Northstar Realty Finance 10Q 2012 Q2 Quarterly report

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

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 o		Accelerated filer ý		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, 134,675,417 shares outstanding as of August 6, 2012.

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NORTHSTAR REALTY FINANCE CORP.

FORM 10-Q

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Index

Part I.	Financial Information	5
Item 1.	Financial Statements	5
	Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011	5
	Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2012 and 2011	6
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2012 and 2011	7
	Consolidated Statements of Equity as of June 30, 2012 (unaudited) and December 31, 2011	8
	Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011	9
	Notes to the Consolidated Financial Statements (unaudited)	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	65
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	94
Item 4.	Controls and Procedures	97
Part II.	Other Information	97
Item 1.	Legal Proceedings	97
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	98
Item 6.	Exhibits	98
Signatures		103

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. 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," "future" 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. Such statements include, but are not limited to, those relating to the operating performance of our investments, our financing needs, the effects of our current strategies, loan and securities activities, our ability to manage our collateralized debt obligations, or CDOs, and our ability to raise capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the economic environment. 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 and you should not unduly rely on these 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. These factors include, but are not limited to:

•: adverse economic conditions and the impact on the commercial real estate finance industry;
•: access to debt and equity capital and our liquidity;
•: our use of leverage;
•: our ability to meet various coverage tests with respect to our CDOs;
•: our ability to obtain mortgage financing on our net lease properties;
•: the affect of economic conditions on the valuations of our investments;
•: our ability to source and close on attractive investment opportunities;
•: the impact of economic conditions on the borrowers of the commercial real estate debt we originate and the commercial mortgage loans underlying the commercial mortgage backed securities in which we invest;
•: any failure in our due diligence to identify all relevant facts in our underwriting process or otherwise;
•: credit rating downgrades;
•: tenant or borrower defaults or bankruptcy;
•: illiquidity of properties in our portfolio;
•: environmental compliance costs and liabilities;
•: effect of regulatory actions, litigation and contractual claims against us and our affiliates, including the potential settlement and litigation of such claims;
•: competition for investment opportunities;
•: regulatory requirements with respect to our business and the related cost of compliance;
•: the impact of any conflicts arising from our asset management business;

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•: the ability to raise capital for the non-listed real estate investment trusts, or REITs, we sponsor;
•: changes in laws or regulations governing various aspects of our business;
•: the loss of our exemption from the definition of "investment company" under the Investment Company Act of 1940, as amended;
•: competition for qualified personnel and our ability to retain key personnel;
•: the effectiveness of our risk management systems;
•: failure to maintain effective internal controls;
•: compliance with the rules governing REITs; and
•: performance of our investments relative to our expectations and the impact on our actual return on equity.

The foregoing list of factors is not exhaustive. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us on the date hereof and 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 Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. 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.

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PART I. Financial Information

Item 1. Financial Statements

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

	June 30, 2012 (Unaudited)			December 31, 2011

Assets
VIE Financing Structures
Restricted cash	$	233,778		$	261,295
Operating real estate, net		341,997			313,227
Real estate securities, available for sale		1,199,412			1,358,282
Real estate debt investments, net		1,554,868			1,631,856
Investments in and advances to unconsolidated ventures		62,152			60,352
Receivables, net of allowance of $1,210 in 2012 and $1,179 in 2011		19,359			22,530
Derivative assets, at fair value		28			61
Deferred costs and intangible assets, net		42,377			47,499
Assets of properties held for sale		1,597			3,198
Other assets		18,046			23,135

		3,473,614			3,721,435

Non-VIE Financing Structures
Cash and cash equivalents		195,759			144,508
Restricted cash		48,983			37,069
Operating real estate, net		772,892			776,222
Real estate securities, available for sale		147,074			115,023
Real estate debt investments, net		225,212			78,726
Investments in and advances to unconsolidated ventures		40,077			33,205
Receivables		14,910			8,958
Receivables, related parties		7,275			5,979
Unbilled rent receivable		12,907			11,891
Derivative assets, at fair value		11,822			5,674
Deferred costs and intangible assets, net		49,036			50,885
Other assets		10,516			16,862

		1,536,463			1,285,002

Total assets	$	5,010,077		$	5,006,437

Liabilities
VIE Financing Structures
CDO bonds payable (see Note 9)	$	2,062,304		$	2,273,907
Mortgage notes payable		228,446			228,525
Secured term loan		14,682			14,682
Accounts payable and accrued expenses		14,346			15,754
Escrow deposits payable		70,064			52,660
Derivative liabilities, at fair value		206,152			226,481
Other liabilities		48,733			55,007

		2,644,727			2,867,016

Non-VIE Financing Structures
Mortgage notes payable		554,840			554,732
Credit facilities		132,318			64,259
Exchangeable senior notes		282,694			215,853
Junior subordinated notes, at fair value		161,374			157,168
Accounts payable and accrued expenses		37,486			50,868
Escrow deposits payable		12,345			196
Derivative liabilities, at fair value		—			8,193
Other liabilities		50,324			48,538

		1,231,381			1,099,807

Total liabilities		3,876,108			3,966,823

Commitments and contingencies (see Note 15)
Equity
NorthStar Realty Finance Corp. Stockholders' Equity
Preferred stock, 8.75% Series A, $0.01 par value, $60,525 and $60,000 liquidation preference as of June 30, 2012 and December 31, 2011, respectively		58,357			57,867
Preferred stock, 8.25% Series B, $0.01 par value, $233,350 and $190,000 liquidation preference as of June 30, 2012 and December 31, 2011, respectively		221,643			183,505
Common stock, $0.01 par value, 500,000,000 shares authorized, 133,425,417 and 96,044,383 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		1,334			960
Additional paid-in capital		1,008,913			809,826
Retained earnings (accumulated deficit)		(155,057	)		(8,626	)
Accumulated other comprehensive income (loss)		(26,229	)		(36,160	)

