference between payments we must make to our creditors and shareholders and the ultimate receipt of a return on our invested capital. Our future level of earnings and dividends in this changing interest rate and liquidity environment is dependent upon market conditions and our ability to successfully execute these plans.

We believe that in the longer term, liquidity 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 and in our Quarterly Report on Form 10-Q for the period ended September 30, 2008.

Risk Management

As of September 30, 2008, no assets were delinquent on contractual principal or interest payments according to the underlying loan terms and no assets were considered non-performing. A loan is classified as non-performing at such time as the loan becomes 90 days delinquent or the loan has a maturity default.

We use many methods to actively manage our asset base to preserve our income and capital. Generally, for loans and net lease assets, frequent dialogue with borrowers/tenants and inspections of our collateral and owned properties have proven to be an effective process for identifying issues early and prior to missed debt service and lease payments. Many of our loans also require borrowers to replenish cash reserves for items such as taxes, insurance and future debt service costs. Late replenishments also may be an early indicator there could be a problem with the borrower or collateral property. We also may negotiate modifications to loan terms if we believe such modification improves our ability to maximize principal recovery. Modifications may include changes to contractual interest

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rates, maturity dates and other borrower obligations. Generally, when we make a concession such as reducing an interest rate or extending a maturity date, we seek to get additional collateral and/or fees in return for the modification. In some cases we may issue default notices and begin foreclosure proceedings when the borrower is not complying with the loan terms and we believe taking control of the collateral is the best course of action to protect our capital. For net leases, we may seek to obtain up-front or accelerated payment in return for an early cancelation of the lease if we believe the tenant's creditworthiness has significantly deteriorated and that taking control of the property and re-leasing it maximizes value.

Securities investments generally have a more liquid market than loans and net lease assets, but we typically have very little control over restructuring decisions when there is a problem with the asset. Generally, we manage risk in the securities portfolio by selling the asset when we can obtain a price that is attractive relative to its riskiness. In certain situations, we may sell an asset because there is an opportunity to reinvest the capital into a new asset with a more attractive risk/return profile.

We conduct a quarterly comprehensive credit review which 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." Nevertheless, we cannot be certain that our review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from assets that are not identified by our credit reviews. Based on the quarterly reviews, loans and net lease 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. Securities investments are generally added to the watch list if there is a default, although management may use its discretion to include or exclude any asset from the watch list based on qualitative factors such as likelihood of actual loss realization, level of resources required to work out the issue, and probability of default if there has not yet been an actual default. A Watch List asset does not necessarily mean it is non-performing or that there is an impaired 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.

In the first quarter 2008, we recorded a $0.8 million credit loss provision on a $19.5 million first mortgage loan secured by two multi-family properties located in San Antonio, Texas. The loans were paying current. During the second quarter 2008 we recorded a $2.5 million credit loss provision relating to two loans which are on the Watch List. We recorded a $2.0 million credit loss provision relating to an $11.0 million mezzanine loan backed by a portfolio of seven limited service hotel properties and unentitled land. The properties securing the loan were recently completed and continue to experience improving operating performance as they reach expected stabilized occupancy levels. In addition, the borrower plans to market the land for sale. During the second quarter 2008, we also recorded a $0.5 million credit loss provision relating to an $18.0 million first mortgage loan backed by a multi-family property located in South Florida. The sponsor of this asset has experienced financial distress and cannot currently meet its reserve replenishment funding obligations. We believe the reserve is prudent until such time as the collateral's performance indicates that its value fully covers our loan basis.

In the third quarter of 2008, we recorded a $2.2 million reserve against a $13.1 million mezzanine loan backed by a multi-family property located in Georgia, a $0.5 million reserve against a $16.9 million first mortgage loan backed by a multi-family property located in South Florida and an additional $0.5 million reserve ($1.0 million total to date) against the $18.0 million first mortgage loan backed by a multi-family property located in South Florida referred to earlier. We also reversed the $0.8 million reserve taken during the first quarter 2008 against the $19.5 million first mortgage backed by two multi-family properties located in San Antonio, Texas upon a third party acquisition of the property for $2.5 million cash and assumption of our loan. Credit loss reserves for real estate loans total $5.7 million as of September 30, 2008.

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During the third quarter we added four loan assets totaling $99.7 million and our equity investment in one net lease asset totaling $15.2 million to the Watch List. We removed the $19.5 million San Antonio first mortgage from the Watch List. We do not currently believe that any credit loss reserves are required for the loan assets added to the Watch List this quarter. As of September 30, 2008, we had 11 assets on our Watch List totaling $205.4 million.

The loan assets added this quarter include a $46.0 million first mortgage on a multi-family property in Naples, FL, a $21.4 million first mortgage on a residential condo development site in Manhattan (New York City), a $20.8 million mezzanine loan on a multi-family property in Ventura, CA and an $11.3 million first mortgage on an independent living facility in Arlington, TX. Each of these assets is significantly underperforming our underwritten expectations and/or the sponsors are under financial stress and may not be able to provide additional support to the assets.

This quarter we also added a net leased asset comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and 100% leased to Washington Mutual Bank, FA ("WaMu"). As of September 30, 2008 the buildings had a combined $54.6 million net book value and were financed with a non-recourse $43.0 million first mortgage loan. The assets are also financed with a $9.7 million mezzanine loan which is collateral for one of our securities term financings. On September 25, 2008, JPMorgan Chase & Co. ("JPMorgan") announced that it had acquired substantially all of the assets and liabilities of WaMu from the Federal Deposit Insurance Corp. JPMorgan is entitled to a 90-day period from the WaMu acquisition date to decide whether they will accept or reject the terms of the lease. JPMorgan has preliminarily indicated they would like to decrease the rented space and shorten the remaining term of the existing lease. We have not yet agreed to any lease modification, the terms of which would also have to be satisfactory to the first mortgage lender. In a worst case scenario, we could transfer our ownership of the facilities to the first mortgage lender, in which case the value of our mezzanine loan and residual equity interest totaling $15.2 million at September 30, 2008 would be reduced to zero.