Total NorthStar Realty Finance Corp. stockholders' equity		1,108,961			1,007,372
Non-controlling interests		25,008			32,242

Total equity		1,133,969			1,039,614

Total liabilities and equity	$	5,010,077		$	5,006,437

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,

	2012			2011			2012			2011
Revenues
Interest income	$	79,988		$	110,790		$	160,700		$	208,430
Rental and escalation income		29,226			25,956			57,659			58,883
Commission income		8,679			1,726			16,078			2,644
Advisory and other fee income		2,742			212			3,259			295
Other revenue		1,531			1,365			1,739			1,615

Total revenues		122,166			140,049			239,435			271,867
Expenses
Interest expense		34,665			34,206			69,963			67,626
Real estate properties—operating expenses		5,025			2,613			9,689			15,110
Asset management expenses		304			1,328			1,801			2,889
Commission expense		6,748			1,299			12,397			2,016
Other costs, net		200			—			392			—
Provision for loan losses		6,537			14,200			13,377			38,700
Provision for loss on equity investment		—			—			—			4,482
General and administrative
Salaries and equity-based compensation(1)		16,014			19,528			30,144			32,269
Other general and administrative		5,570			7,361			12,501			14,062

Total general and administrative		21,584			26,889			42,645			46,331
Depreciation and amortization		12,677			11,526			24,983			19,608

Total expenses		87,740			92,061			175,247			196,762

Income (loss) from operations		34,426			47,988			64,188			75,105
Equity in earnings (losses) of unconsolidated ventures		(336	)		(1,555	)		(837	)		(3,783	)
Other income (loss)		—			—			20,258			10,138
Unrealized gain (loss) on investments and other		(115,648	)		(130,607	)		(211,054	)		(282,825	)
Realized gain (loss) on investments and other		5,195			36,839			20,547			47,573

Income (loss) from continuing operations		(76,363	)		(47,335	)		(106,898	)		(153,792	)
Income (loss) from discontinued operations		(43	)		(1,047	)		(65	)		(638	)
Gain (loss) on sale from discontinued operations		285			9,416			285			14,447

Net income (loss)		(76,121	)		(38,966	)		(106,678	)		(139,983	)
Less: net (income) loss allocated to non-controlling interests		4,244			(5,813	)		6,207			(349	)
Preferred stock dividends		(5,635	)		(5,231	)		(10,958	)		(10,463	)
Contingently redeemable non-controlling interest accretion		—			(1,973	)		—			(4,982	)

Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(77,512	)	$	(51,983	)	$	(111,429	)	$	(155,777	)

Net income (loss) per share from continuing operations (basic/diluted)	$	(0.62	)	$	(0.69	)	$	(0.98	)	$	(2.05	)
Income (loss) per share from discontinued operations (basic/diluted)		—			(0.01	)		—			(0.01	)
Gain per share on sale of discontinued operations (basic/diluted)		—			0.10			—			0.17

Net income (loss) per common share attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)	$	(0.62	)	$	(0.60	)	$	(0.98	)	$	(1.89	)

Weighted average number of shares of common stock:
Basic		124,802,710			86,966,645			113,524,914			82,605,559

Diluted		131,178,131			91,233,904			119,285,979			86,908,265

Dividends declared per share of common stock	$	0.16		$	0.10		$	0.31		$	0.20

(1): The three months ended June 30, 2012 and 2011 include $4.8 million and $2.6 million, respectively, of equity-based compensation expense. The six months ended June 30, 2012 and 2011 include $7.2 million and $4.6 million, respectively, of equity-based compensation expense.

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in Thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,

	2012			2011			2012			2011
Net income (loss)	$	(76,121	)	$	(38,966	)	$	(106,678	)	$	(139,983	)
Other comprehensive income (loss):
Unrealized gain (loss) on real estate securities, available for sale		4,495			—			6,689			—
Reclassification adjustment for gains (losses) included in net income (loss)		1,873			1,873			3,746			3,746

Total other comprehensive income (loss)		6,368			1,873			10,435			3,746
Comprehensive income (loss)		(69,753	)		(37,093	)		(96,243	)		(136,237	)
Less: Comprehensive (income) loss attributable to non-controlling interests		3,935			(5,999	)		5,703			(633	)

Comprehensive income (loss) attributable to NorthStar Realty Finance Corp.	$	(65,818	)	$	(43,092	)	$	(90,540	)	$	(136,870	)

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Amounts in Thousands)

	Preferred Stock

	Series A				Series B				Common Stock							Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total NorthStar Stockholders' Equity
	Series A				Series B				Common Stock				Additional Paid-in Capital												Non-controlling Interests			Total Equity
	Shares		Amount		Shares		Amount		Shares		Amount		Additional Paid-in Capital												Non-controlling Interests			Total Equity
Balance at December 31, 2010		2,400	$	57,867		7,600	$	183,505		78,105	$	781	$	723,102		$	293,382		$	(36,119	)	$	1,222,518		$	55,173		$	1,277,691
Net proceeds from offering of common stock		—		—		—		—		17,250		173		69,132			—			—			69,305			—			69,305
Reclassification of equity compensation to liability		—		—		—		—		—		—		—			—			—			—			(2,136	)		(2,136	)
Non-controlling interest contribution to joint venture		—		—		—		—		—		—		—			—			—			—			144			144
Non-controlling interest distributions		—		—		—		—		—		—		—			—			—			—			(13,202	)		(13,202	)
Dividend reinvestment and stock purchase plan		—		—		—		—		62		—		264			—			—			264			—			264
Amortization of equity-based compensation		—		—		—		—		—		—		17			—			—			17			11,665			11,682
Contingently redeemable non-controlling interest accretion		—		—		—		—		—		—		—			(5,178	)		—			(5,178	)		—			(5,178	)
Equity component of exchangeable notes		—		—		—		—		—		—		10,971			—			—			10,971			—			10,971
Other comprehensive income (loss)		—		—		—		—		—		—		—			—			(41	)		(41	)		26			(15	)
Conversion of LTIP units		—		—		—		—		628		6		6,340			—			—			6,346			(6,346	)		—
Dividends on common stock and LTIP Units		—		—		—		—		—		—		—			(38,994	)		—			(38,994	)		(1,809	)		(40,803	)
Dividends on preferred stock		—		—		—		—		—		—		—			(20,925	)		—			(20,925	)		—			(20,925	)
Net income (loss)		—		—		—		—		—		—		—			(236,911	)		—			(236,911	)		(11,273	)		(248,184	)