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.

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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, commercial mortgage backed securities, and long-dated or complex derivatives including certain foreign exchange options and long dated options on gas and power).

The fair values 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

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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.

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. We are currently assessing the potential impact that the adoption of SFAS 160 could have on our financial statements.

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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 assessing the potential impact that the adoption of SFAS 161 could have on our financial statements.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission ("SEC") of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". We are currently assessing the potential impact that the adoption of SFAS 162 could have on our financial statements.

In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement of the conversion option. FSP APB 14-1 requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity. The liability component of the debt instrument is accreted to par using the effective yield method; accretion is reported as a component of interest expense. The equity component is not subsequently re-valued as long as it continues to qualify for equity treatment. This practice marks a significant change from the current accounting practice for convertible debt instruments in the scope of the FSP. Current practice does not require separation of the liability and equity components of such instruments. Separately accounting for these instruments' liability and equity components will results in the recording of more non-cash interest cost over the life of the convertible debt instrument, because of an initial debt discount. Additionally, FSP APB 14-1 precludes the use of the fair value option pursuant to SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We intend to adopt FSP APB 14-1 effective January 1, 2009 and apply its provisions retrospectively to all periods presented in our financial statements. We are currently evaluating the impact of the adoption of FSP APB 14-1 on our balance sheet, but has determined that FSP APB 14-1will result in the recognition of additional non-cash interest expense of approximately $0.8 million, $2.1 million and $3.6 million in our 2007, 2008 and 2009 statements of operations, respectively. The 2008 increase in non-cash interest expense will be offset by a $5.0 million capitalization of financing fees which were expensed upon the election of the fair value option on the convertible debt instruments.

In October 2008, the FASB issued Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active ("FSP 157-3"). FSP 157-3 clarifies the application of SFAS 157, which we adopted as of January 1, 2008, in cases where a market is not active. We have considered the guidance provided by FSP 157-3 in our determination of estimated fair values as of September 30, 2008, and the impact was not material.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2008 to the Three Months Ended September 30, 2007

Revenues

Interest Income

Interest income for the three months ended September 30, 2008 totaled $49.8 million, representing a decrease of $28.3 million, or 36%, compared to $78.1 million for the three months ended September 30, 2007. The decrease consisted of a $16.5 million decrease attributable to a lower average LIBOR rate of approximately 310 basis points, a decrease of $10.8 million in interest income, attributable to the sale of certain assets to the Securities Fund and the deconsolidation of Monroe Capital as a result of the recapitalization, and a decrease of $5.9 million attributable to lower investment volume.

Interest Income—Related Parties

Interest income from related parties for the three months ended September 30, 2008 totaled $3.4 million, representing a decrease of $0.4 million, or 11%, compared to $3.8 million for the three months ended September 30, 2007. The decrease is attributable to decreased interest income earned on certain of our unconsolidated term debt investments due to decreased LIBOR. 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 September 30, 2008 totaled $29.0 million, representing an increase of $2.3 million, or 9%, compared to $26.7 million for the three months ended September 30, 2007. The increase was primarily attributable to net lease property acquisitions by our Wakefield joint venture. These acquisitions collectively contributed $2.0 million of additional rental income. Other net lease properties acquired during the three months ended, or subsequent to, September 30, 2007, contributed additional rental and escalation income of $0.7 million. These increases were partially offset by a decrease of $0.4 million in reimbursement and miscellaneous income in our core net lease properties.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the three months ended September 30, 2008 totaled $1.8 million, representing a decrease of approximately $0.6 million, or 25%, compared to $2.4 million for the three months ended September 30, 2007. The decrease was primarily attributable to the sale of 67% of our advisory fee income stream, pursuant to our agreement with N-Star IX, to the Securities Fund, during the second quarter 2008.

Other Revenue

Other revenue for the three months ended September 30, 2008 totaled $9.5 million, representing an increase of $7.8 million, or 459%, compared to $1.7 million the three months ended September 30, 2007. Other revenue for three months ended September 30, 2008 consisted primarily of $9.0 million in a lease termination fee, $0.3 million in exit fees, $0.1 million in unused credit line fees and $0.1 million in miscellaneous other revenue. Other revenue for the three months ended September 30, 2007

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consisted primarily of $1.0 million in early prepayment fees, $0.5 million of exit fees and loan draw fees and $0.2 million in other fees across our portfolio.

Expenses

Interest Expense

Interest expense for the three months ended September 30, 2008 totaled $45.5 million, representing a decrease of $19.8 million, or 30%, compared to $65.3 million for the three months ended September 30, 2007. The decrease in interest expense for the three months ended September 30, 2008 includes the sale of N-Star IX and other assets to the Securities Fund, decreasing interest expense by $0.5 million, a decrease of $13.9 million on N-Star IV, VI, VII and VIII bonds payable due to decreases in LIBOR, debt pay downs, the effect of net settlements on interest rate swaps being recorded in unrealized gain (loss) on investments and other and reduced amortization of deferred financing as the result of the SFAS 159 election on the underlying debt, reduced interest as a result of the recapitalization of our corporate lending venture of $6.4 million, lower credit facility balances resulting in lower expense of $2.5 million, and the pay down of repurchase obligations decreasing interest expense by $0.9 million. These decreases were partially offset by additional mortgage loans payable due to acquisitions in our net lease portfolio resulting in $3.3 million in additional interest expense, higher balances on credit facilities increasing interest expense by $0.7 million and the foreign exchange impact of the Euro-note resulting in $0.4 million additional interest expense.

Real Estate Properties—Operating Expenses

Real estate property operating expenses for three months ended September 30, 2008 totaled $1.9 million, representing a decrease of $0.3 million, or 14%, compared to $2.2 million for three months ended September 30, 2007. The decrease was primarily attributable to reduced insurance expense at various net lease properties.

Asset Management Fees—Related Party

Advisory fees for related parties for the three months ended September 30, 2008 totaled $0.9 million, representing a decrease of $0.5 million, or 36%, compared to $1.4 million for the three months ended September 30, 2007. The decrease was primarily attributable to the termination of the Monroe Management joint venture agreement. We incurred $0.9 million of advisory fees to Wakefield Capital Management and no advisory fees to Monroe Management for the three months ended September 30, 2008, respectively. We incurred $0.8 million of advisory fees to Wakefield Capital Management and $0.6 million of advisory fees to Monroe Management for the three months ended September 30, 2007, respectively.

Fundraising Fees, Debt Issuance Costs and Other

Fundraising fees, debt issuance costs and other for the three months ended September 30, 2007 consisted of $3.2 million of placement fee expenses for raising private capital for our Securities Fund and a $3.1 million write-off of due diligence costs relating to the termination of a purchase agreement to acquire a portfolio of tax credit multi-family properties by one of our joint ventures. We incurred no such fundraising fees, debt issuance costs and other for the three months ended September 30, 2008.

Provision for Loss on Investments

Provision for loss on investments for the three months ended September 30, 2008 totaled $2.5 million. The provision includes a $2.2 million reserve against a $13.1 million mezzanine loan backed by a multi-family complex located in Georgia, a $0.5 million reserve against a $16.9 million first

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mortgage loan backed by multi-family property located in South Florida and a $0.5 million reserve against a $18.0 million first mortgage loan backed by a multi-family property located in South Florida. We also reversed a $0.8 million reserve taken during the first quarter 2008 against a $19.5 million first mortgage backed by two multi-family properties upon recapitalization and assumption of the loan by a third party. There was no provision for loss on investments for the three months ended September 30, 2007.

General and Administrative

General and administrative expenses for the three months ended September 30, 2008 totaled $13.7 million, representing a decrease of $0.7 million, or 5%, compared to $14.4 million for the three months ended September 30, 2007. The primary components of our general and administrative expenses were the following:

Salaries and equity-based compensation for the three months ended September 30, 2008 totaled $9.4 million, representing a decrease of approximately $0.1 million, or 1%, compared to $9.5 million, for the three months ended September 30, 2007. The decrease was attributable to a $1.6 million decrease related to salaries due to lower staffing levels resulting from decreased investment activity offset partially by a $1.5 million increase related to equity-based compensation. The $1.5 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. The increase was offset by a decrease of $1.0 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 $0.2 million related to our Employee Outperformance Plan.

Auditing and professional fees for the three months ended September 30, 2008 totaled $1.0 million, representing a decrease of $0.3 million, or 23%, compared to $1.3 million for the three months ended September 30, 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 September 30, 2008 totaled $3.3 million, representing a decrease of approximately $0.2 million, or 12%, compared to $3.5 million for the three months ended September 30, 2007. The decrease was primarily attributable to decreases costs related to decreased investment initiatives and a decrease in overhead resulting from lower staffing levels during the three months ended September 30, 2008.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2008 totaled $13.6 million, representing an increase of $4.4 million, or 48%, compared to $9.2 million for the three months ended September 30, 2007. This increase was primarily attributable to $82.8 million of net lease acquisitions made subsequent to September 30, 2007.

Equity in (Loss) Earnings of Unconsolidated Ventures

Equity in (loss) earnings for the three months ended September 30, 2008 totaled earnings of $0.8 million, representing an increase of $5.4 million, compared to a loss of $4.6 million for the three months ended September 30, 2007. In July 2007, we closed our Securities Fund, retaining a 25.7% interest that is accounted for under the equity method of accounting. During the second quarter 2008, we increased our interest in the Securities Fund to 46.0%. For the three months ended September 30, 2008, we recognized equity in earnings of $0.5 million from the Securities Fund, $0.9 million equity in

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earnings from our investment in the corporate lending joint venture, which was recapitalized in May 2008 resulting in deconsolidation of the venture and equity in earnings of $0.1 million in connection with our net lease joint venture. The earnings were partially offset by equity in loss of $0.8 million on the LandCap joint venture. Equity in losses for the three months ended September 30, 2007 consisted primarily of a loss of $3.8 million from the Securities Fund, the operations of Monroe Management which generated a loss of $1.0 million, partially offset by a net lease joint venture, which generated equity in earnings of $0.1 million.

Unrealized Gain (Loss) on Investments and Other

Unrealized gain (loss) on investments and other increased by approximately $240.9 million for the three months ended September 30, 2008 to a gain of $245.3 million, compared to a gain of $4.4 million for the three months ended September 30, 2007. The unrealized gain on investments for the three months ended September 30, 2008 consisted primarily of unrealized gains related to SFAS 159 mark-to-market adjustments of $251.0 million on various N-Star bonds payable, $42.9 million on liability to subsidiary trusts issuing preferred securities and $16.2 million on exchangeable senior notes, offset partially by unrealized losses related to SFAS 159 mark-to-market adjustments of $57.9 million on various N-Star available for sale securities and $7.1 million on interest rate swaps as a result of these swaps no longer qualifying for hedge accounting under SFAS 133. The unrealized gain on investment for the three months ended September 30, 2007 consisted of a reversal of a prior period negative $4.9 million mark-to-market adjustment on the assets sold to the Securities Fund prior to the date of sale. We also had a $0.1 million unrealized loss related to the ineffective portion on our interest rate swaps and a $0.4 million unrealized loss on a U.S. treasury note short sale hedge.