Balance at December 31, 2011		2,400	$	57,867		7,600	$	183,505		96,045	$	960	$	809,826		$	(8,626	)	$	(36,160	)	$	1,007,372		$	32,242		$	1,039,614

Net proceeds from offering of common stock		—	$	—		—	$	—		37,250	$	372	$	198,751		$	—		$	—		$	199,123		$	—		$	199,123
Net proceeds from offering of preferred stock		21		490		1,734		38,138		—		—		—			—			—			38,628			—			38,628
Redemptions of non-controlling interests		—		—		—		—		—		—		(2,358	)		—			—			(2,358	)		2,358			—
Non-controlling interest distributions		—		—		—		—		—		—		—			—			—			—			(7,051	)		(7,051	)
Dividend reinvestment plan		—		—		—		—		17		1		93			—			—			94			—			94
Amortization of equity-based compensation		—		—		—		—		—		—		—			—			—			—			7,158			7,158
Equity component of exchangeable notes		—		—		—		—		—		—		1,986			—			—			1,986			—			1,986
Other comprehensive income (loss)		—		—		—		—		—		—		—			—			9,931			9,931			504			10,435
Conversion of LTIP units		—		—		—		—		113		1		615			—			—			616			(616	)		—
Dividends on common stock, LTIP Units and RSUs		—		—		—		—		—		—		—			(35,002	)		—			(35,002	)		(3,380	)		(38,382	)
Dividends on preferred stock		—		—		—		—		—		—		—			(10,958	)		—			(10,958	)		—			(10,958	)
Net income (loss)		—		—		—		—		—		—		—			(100,471	)		—			(100,471	)		(6,207	)		(106,678	)

Balance at June 30, 2012 (unaudited)		2,421	$	58,357		9,334	$	221,643		133,425	$	1,334	$	1,008,913		$	(155,057	)	$	(26,229	)	$	1,108,961		$	25,008		$	1,133,969

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

	Six Months Ended June 30,

	2012			2011
Cash flows from operating activities:
Net income (loss)	$	(106,678	)	$	(139,983	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) loss of unconsolidated ventures		837			3,783
Depreciation and amortization		24,987			20,400
Amortization of premium/discount on investments		(38,841	)		(78,904	)
Interest accretion on investments		(277	)		(7,571	)
Amortization of deferred financing costs		1,660			2,897
Equity-based compensation		7,158			4,647
Unrealized (gain) loss on investments and other		168,441			227,869
Realized gain on sale of investments and other / other income		(20,805	)		(62,022	)
Reversal of accrued loss and other costs		(22,041	)		—
Distributions from unconsolidated ventures		802			325
Amortization of capitalized above/below market leases		(565	)		(384	)
Unbilled rent receivable		(1,501	)		(1,194	)
Provision for loss on equity investment		—			4,482
Provision for loan losses		13,377			38,700
Allowance for uncollectable accounts		225			55
Discount and loan fees received		13,158			2,772
Loan acquisition costs		(835	)		—
Changes in assets and liabilities:
Restricted cash		(7,664	)		(13,899	)
Receivables		(4,232	)		(1,636	)
Other assets		6,729			11,821
Receivables from related parties		(1,254	)		(1,301	)
Accounts payable and accrued expenses		(16,628	)		5,635
Other liabilities		17,680			(3,646	)

Net cash provided by (used in) operating activities		33,733			12,846
Cash flows from investing activities:
Acquisitions of operating real estate, net		(6,858	)		—
Improvements of operating real estate		(1,614	)		(381	)
Deferred costs and intangible assets		(732	)		(134	)
Net proceeds from disposition of operating real estate		8,542			114,507
Acquisitions of real estate securities, available for sale		(82,865	)		(166,423	)
Proceeds from sales of real estate securities, available for sale		200,285			126,381
Repayments on real estate securities, available for sale		77,974			71,534
Originations/acquisitions of real estate debt investments		(210,487	)		(174,852	)
Repayments on real estate debt investments		94,651			163,966
Proceeds from sales of real estate debt investments		10,845			60,885
Restricted cash provided by (used in) investment activities		(5,417	)		(1,659	)
Other receivables		10,776			—
Investment in and advances to unconsolidated ventures		(7,939	)		(1,218	)
Distributions from unconsolidated ventures		175			676

Net cash provided by (used in) investing activities		87,336			193,282
Cash flows from financing activities:
Purchase of derivative instruments		(8,920	)		—
Settlement of derivative instrument		(8,163	)		(27,097	)
Collateral held by derivative counterparties		—			23,280
Borrowings of mortgage notes		4,500			20,920
Repayments of mortgage notes		(4,471	)		(101,043	)
Borrowings under credit facilies		84,161			—
Repayments of credit facilities		(16,102	)		—
Proceeds from CDO bonds reissuance		10,360			—
Proceeds from CDO bonds		10,000			23,000
Repayments of CDO bonds		(387,885	)		(97,962	)
Repurchases of CDO bonds		(59,161	)		(70,687	)
Repayments of secured term loans		—			(22,199	)
Payment of deferred financing costs		(3,072	)		(9,748	)
Change in restricted cash		58,415			(23,849	)
Proceeds from exchangeable senior notes		75,000			172,500
Repurchases and repayment of exchangeable senior notes		(7,500	)		(50,787	)
Net proceeds from preferred stock offering		38,628			—
Net proceeds from common stock offering		199,123			69,341
Proceeds from dividend reinvestment and stock purchase plan		94			153
Dividends (common and preferred)		(45,961	)		(27,860	)
Distributions / repayments to non-controlling interests		(8,864	)		(18,336	)