Realized Gain on Investments and Other

The realized gain of $7.0 million for the three months ended September 30, 2008 was attributable to the repurchase of various N-Star bonds. Realized gain on investments and other for the three months ended September 30, 2007, consisted of a realized gain on the settlement of US treasury note short sale entered into as a hedge offset by a gain on assets sold.

Income from Discontinued Operations, Net of Minority Interest

There were no discontinued operations for either the three months ended September 30, 2008 or September 30, 2007.

Comparison of the Nine months Ended September 30, 2008 to the Nine months Ended September 30, 2007

Revenues

Interest Income

Interest income for the nine months ended September 30, 2008 totaled $163.4 million, representing a decrease of $52.9 million, or 24%, compared to $216.3 million for the nine months ended September 30, 2007. The decrease consisted of a $37.8 million decrease attributable to a lower average LIBOR rate of approximately 242 basis points, a decrease of $33.4 million in interest income attributable to the sale of certain assets to the Securities Fund and the deconsolidation of Monroe Capital as a result of the recapitalization. The decrease was partially offset by a net increase to interest income of approximately $18.3 million resulting from the $2.9 billion of investments acquired subsequent to September 30, 2007, the origination and acquisition of commercial real estate debt, commercial real estate securities and corporate debt subsequent to September 30, 2007 with a net book

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value of $0.6 million and approximately $0.7 million of investment dispositions and repayments subsequent to September 30, 2007.

Interest Income—Related Parties

Interest income from related parties for the nine months ended September 30, 2008 totaled $10.8 million, representing an increase of $1.1 million, or 11%, compared to $9.7 million for the nine months ended September 30, 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 nine months ended September 30, 2008 totaled $87.0 million, representing an increase of $19.1 million, or 28%, compared to $67.9 million for the nine months ended September 30, 2007. The increase was primarily attributable to net lease property acquisitions by our Wakefield joint venture. These acquisitions collectively contributed $15.3 million of additional rental income. Other net lease properties acquired during the nine months ended, or subsequent to, September 30, 2007, contributed additional rental and escalation income of $3.8 million.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the nine months ended September 30, 2008 totaled $10.7 million, representing an increase of approximately $5.4 million, or 102%, compared to $5.2 million for the nine months ended September 30, 2007. 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 advisory fees from the financing. During the second quarter 2008, we sold 67% of our advisory fee income stream, pursuant to our agreement with N-Star IX, to the Securities Fund. The increase was primarily attributable to the recognition of an additional $4.8 million in fee income related to the sale, the advisory fees earned on N-Star IX prior to the sale of $1.0 million, partially offset by reduced advisory fees earned on N-Star IX after the sale of $0.5 million, all of which were formerly eliminated in consolidation, and increased fees earned on the Securities Fund of $0.1 million.

Other Revenue

Other revenue for the nine months ended September 30, 2008 totaled $14.5 million, representing an increase of $9.2 million, or 174%, compared to $5.3 million the nine months ended September 30, 2007. Other revenue for nine months ended September 30, 2008 consisted primarily of $9.0 million in a lease termination fee, $3.7 million in profit participation proceeds from the modification of a real estate debt investment and $0.3 million in prepayment penalties, $0.6 million of exit fees, $0.4 million in unused credit line fees, $0.2 million in draw fees and $0.3 million miscellaneous other revenue. Other revenue for the nine months ended September 30, 2007 included $1.8 million in early prepayment fees, $0.5 million of exit fees and loan draw fees, $0.2 million in assumption fees, $0.2 million in unused credit line fees and $0.2 million in other fees on loans in our real estate debt portfolio, $1.9 million of recurring income from premiums received on credit default swaps related to Abacus NS2, and $0.3 million related to a one-time consent fee on the early repayment of one of our real estate securities investment.

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Expenses

Interest Expense

Interest expense for the nine months ended September 30, 2008 totaled $146.3 million, representing a decrease of $31.1 million, or 18%, compared to $177.4 million for the nine months ended September 30, 2007. The decrease in interest was primarily the result of the sale of N-Star IX and other assets to the Securities Fund, decreasing interest expense by $16.1 million, decreased interest expense of $32.3 million on N-Star IV, VI, VII and VIII bonds payable due to decreases in LIBOR, debt paydowns, the effect of net settlements on interest rate swaps being recorded in unrealized gain (loss) on investments and other and reduced amortization of deferred financing as the result of the SFAS 159 election on the underlying debt, decreased interest expense of $3.1 million due to the paydown of repurchase obligations, lower balances on credit facilities resulting in decreased interest expense of $2.4 million and reduced interest as a result of the recapitalization of our corporate lending venture of $0.9 million and. The decrease in interest expense was partially offset by additional mortgage loans payable due to acquisitions in our net lease portfolio resulting in $13.1 million additional interest expense, 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 $5.4 million, the full period impact of the Euro-note resulting in $3.0 million additional interest expense and increased term loan balance resulting in $2.1 million additional interest expense.

Real Estate Properties—Operating Expenses

Real estate property operating expenses for nine months ended September 30, 2008 totaled $6.0 million, representing a decrease of $0.4 million, or 6%, compared to $6.4 million for nine months ended September 30, 2007. The decrease was primarily attributable to reduced insurance expense at various net lease properties.

Asset Management Fees—Related Party

Advisory fees for related parties for the nine months ended September 30, 2008 totaled $3.9 million, representing an increase of $1.0 million, or 34%, compared to $2.9 million for the nine months ended September 30, 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 $2.6 million of advisory fees to Wakefield Capital Management and $1.3 million of advisory fees to Monroe Management for the nine months ended September 30, 2008, respectively. We incurred $2.2 million of advisory fees to Wakefield Capital Management and $0.7 million of advisory fees to Monroe Management for the nine months ended September 30, 2007, respectively.