Net cash provided by (used in) financing activities		(69,818	)		(140,374	)
Net increase (decrease) in cash and cash equivalents		51,251			65,754
Cash and cash equivalents—beginning of period		144,508			125,439

Cash and cash equivalents—end of period	$	195,759		$	191,193

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts in Thousands, Except Per Share Data

(Unaudited)

1. Formation and Organization

NorthStar Realty Finance Corp., a real estate finance company and Maryland corporation (the "Company"), is an internally-managed real estate investment trust ("REIT"), which was formed in October 2003 in order to continue and expand the commercial real estate ("CRE") debt, CRE securities and net lease businesses conducted by its predecessor. In addition, the Company engages in asset management and other activities related to real estate and real estate finance. Substantially all of the Company's assets, directly or indirectly, are held by, and the Company conducts its operations, directly or indirectly, through NorthStar Realty Finance Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the "Operating Partnership").

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP 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 consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission ("SEC").

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, and its subsidiaries, which are majority-owned and controlled by the Company or a variable interest entity ("VIE") where the Company is the primary beneficiary. All significant intercompany balances have been eliminated in consolidation.

A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and its quantitative analysis on the forecasted cash flows of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE's economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE's purpose and design, including the risks the VIE was designed to create and passthrough to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements. Actual results could differ materially from these estimates and assumptions.

Reclassifications

Certain prior period amounts have been reclassified in the consolidated financial statements to conform to the current period presentation.

Comprehensive Income

The Company reports consolidated comprehensive income in separate statements following its consolidated statements of operations. Comprehensive income is defined as the change in equity resulting from net income (loss) and other comprehensive income (loss) ("OCI"). The Company's components of OCI principally include: (i) unrealized gain (loss) of securities available for sale for which the fair value option is not elected; and (ii) the reclassification of unrealized gain (loss) on derivative instruments that are or were deemed to be effective hedges.

Fair Value Option

The fair value option provides an election that allows companies to irrevocably elect fair value for certain financial assets and liabilities on an instrument-by-instrument basis at initial recognition. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur.

Real Estate Debt Investments

CRE debt investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination fees, discounts and unfunded commitments. CRE debt investments that are deemed to be impaired are carried at amortized cost less a loan loss reserve, if deemed appropriate, and represents fair value.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Real Estate Securities

The Company classifies its CRE securities as available for sale on the acquisition date. Available for sale securities are recorded at fair value. The Company has generally elected to apply the fair value option of accounting for its CRE securities portfolio. For those CRE securities for which the fair value option of accounting was elected, any unrealized gains (losses) from changes in fair value are recorded in unrealized gains (losses) on investments and other in the Company's consolidated statements of operations.

The Company may decide to not elect the fair value option for certain CRE securities due to the nature of the particular instrument. For those CRE securities for which the fair value option of accounting was not elected, any unrealized gains (losses) from the change in fair value is reported as a component of accumulated other comprehensive income (loss) in the Company's consolidated statements of equity, to the extent impairment losses are considered temporary.

Operating Real Estate

Operating real estate is carried at historical cost less accumulated depreciation. The Company follows the purchase method of accounting for acquisitions of operating real estate held for investment, where the purchase price of operating real estate is allocated to tangible assets such as land, building, tenant improvements and other identified intangibles. The Company evaluates whether real estate acquired in connection with a foreclosure, UCC/deed in lieu of foreclosure or a consentual modification of a loan (herein collectively referred to as taking title to a property) ("REO") constitutes a business and whether business combination accounting is relevant. Any excess upon taking title to a property between the carrying value of a loan over the estimated fair value of the property is charged to provision for loan losses.

Operating real estate, including REO, which has met the criteria to be classified as held for sale, is separately presented in the consolidated balance sheets. Such operating real estate is reported at the lower of its carrying value or its estimated fair value less the cost to sell. Once a property is determined to be held for sale, depreciation is no longer recorded. In addition, the results of operations are reclassified to income (loss) from discontinued operations in the consolidated statements of operations. Other REO for which the Company intends to market for sale in the near term is recorded at estimated fair value.

Revenue Recognition

Real Estate Debt Investments

Interest income is recognized on an accrual basis and any related discount, premium, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The accretion of discount or amortization of a premium is discontinued if such loan is reclassified to held for sale.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Loans acquired at a discount with deteriorated credit quality are accreted to expected recovery. The Company continues to estimate the amount of recovery over the life of such loans. A subsequent increase in expected future cash flows is recognized as an adjustment to the accretable yield prospectively over the remaining life of such loan.

Real Estate Securities

Interest income is recognized using the effective interest method with any purchased premium or discount accreted through earnings based upon expected cash flows through the expected maturity date of the security. Changes to expected cash flows may result in a change to the yield which is then used prospectively to recognize interest income.

Operating Real Estate

Rental income from operating real estate is derived from leasing of space to various types of corporate tenants and healthcare operators. The leases are for fixed terms of varying length and generally provide for annual rentals and expense reimbursements to be paid in monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases.

Credit Losses and Impairment on Investments

Real Estate Debt Investments

Loans are considered impaired when based on current information and events, it is probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment of the Company is required in this analysis. The Company considers the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded with a corresponding charge to the provision for loan losses. The loan loss reserve for each loan is maintained at a level that is determined to be adequate by management to absorb probable losses.

Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of the Company, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.

Real Estate Securities

CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment ("OTTI") as changes in fair value are recorded in the Company's consolidated statements of operations. Realized losses on such securities are reclassified to realized gain (loss) on investments and other as losses occur. CRE securities for which the fair value option is not elected are evaluated for OTTI quarterly.

Operating Real Estate

The Company's real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property's value is considered impaired if the Company's estimate of the aggregate future undiscounted cash flows to be generated by the property is less than the carrying value of the property. In conducting this review, the Company considers U.S. macroeconomic factors, including real estate sector conditions, together with asset specific and other factors. To the extent an impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property.

Allowances for doubtful accounts for tenant receivables are established based on periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due. Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on billed and unbilled rents receivable based upon an evaluation of the collectability of such amounts.

Troubled Debt Restructuring

CRE debt investments modified in a troubled debt restructuring ("TDR") are modifications granting a concession to a borrower experiencing financial difficulties where a lender agrees to terms that are more favorable to the borrower than is otherwise available in the current market. Management judgment is necessary to determine whether a loan modification is considered a TDR. Troubled debt that is fully satisfied via taking title to a property, repossession or other transfers of assets is generally included in the definition of TDR. Loans acquired as a pool with deteriorated credit quality that have been modified are not considered a TDR.

Other

Refer to the section of the Company's Annual Report on Form 10-K for the year ended December 31, 2011 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" for a full discussion of the Company's critical accounting policies.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Recently Issued Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued an accounting update to amend existing guidance concerning fair value measurements and disclosures. The update is intended to achieve common fair value measurements and disclosure requirements under U.S. GAAP and International Financial Reporting Standards and is effective in the first interim or annual period beginning after December 15, 2011. The Company adopted this accounting update in the first quarter 2012 and the required disclosures have been incorporated into Note 4 of the consolidated financial statements. The adoption did not have a material impact on the consolidated financial statements.

In June 2011, the FASB issued an accounting update concerning the presentation of comprehensive income. The update requires either a single, continuous statement of comprehensive income be included in the statement of operations or an additional statement of comprehensive income immediately following the statement of operations. The update does not change the components of OCI that must be reported but it eliminates the option to present OCI on the statement of equity. In December 2011, the FASB issued an accounting update to defer the requirement to present the reclassification adjustments to OCI by component and are currently redeliberating this requirement. The remaining requirements of the accounting update were effective for the Company in the first quarter 2012 and were applied retrospectively to all periods reported after the effective date. There was no impact on the consolidated financial statements as the Company currently complies with the update.

3. Variable Interest Entities

The Company has evaluated its CRE debt and security investments, investments in unconsolidated ventures, liabilities to subsidiary trusts issuing preferred securities ("junior subordinated notes") and its collateralized debt obligations ("CDOs") to determine whether they are a VIE. The Company monitors these investments and, to the extent it has determined that it potentially owns a majority of the current controlling class, analyzes them for potential consolidation. The Company will continue to analyze future investments and liabilities, as well as reconsideration events, including a modified loan deemed to be a troubled debt restructuring, pursuant to the VIE requirements. These analyses require considerable judgment in determining the primary beneficiary of a VIE. This could result in the consolidation of an entity that would otherwise not have been consolidated or the non-consolidation of an entity that would have otherwise have been consolidated.

Consolidated VIEs (the Company is the primary beneficiary)

The Company has sponsored nine CDOs, which are referred to as the N-Star CDOs. In addition, the Company has acquired the equity interests of two CDOs, the CSE RE 2006-A CDO ("CSE CDO") and the CapLease 2005-1 CDO ("CapLease CDO"). The Company collectively refers to subordinate CDO bonds, preferred shares and equity notes as equity interests in a CDO. In the case of the CSE CDO, the Company was delegated the collateral management and special servicing rights, and for the CapLease CDO, the Company acquired the collateral management rights.

The CRE debt investments that serve as collateral for the CDO financing transactions include first mortgage loans, subordinate mortgage interests, mezzanine loans, credit tenant loans and other loans.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

The CRE securities that serve as collateral for the CDO financing transactions include commercial mortgage-backed securities ("CMBS"), unsecured REIT debt and CDO notes backed primarily by CRE securities and CRE debt. By financing these assets with long-term borrowings through the issuance of CDO bonds, the Company seeks to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. In connection with these financing transactions, the Company has various forms of significant ongoing involvement, which may include: (i) holding senior or subordinated interests in the CDOs; (ii) asset management; and (iii) entering into derivative contracts to manage interest rate risk. Each CDO transaction is considered a VIE. The Company has determined it is the primary beneficiary, and as a result, consolidates all of its CDO financing transactions, including the CSE CDO and CapLease CDO.

The following table displays the classification and carrying value of assets and liabilities of consolidated VIEs as of June 30, 2012 (amounts in thousands):

	Consolidated Variable Interest Entities

	N-Star I		N-Star II		N-Star III		N-Star IV		N-Star V			N-Star VI		N-Star VII			N-Star VIII		N-Star IX		CSE CDO		CapLease CDO		Total
Assets of consolidated VIEs:
Restricted cash	$	2,397	$	1,464	$	2,327	$	14,766	$	270		$	44,263	$	718		$	45,926	$	28,043	$	89,745	$	3,859	$	233,778
Operating real estate, net		—		—		—		71,648		—			—		—			266,055		—		4,294		—		341,997
Real estate securities, available for sale		156,498		145,157		135,826		29,938		145,329			35,459		143,647			10,794		331,377		51,425		13,962		1,199,412
Real estate debt investments, net		—		—		16,666		215,355		—			302,244		—			481,095		50,553		367,129		121,826		1,554,868
Investments in and advances to unconsolidated ventures		—		—		—		—		—			2,586		—			59,566		—		—		—		62,152
Receivables, net of allowance		1,521		987		1,168		1,181		1,500			876		1,583			2,849		3,658		3,208		828		19,359
Derivative assets, at fair value		—		—		—		—		—			—		28			—		—		—		—		28
Deferred costs and intangible assets, net		—		—		—		3,155		—			93		—			39,129		—		—		—		42,377
Assets of properties held for sale		—		—		—		—		—			—		—			—		—		1,597		—		1,597
Other assets		13		16		50		746		11			92		3,159			2,367		307		11,265		20		18,046