Fundraising Fees, Debt Issuance Costs and Other

Fundraising fees, debt issuance costs and other for the nine months ended September 30, 2008 totaled $4.9 million, representing a decrease of $1.4 million, or 22%, compared to $6.3 million for the nine months ended September 30, 2007. Fundraising Fees, Debt Issuance Costs and Other for the nine months ended September 30, 2008 included $4.9 million of debt issuance cost related to the May 2008 issuance of our 11.50% exchangeable senior notes (the "NNN Notes"). Fundraising Fees, Debt Issuance Costs and Other for the nine months ended September 30, 2007 included $3.2 million of placement fee expenses for raising private capital for our Securities Fund and a $3.1 million write-off of due diligence costs relating to the termination of a purchase agreement to acquire a portfolio of tax credit multi-family properties by one of our joint ventures.

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Provision for Loss on Investments

Provision for loss on investments for the nine months ended September 30, 2008 totaled $5.7 million. The provision includes a $2.2 million reserve against a $13.1 million mezzanine loan backed by a multi-family complex located in Georgia, a $2.0 million reserve against a $11.0 million mezzanine loan backed by a portfolio of seven limited service hotel properties and unentitled land, a $1.0 million reserve against a $18.0 million first mortgage loan backed by a multi-family property located in South Florida, and a $0.5 million reserve against a $16.9 million first mortgage loan backed by multi-family property located in South Florida. There was no provision for loss on investments for the nine months ended September 30, 2007.

General and Administrative

General and administrative expenses for the nine months ended September 30, 2008 totaled $46.5 million, representing an increase of $3.6 million, or 8%, compared to $42.9 million for the nine months ended September 30, 2007. The primary components of our general and administrative expenses were the following:

Salaries and equity-based compensation for the nine months ended September 30, 2008 totaled 31.1 million, representing an increase of approximately $4.0 million, or 15%, compared to $27.1 million, for the nine months ended September 30, 2007. The increase was attributable to a $6.6 million increase related to equity-based compensation, which was partially offset by a $2.6 million decrease related to salaries due to lower staffing levels resulting from decreased investment activity. The $6.6 million increase in equity-based compensation expense was attributable to an increase of approximately $8.2 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 $2.3 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 $1.2 million related to our Employee Outperformance Plan.

Auditing and professional fees for the nine months ended September 30, 2008 totaled $4.6 million, representing a decrease of $1.0 million, or 18%, compared to $5.6 million for the nine months ended September 30, 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 nine months ended September 30, 2008 totaled $10.7 million, representing a decrease of approximately $0.5 million, or 4%, compared to $10.2 million for the three months ended September 30, 2007. The decrease was primarily attributable to decreases costs related to decreased investment initiatives and a decrease in overhead resulting from lower staffing levels during the nine months ended September 30, 2008.

Depreciation and Amortization

Depreciation and amortization expense for the nine months ended September 30, 2008 totaled $33.5 million, representing an increase of $9.9 million, or 42%, compared to $23.6 million for the nine months ended September 30, 2007. This increase was primarily attributable to $82.8 million of net lease acquisitions made subsequent to September 30, 2007.

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Equity in (Loss) Earnings of Unconsolidated Ventures

Equity in (loss) earnings for the nine months ended September 30, 2008 totaled a loss of $4.8 million, representing an increase of $0.4 million, compared to a loss of $5.2 million for the nine months ended September 30, 2007. In July 2007, we closed our Securities Fund, retaining a 25.7% interest that is accounted for under the equity method of accounting. During the second quarter 2008, we increased our interest in the Securities Fund to 45.9%. For the nine months ended September 30, 2008, we recognized equity in loss of $5.1 million from the Securities Fund and equity in loss of $2.5 million on the LandCap joint venture. The losses were partially offset by our investment in Monroe Management prior to terminating the joint venture in May 2008 and our investment in the corporate lending joint venture which was recapitalized in May 2008 resulting in deconsolidation of the venture. We are currently accounting for the venture under the equity method of accounting. We recognized $2.3 million of equity in earnings in connection with these joint ventures and $0.3 million in connection with our net lease joint venture. Equity in losses for the nine months ended September 30, 2007 consisted primarily of a loss of $3.8 million on the Securities Fund and to the operations of Monroe Management, which generated a loss of $1.7 million. The losses were partially offset by a net lease joint venture we entered into in February 2006, which generated equity in earnings of $0.3 million.

Unrealized Gain (Loss) on Investments and Other

Unrealized gain (loss) on investments and other increased by approximately $431.5 million for the nine months ended September 30, 2008 to a gain of $427.7 million, compared to a loss of $3.8 million for the nine months ended September 30, 2007. The unrealized gain on investments for the nine months ended September 30, 2008 consisted primarily of unrealized gains related to SFAS 159 mark-to-market adjustments of $529.0 million on various N-Star bonds payable, $72.8 million on liability to subsidiary trusts issuing preferred securities and $28.9 million on exchangeable senior notes, offset partially by unrealized losses related to SFAS 159 mark-to-market adjustments of $164.1 million on various N-Star available for sale securities, $32.3 million on our corporate lending joint venture and $6.6 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 nine months ended September 30, 2007 consisted of a $3.4 million mark-to-market loss on the securities in N-Star IX warehouse prior to the closing of the term debt transaction in February 2007 and a $0.3 million unrealized loss related to the ineffective portion of our interest rate swaps.