Total assets of consolidated VIEs(1)		160,429		147,624		156,037		336,789		147,110			385,613		149,135			907,781		413,938		528,663		140,495		3,473,614
Liabilities of consolidated VIEs:
CDO bonds payable		143,028		92,979		95,126		139,686		112,832			178,226		115,085			352,371		236,333		480,487		116,151		2,062,304
Mortgage notes payable		—		—		—		—		—			—		—			228,446		—		—		—		228,446
Secured term loan		—		—		—		—		—			14,682		—			—		—		—		—		14,682
Accounts payable and accrued expenses		868		72		681		1,564		446			389		359			4,719		1,432		2,646		1,170		14,346
Escrow deposits payable		—		—		—		5,236		—			26,755		—			20,636		339		16,544		554		70,064
Derivative liabilities, at fair value		3,322		8,254		14,691		—		36,057			7,651		48,911			25,543		48,173		13,550		—		206,152
Other liabilities		—		—		—		1,306		—			—		255			19,700		27,407		17		48		48,733

Total liabilities of consolidated VIEs(2)		147,218		101,305		110,498		147,792		149,335			227,703		164,610			651,415		313,684		513,244		117,923		2,644,727

Net assets	$	13,211	$	46,319	$	45,539	$	188,997	$	(2,225	)	$	157,910	$	(15,475	)	$	256,366	$	100,254	$	15,419	$	22,572	$	828,887

(1): Assets of each of the consolidated VIEs may only be used to settle obligations of the respective VIE.
(2): Creditors of each of the consolidated VIEs have no recourse to the general credit of the Company.

The Company is not contractually required to provide financial support to any of its consolidated VIEs, however, the Company, in its capacity as collateral manager and/or special servicer, may in its

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

sole discretion provide support such as protective and other advances it deems appropriate. The Company did not provide any other financial support for the six months ended June 30, 2012 and 2011.

Unconsolidated VIEs (the Company is not the primary beneficiary, but has a variable interest)

Based on management's analysis, the Company is not the primary beneficiary of VIEs it has identified since it does not have both the: (i) power to direct the activities that most significantly impact the VIE's economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, these VIEs are not consolidated into the Company's financial statements as of June 30, 2012.

Real Estate Debt Investments

The Company identified two real estate debt investments in the second quarter 2012 to one borrower with a total carrying value of $54.9 million as variable interests in a VIE. The Company has determined that it is not the primary beneficiary of this VIE, and as such, the VIE should not be consolidated in the Company's financial statements. For all other real estate debt 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.

Real Estate Securities

The Company has identified nine CRE securities with a fair value of $60.9 million as variable interests in VIEs. The Company has determined that it is not the primary beneficiary, and as such, these VIEs are not consolidated in the Company's financial statements.

In prior years, in connection with three existing CMBS investments, the Company became the controlling class of a securitization the Company did not sponsor. The Company determined each securitization was a VIE. However, the Company determined at that time and continues to believe that it does not currently or potentially hold a significant interest in any of these securitizations and, therefore, is not the primary beneficiary. As such, these VIEs are not consolidated.

In March 2011, in connection with existing investments of certain CMBS, the Company became the controlling class of a securitization that the Company did not sponsor. The Company determined it was the primary beneficiary due to having ownership in more than 50% of the controlling class and the right to appoint the special servicer, which gave the Company the power to direct the activities that impact the economic performance of the VIE. However, the Company sold a significant portion of this investment, and as such, it was determined the Company was no longer the primary beneficiary. Then, in September 2011, the Company was appointed special servicer for a loan in this securitization. The Company does not currently or potentially hold a significant interest and, therefore, is not the primary beneficiary. As such, the VIE is not consolidated.

In June 2011, the Company acquired the "B-piece" in a new $2.1 billion CMBS securitization. The Company was appointed as special servicer for the securitization. The Company has determined that the securitization is a VIE. However, the Company determined at that time and continues to believe

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

that it does not currently or potentially hold a significant interest and, therefore, is not the primary beneficiary. As such, the VIE is not consolidated.

In August 2011, the Company invested in a securitization collateralized by originally investment grade rated N-Star CDO bonds. The Company has determined that the securitization is a VIE. However, the Company determined at that time and continues to believe that it does not have the power to direct the activities that most significantly impact the economic performance of the VIE and does not currently or potentially hold a significant interest and, therefore, is not the primary beneficiary. As such, the VIE is not consolidated.

In February 2012, in connection with an existing CMBS investment, the Company became the controlling class of a securitization the Company did not sponsor and was appointed as special servicer for a loan in the securitization. The Company determined the securitization was a VIE. However, the Company determined at that time and continues to believe that it does not currently or potentially hold a significant interest and, therefore, is not the primary beneficiary. As such, the VIE is not consolidated.

In March 2012, the Company invested in a securitization collateralized by originally investment grade rated N-Star CDO bonds. The Company has determined that the securitization is a VIE. However, the Company determined at that time and continues to believe that it does not have the power to direct the activities that most significantly impact the economic performance of the VIE and does not currently or potentially hold a significant interest and, therefore, is not the primary beneficiary. As such, the VIE is not consolidated.

In April 2012, in connection with an existing CMBS investment, the Company became the controlling class of a securitization the Company did not sponsor. The Company determined the securitization was a VIE. However, the Company determined at that time and continues to believe that it does not currently or potentially hold a significant interest in this securitization and, therefore, is not the primary beneficiary. As such, the VIE is not consolidated.