Realized Gain on Investments and Other

The realized gain of $14.1 million for the nine months ended September 30, 2008 was attributable to the recapitalization of our corporate loan venture in which we recognized a $46.0 million realized gain upon the extinguishment of a portion of the debt, a simultaneous $27.1 million cost basis reduction of our investment in the recapitalized venture and a realized loss of $18.9 million related to the sale of certain corporate loans within the portfolio. In addition we recognized a $14.1 million gain on the repurchase of various N-Star bonds. The realized gain of $3.5 million for the nine months ended September 30, 2007 is related to 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, a gain of $1.4 million on the early redemption of REIT debt securities in N-Star VII, a foreign currency translation gain of $0.1 million related to our Euro-denominated investment and a net realized gain of $1.0 million on the sale of certain assets to the Securities Fund, partially offset by a realized loss of $0.3 million on the closing of a short securities position.

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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 April 2007, our Wakefield venture sold two assisted care living facilities. Accordingly, these operations were reclassified to income from discontinued operations. We had no discontinued operations for the nine months ended September 30, 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. As we indicated earlier, availability of such capital is extremely scarce (if available at all) for financial institutions including commercial mortgage REITs.

Our total available liquidity at September 30, 2008 was approximately $280.0 million, including $164.6 million of unrestricted cash and cash equivalents and $107.4 million of cash in our on balance sheet term debt transactions and $8.0 million in our off balance sheet term debt transactions, which is available for reinvestment within the term debt transaction.

We expect to meet our long term liquidity requirements, including the repayment of debt and our investment funding needs, through existing cash resources, our existing secured term debt and potentially 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. In the future, our dividend will be evaluated based upon consideration of several factors including our view of taxable income, company liquidity, availability of capital in the markets and investment opportunities.

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; however, our secured term debt financing structures generally require that the underlying collateral and cash flow generated by the collateral to be in excess of ratios stipulated in the related indentures. These ratios are called overcollateralization ("OC") and interest coverage ("IC") tests. In the event these tests are not met, cash that would normally be distributed to us would be used to amortize the senior notes until the financing is back in compliance with the tests. In the event cash flow is diverted to repay the notes, this could decrease cash available to pay our dividend and to comply with REIT requirements. As of September 30, 2008 we are in compliance with all of the OC and IC tests in our secured term debt transactions.

Our ability to meet a long-term (beyond one year) liquidity requirement may be 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

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policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities.

Exchangeable Senior Notes

In May 2008, NRFC NNN Holdings, LLC ("Triple Net Holdings"), a wholly-owned subsidiary of ours issued $80.0 million of 11.50% exchangeable senior notes (the "Notes") which are due in 2013. The net proceeds from the offering were approximately $71.4 million, after deducting fees and expenses. The proceeds of the offering were used to make additional investments.

We have elected the SFAS 159 fair value option for the Notes. Changes in fair value of the Notes will be recognized in earnings as they occur.

Unsecured Revolving Line of Credit

On May 28, 2008, we voluntarily terminated the Revolving Credit Agreement, dated November 3, 2006 by us and KeyBanc Capital Markets and Bank of America, N.A. (the "Credit Agreement") in order to permit the issuance of the NNN Notes, given certain restrictive covenants set forth in the Credit Agreement. The Credit Agreement had a November 2009 expiration and no amounts were outstanding under the Credit Agreement at the time of termination.

Term Loan

In June 2008, a wholly owned subsidiary of ours entered into a $24.2 million term loan agreement with an investment bank (the "LB Term Loan"). The collateral for the LB Term Loan is a $44.0 million mezzanine loan position and we have guaranteed 50% of such amount. The LB Term Loan matures in February 2009 and bears interest at a spread of 1.50% over one-month LIBOR. Both the LB Term Loan and the mezzanine loan collateral have three one-year extension options. The LB Term Loan contains certain covenants including, among others, financial covenants of a minimum tangible net worth and a minimum debt-to-equity ratio.

Equity Distribution Agreement

In May, 2008, we entered into an equity distribution agreement with Wachovia Capital Markets, LLC ("Wachovia"). In accordance with the terms of the agreement, we may offer and sell up to 10,000,000 shares of our common stock from time to time through Wachovia. Wachovia will receive a commission from us of up to 2.5% of the gross sales price of all shares sold through it under the equity distribution agreement.

For the three and nine months ended September 30, 2008, we issued a total of 12,100 and 114,100 shares of common stock, respectively, related to our equity distribution agreement with Wachovia raising net proceeds of approximately $0.1 million and $0.6 million, net of $2,497 and $28,199 in commissions, respectively.

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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 and nine months ended September 30, 2008, we issued a total of approximately 34,301 and 98,151 common shares, respectively, pursuant to the Plan for a gross sales price of approximately $0.2 million and $0.8 million, respectively.

Wakefield Preferred Equity

On July 9, 2008, Wakefield sold a $100 million convertible preferred equity interest to Inland American Real Estate Trust, Inc. ("Inland American"). We received approximately $87.7 million of net proceeds from the transaction. Prior to conversion, the convertible preferred investment will yield a dividend of 10.5%. The convertible preferred equity may be converted or redeemed, at Inland American's option, upon the sale or recapitalization of the Wakefield venture. Wakefield may, at its option, redeem the convertible preferred interests at any time following the first anniversary of the closing, subject to payment of a call premium that declines over time. In addition, at any time after the second anniversary of the closing, Inland American may convert its preferred equity interests into common equity in Wakefield. Based on the current investment amount and capital accounts of the Wakefield members, the convertible preferred equity interests would represent, upon conversion, approximately a 42% common equity ownership interest in Wakefield. Inland American will have the option of contributing additional preferred equity and participating in new Wakefield investment opportunities in proportion to its percentage ownership interest, assuming it were to convert its interests to common equity.

Cash Flows

The net cash flow provided by operating activities of $72.6 million, decreased by $5.8 million for the nine months ended September 30, 2008 from $78.4 million for the nine months ended September 30, 2007. This was primarily due to the lower LIBOR rates which decreased interest income generated from our asset base.

The net cash flow used by investing activities was $82.1 million for the nine months ended September 30, 2008 compared to the net cash used by investing activities of $2.4 billion for the nine months ended September 30, 2007. This decrease from 2007 was primarily a result of decreased investment activity. Net cash flow used in investing activities in 2007 consisted primarily of the acquisitions of operating real estate, real estate securities, corporate loan investments, and the origination or acquisition of real estate debt investments.

The net cash flow provided by financing activities was $20.3 million for the nine months ended September 30, 2008 compared to $2.5 billion of cash provided by financing activities for the nine months ended September 30, 2007. The primary source of cash flow provided by financing activities was the sale of $100 million convertible preferred equity interest to Inland American, the sale of the issuance of $80.0 million of exchangeable senior notes and additional borrowings under our term loans and credit facilities. Net cash flow in provided by financing activity in 2007 was primarily from the issuance of preferred equity issuance of our 7.25% exchangeable senior notes, issuance of term and borrowing under our credit facilities to finance our investing activities.

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Contractual Obligations and Commitments

As of September 30, 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	$	895,894	$	1,109	$	104,012	$	174,222	$	616,551
Mezzanine loan payable		12,708		413		3,558		4,144		4,593
Exchangeable senior notes		252,500		—		—		—		252,500
Bonds payable		1,573,285		—		—		—		1,573,285
Credit facilities		48,216		—		48,216		—		—
Secured term loan		410,281		—		410,281		—		—
Liability to subsidiary trusts issuing preferred securities		286,258		—		—		—		286,258
Repurchase agreements		1,540		—		1,540		—		—
Capital leases(1)		16,792		174		974		982		14,662
Operating leases		77,821		1,392		11,260		10,983		54,186
Placement fees		1,216		608		608		—		—
Outstanding unfunded commitments(2)		363,536		295,782		67,754		—		—

Total contractual obligations	$	3,940,047	$	299,478	$	648,203	$	190,331	$	2,802,035

(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 $363.5 million, of which a minimum of $195.5 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. Based upon currently approved advance rates on our credit and term debt facilities, our equity requirement would be approximately $84.6 million.

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 September 30, 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 September 30, 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

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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 September 30, 2008 (dollars in thousands):

		Collateral—September 30, 2008									Term Notes—September 30, 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			Stated Maturity
N-Star I(2)			8/21/03	$	301,735		6.64	%		4.14	$	282,732		6.21	%		8/01/2038
N-Star II			7/01/04		331,878		6.22			4.77		295,931		5.60			6/01/2039
N-Star III			3/10/05		404,771		5.90			4.25		358,676		5.14			6/01/2040
N-Star V			9/22/05		509,722		5.49			6.22		456,319		4.74			9/05/2045

	Total			$	1,548,106		5.98	%		4.99	$	1,393,658		5.32	%

(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 $53.8 million at September 30, 2008.

CLO Equity Notes

In December 2006, we 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. We also acquired a 12.5% and 33.5% residual equity interest in two third party CLO's. 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 of the CLOs were not consolidated into our condensed consolidated financial statements. On May 7, 2008, we completed a recapitalization of our middle-market corporate lending venture. We contributed our CLO equity interests into the recapitalized entity. Prior to May 7, 2008, our residual combined equity interests were accounted for as debt securities available for sale pursuant to EITF 99-20. Upon completion of the recapitalization transaction, the new investor became the controlling manager of the assets and we deconsolidated the venture and now use the equity method of accounting for the investment, which includes our residual combined equity interests in the CLO's contributed in the recapitalization.

NorthStar Real Estate Securities Opportunity Fund

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

We are the manager and general partner of the Securities Fund. We receive base management fees ranging from 1.0% to 2.0% per annum on third-party capital and 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.

During the second quarter 2008, we invested an additional $16.0 million in the Securities Fund. Additionally, during the second quarter 2008, we sold 67% of our N-Star IX advisory fee income stream to the Securities Fund for $8.8 million. The Securities Fund owns all of the equity in the N-Star

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IX term financing but we retained the advisory fees when N-Star IX was sold to the Securities Fund at its inception. We recognized $4.8 million of advisory fee income from the sale and deferred the remaining $4.0 million, which represented our ownership interest in the Securities Fund. The deferred advisory fee income will be recognized into income as the fees are earned. For the three and nine months ended September 30, 2008, we recognized $0.1 million in additional income from the amortization of deferred advisory fee income. At September 30, 2008, we had invested a total of $47.9 million in the Securities Fund and the carrying value of our investment was $33.8 million, representing a 46.0% interest.

For the three months ended September 30, 2008, we recognized equity in earnings of $0.5 million. We also earned $0.1 million of management fees from the Securities Fund for the three months ended September 30, 2008. For the nine months ended September 30, 2008, we recognized equity in loss of $4.5 million. We also earned $0.4 million of management fees from the Securities Fund for the three months ended September 30, 2008.

Recent Developments

Dividends

On October 8, 2008, we declared a dividend of $0.36 per share of common stock. On October 21, 2008, we declared a dividend of $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends will be paid on November 14, 2008 to the stockholders of record as of the close of business on November 4, 2008.