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 trust preferred securities. 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

The following table displays the classification, carrying value and maximum exposure of unconsolidated VIEs as of June 30, 2012 (amounts in thousands):

	Unconsolidated Variable Interest Entities

	Junior Subordinated Notes, at Fair Value			Real Estate Debt Investments		Real Estate Securities, Available for Sale		Total			Maximum Exposure to Loss(1)
Real estate debt investments	$	—		$	54,916	$	—	$	54,916		$	54,916
Real estate securities, available for sale		—			—		60,879		60,879			60,879

Total assets		—			54,916		60,879		115,795			115,795
Junior subordinated notes, at fair value		161,374			—		—		161,374			NA

Total liabilities		161,374			—		—		161,374			NA

Net asset (liability)	$	(161,374	)	$	54,916	$	60,879	$	(45,579	)		NA

(1): The Company's maximum exposure to loss as of June 30, 2012 would not exceed the carrying value of its investment.

The Company did not provide financial support to any of its unconsolidated VIEs during the six months ended June 30, 2012 and 2011. As of June 30, 2012, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

4. Fair Value

Fair Value Measurement

The Company follows fair value guidance in accordance with U.S. GAAP to account for its financial instruments. The Company categorizes 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 CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

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


Level 1.	Quoted prices for identical assets or liabilities in an active market.
Level 2.	Financial assets and liabilities whose values are based on the following:
	a)	Quoted prices for similar assets or liabilities in active markets.
	b)	Quoted prices for identical or similar assets or liabilities in non-active markets.
	c)	Pricing models whose inputs are observable for substantially the full term of the asset or liability.
	d)	Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
Level 3.	Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Determination of Fair Value

The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.

Real Estate Securities

CRE securities are generally valued using a third-party pricing service or broker quotations. These quotations are not adjusted and are based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy. Certain CRE securities are valued based on a single broker quote or an internal price which have less observable pricing, and as such, are classified as Level 3 of the fair value hierarchy.

Derivative Instruments

Derivative instruments are valued using a third-party pricing service. These quotations are not adjusted and are generally based on valuation models with market observable inputs such as interest rates and contractual cash flows, and as such, are classified as Level 2 of the fair value hierarchy. Derivative instruments are also assessed for credit valuation adjustments due to the risk of non-performance by the Company and derivative counterparties. However, since the majority of the Company's derivatives are held in non-recourse CDO financing structures where, by design, the derivative contracts are senior to all the CDO bonds payable, there is no material impact of a credit valuation adjustment.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

CDO Bonds Payable

CDO bonds payable are valued using quotations from nationally recognized financial institutions that generally acted as underwriter for the transactions. These quotations are not adjusted and are generally based on valuation models using market observable inputs for interest rates and other unobservable inputs for assumptions related to the timing and amount of expected future cash flows, the discount rate, estimated prepayments and projected losses. CDO bonds payable are classified as Level 3 of the fair value hierarchy.

Junior Subordinated Notes

Junior subordinated notes are valued using quotations from nationally recognized financial institutions. These quotations are not adjusted and are generally based on a valuation model using market observable inputs for interest rates and other unobservable inputs for assumptions related to the implied credit spread of the Company's other borrowings and the timing and amount of expected future cash flows. Junior subordinated notes are classified as Level 3 of the fair value hierarchy.

Fair Value Measurement

Financial assets and liabilities recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables set forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 by level within the fair value hierarchy (amounts in thousands):

	June 30, 2012

	Level 1		Level 2		Level 3		Total
Assets:
Real estate securities, available for sale:
CMBS	$	—	$	932,099	$	226,747	$	1,158,846
Third-party CDO notes		—		—		70,936		70,936
Unsecured REIT debt		—		82,868		136		83,004
Trust preferred securities		—		—		7,584		7,584
Agency debentures		—		26,116		—		26,116

Subtotal real estate securities, available for sale		—		1,041,083		305,403		1,346,486
Derivative assets		—		11,850		—		11,850

Total assets	$	—	$	1,052,933	$	305,403	$	1,358,336

Liabilities:
CDO bonds payable(1)	$	—	$	—	$	1,946,153	$	1,946,153
Junior subordinated notes		—		—		161,374		161,374
Derivative liabilities		—		206,152		—		206,152

Total liabilities	$	—	$	206,152	$	2,107,527	$	2,313,679

(1): Excludes CapLease CDO bonds payable for which the fair value option was not elected.

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Amounts in Thousands, Except Per Share Data

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4. Fair Value (Continued)

	December 31, 2011

	Level 1		Level 2		Level 3		Total
Assets:
Real estate securities, available for sale:
CMBS	$	—	$	936,315	$	336,421	$	1,272,736
Third-party CDO notes		—		—		63,567		63,567
Unsecured REIT debt		—		90,824		3,474		94,298
Trust preferred securities		—		—		19,145		19,145
Agency debentures		—		23,559		—		23,559

Subtotal real estate securities, available for sale		—		1,050,698		422,607		1,473,305
Derivative assets		—		5,735		—		5,735

Total assets	$	—	$	1,056,433	$	422,607	$	1,479,040

Liabilities:
CDO bonds payable(1)	$	—	$	—	$	2,145,239	$	2,145,239
Junior subordinated notes		—		—		157,168		157,168
Derivative liabilities		—		234,674		—		234,674

Total liabilities	$	—	$	234,674	$	2,302,407	$	2,537,081

(1): Excludes CapLease CDO bonds payable for which the fair value option was not elected.