JP Facility

On October 7, 2008, we and a subsidiary of ours entered into Amendment No. 1 (the "Amendment") to the Master Repurchase Agreement (as amended, the "Facility") with JPMorgan Chase Bank, N.A. ("JPMorgan"). The Facility had approximately $50.4 million outstanding on the amendment date and such amounts bear interest at spreads of 1.25% to 1.80% over one-month LIBOR. Advance rates for the assets currently financed under the Facility range from 55% to 80% of the value of the collateral for which the advance is made. Interest rates and advance rates on future borrowings under the Facility will be determined by JPMorgan. Pursuant to the Amendment, the maximum amount outstanding under the Facility shall not exceed $150 million and we have agreed to guaranty the outstanding amount under the Facility. The term of the Facility will expire on August 8, 2010, subject to renewal by JPMorgan on August 8, 2009.

Stock Repurchase Program

On October 8, 2008, our Board of Directors authorized a stock repurchase program of up to 10,000,000 shares of our outstanding common stock, or approximately 16% of our outstanding common stock. Stock repurchases under this program will be made from time to time through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. As of November 6, 2008, we have not repurchased any shares under the authorization.

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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

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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 and nine months ended September 30, 2008 and 2007 (in thousands):

	Three Months Ended September 30, 2008			Three Months Ended September 30, 2007			Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007

Funds from Operations:
Income from continuing operations before minority interest	$	268,588		$	14,813		$	476,413		$	39,546
Minority interest in joint ventures		(2,300	)		(215	)		(2,097	)		(351	)

Income from continuing operations before minority interest in operating partnership		266,288			14,598			474,316			39,195
Adjustments:
Preferred dividend		(5,231	)		(5,231	)		(15,693	)		(11,302	)
Depreciation and amortization		13,566			9,163			33,481			23,594
Funds from discontinued operations		—			—			—			17
Real estate depreciation and amortization—unconsolidated ventures		247			247			742			743

Funds from Operations	$	274,870		$	18,777		$	492,846		$	52,247

Adjusted Funds from Operations:
Funds from Operations	$	274,870		$	18,777		$	492,846		$	52,247
Straight-line rental income, net		(344	)		(866	)		(1,817	)		(1,853	)
Straight-line rental income, discontinued operations		—			—			—			10
Straight-line rental income and fair value lease revenue (SFAS 141 adjustment), unconsolidated ventures		(39	)		(54	)		(125	)		(167	)
Amortization of equity-based compensation		5,439			3,948			18,396			11,837
Fair value lease revenue (SFAS 141 adjustment)		(809	)		(271	)		(1,420	)		(611	)
Unrealized(gains)/losses from mark-to-market adjustments		(249,244	)		(6,365	)		(438,565	)		3,473
Unrealized losses from mark-to-market adjustments, unconsolidated ventures		(3,291	)		4,393			6,356			4,393

Adjusted Funds from Operations	$	26,582		$	19,562		$	75,671		$	69,329

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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 September 30, 2008			Annualized September 30, 2008(2)		Year Ended December 31, 2007

Adjusted Funds from Operations (AFFO)		[A]	$	26,582		$	106,328	$	95,683
Plus: Fundraising Fees, Debt Issuance Costs and Other				—					6,295

AFFO, excluding Fundraising Fees, Debt Issuance Costs and Other		[B]		26,582			106,328		101,978
Plus: General & Administrative Expenses				13,725					56,561
Plus: General & Administrative Expenses from Unconsolidated Ventures				1,070					4,810
Less: Equity-Based Compensation included in G&A				5,439					16,214

AFFO, excluding G&A		[C]		35,938			143,752		147,135
Average Common Book Equity & Operating Partnership Minority Interest(1)		[D]	$	979,020				$	442,018
	Return on Average Common Book Equity (including G&A)	[A]/[D]		10.9	%				21.6	%
	Return on Average Common Book Equity (excluding Fundraising Fees, Debt Issuance Costs and Other)	[B]/[D]		10.9	%				23.1	%
	Return on Average Common Book Equity (excluding G&A)	[C]/[D]		14.7	%				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 September 30, 2008, a hypothetical 100 basis point increase in

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interest rates applied to our variable rate assets would increase our annual interest income by approximately $27.2 million, offset by an increase in our interest expense of approximately $21.6 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.

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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

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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 non-recourse 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.

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 and we monitor their financial condition; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings and financial support from the U.S. Government. 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 September 30, 2008, we recorded in earnings a mark-to-market unrealized loss of $1.8 million and a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps. For the nine months ended September 30, 2008, we recorded in earnings a mark-to-market unrealized gain of $8.3 million and a $4.1 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps.

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The following tables summarize our derivative financial instruments as of September 30, 2008 (in thousands).

				Range of Fixed LIBOR	Range of Maturity

Interest rate swaps and basis swaps
As of September 30, 2008	1,495,212	(44,860	)	3.02% - 5.96%	October 2009 - 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.

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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)
			Certain instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
	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)

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Exhibit Number			Description of Exhibit

	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)

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Exhibit Number			Description of Exhibit

	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		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)
	10.18		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)
	10.19		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)
	10.20		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)
	10.21		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)
	10.22		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)
	10.23		Fourth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 24, 2007 (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed May 29, 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)

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Exhibit Number			Description of Exhibit

	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)
	10.35		Registration Rights Agreement relating to the 11.50% Exchangeable Senior Notes due 2013 of NRFC NNN Holdings, LLC, dated May 28, 2008 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-152545))

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Exhibit Number			Description of Exhibit

	10.36		Fifth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 29, 2008 (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)
	10.37		Amendment No. 1 to Master Repurchase Agreement, dated as of October 7, 2008, by and among NRFC JP Holdings, LLC, and JP Morgan Chase Bank, N.A.
	10.38		Amended and Restated Guarantee Agreement, dated as of October 7, 2008, made by NorthStar Realty Finance Corp., in favor of JP Morgan Chase Bank, N.A.
	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.

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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: November 6, 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 (NRF) Inactive 10-Q2008 Q3 Quarterly report

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