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Amounts in Thousands, Except Per Share Data

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4. Fair Value (Continued)

The following table presents additional information about the Company's financial assets and liabilities which are measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, for which the Company has utilized Level 3 inputs to determine fair value (amounts in thousands):

	June 30, 2012									December 31, 2011

	Real Estate Securities			CDO Bonds Payable			Junior Subordinated Notes			Real Estate Securities			CDO Bonds Payable			Junior Subordinated Notes
Beginning balance(1)	$	422,607		$	2,145,239		$	157,168		$	492,576		$	2,258,805		$	191,250
Transfers into Level 3(2)		58,288			—			—			469,209			—			—
Transfers out of Level 3(2)		(137,473	)		—			—			(434,036	)		—			—
Purchases / borrowings / amortization		38,286			20,444						146,152			65,199			—
Sales		(77,939	)		—			—			(111,437	)		—			—
Paydowns		(40,989	)		(373,708	)		—			(23,361	)		(325,989	)		—
Repurchases		—			(59,161	)		—			—			(75,316	)		—
Losses (realized or unrealized)
Included in earnings		(32,220	)		213,339			4,206			(216,939	)		225,972			—
Included in other comprehensive income (loss)		—			—			—			(7,676	)		—			—
Gains (realized or unrealized)
Included in earnings		68,024			—			—			108,109			(3,432	)		(34,082	)
Included in other comprehensive income (loss)		6,819			—			—			10			—			—

Ending balance	$	305,403		$	1,946,153		$	161,374		$	422,607		$	2,145,239		$	157,168

Gains (losses) included in earnings attributable to the change in unrealized gains (losses) relating to assets or liabilities still held.	$	29,676		$	(209,471	)	$	(4,206	)	$	(113,592	)	$	(202,276	)	$	34,082

(1): Reflects the balance at January 1, 2012 and 2011 for the periods ended June 30, 2012 and December 31, 2011, respectively.
(2): Transfers between Level 2 and Level 3 represent a fair value measurement from a third-party pricing service or a broker quotation that has become less observable during the period. Transfers are assumed to occur at the beginning of the quarter.

The Company relied on the third-party pricing exception with respect to the requirement to provide quantitative disclosures about significant Level 3 inputs being used. The Company believes such pricing service or broker quotes may be based on market transactions with comparable coupons and

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Amounts in Thousands, Except Per Share Data

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4. Fair Value (Continued)

credit (such as credit support and delinquency rates). Significant increases (decreases) in any one of the inputs in isolation may result in a significantly different fair value for the financial assets and liabilities utilizing such Level 3 inputs.

The Company's non-recurring financial measurements include the measurement of provision for loan losses on CRE debt and provision for loss on equity investments in unconsolidated ventures, which are classified as Level 3 of the fair value hierarchy. The provision for loan losses are generally based on a discounted cash flow model of a loan's underlying collateral. The key unobservable inputs used to determine the provision for loan losses for the three and six months ended June 30, 2012 included discount rates ranging from 7.0% to 15.5% and capitalization rates ranging from 5.0% to 23.0%. Refer to Note 7 for a further discussion of impairment on our CRE debt and Note 8 for a discussion of impairment on investments in unconsolidated ventures, if any.

Fair Value Option

The Company has generally elected to apply the fair value option of accounting to the following financial assets and liabilities existing at the time of adoption or at the time the Company recognizes the eligible item for the purpose of consistent accounting application: CRE securities; CDO bonds payable; and junior subordinated notes. The Company may decide not to elect the fair value option for certain of its financial assets or liabilities due to the nature of the instrument.

The following table sets forth the fair value of the Company's financial instruments for which the fair value option was elected as of June 30, 2012 and December 31, 2011 (amounts in thousands):

	June 30, 2012		December 31, 2011

Assets:
Real estate securities, available for sale:(1)
CMBS	$	1,063,592	$	1,199,660
Third-party CDO notes		40,664		40,231
Unsecured REIT debt		83,004		94,298
Trust preferred securities		7,584		19,145
Agency debentures		26,116		23,559

Total assets	$	1,220,960	$	1,376,893

Liabilities:
CDO bonds payable(2)	$	1,946,153	$	2,145,239
Junior subordinated notes		161,374		157,168

Total liabilities	$	2,107,527	$	2,302,407

(1): June 30, 2012 excludes 22 CRE securities with an aggregate carrying value of $125.5 million for which the fair value option was not elected. December 31, 2011 excludes ten CRE securities with an aggregate carrying value of $96.4 million for which the fair value option was not elected.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

(2): June 30, 2012 and December 31, 2011 excludes CapLease CDO bonds payable with a carrying value of $116.2 million and $128.7 million for which the fair value option was not elected, respectively.

The following table presents the difference between the fair value and the aggregate principal amount of liabilities, for which the fair value option has been elected as of June 30, 2012 (amounts in thousands):

	Fair Value at June 30, 2012		Amount Due Upon Maturity		Difference

CDO bonds payable(1)	$	1,946,153	$	3,508,705	$	(1,562,552	)
Junior subordinated notes		161,374		280,117		(118,743	)

Total liabilities	$	2,107,527	$	3,788,822	$	(1,681,295	)

(1): Excludes the CapLease CDO bonds payable for which the fair value option was not elected.

The Company attributes the change in the fair value of floating-rate liabilities to changes in instrument-specific credit spreads. For fixed-rate liabilities, the Company attributes the change in fair value to interest rate-related and instrument-specific credit spread changes.

Changes in Fair Value Recorded in the Statements of Operations

For the three and six months ended June 30, 2012 and 2011, the Company recognized the following unrealized gains (losses) on investments and other related to the change in fair value of financial assets and liabilities in the consolidated statements of operations:

	Three Months Ended June 30,						Six Months Ended June 30,

	2012			2011			2012			2011
Assets:
Real estate securities, available for sale	$	(29,639	)	$	(79,885	)	$	24,939		$	107,490
Liabilities:
CDO bonds payable		(86,338	)		(22,690	)		(209,475	)		(324,802	)
Junior subordinated notes		15,554			13,054			(4,206	)		(15,716	)

Subtotal(1)		(100,423	)		(89,521	)		(188,742	)		(233,028	)
Derivatives		5,838			(13,486	)		20,295			5,159

Total	$	(94,585	)	$	(103,007	)	$	(168,447	)	$	(227,869	)

(1): Represents financial assets and liabilities for which the fair value option was elected.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

The remaining amount of unrealized gains (losses) on investments and other on the Company's consolidated statements of operations relates to net cash payments for interest rate swaps.

The unrealized losses for CDO bonds payable attributable to paydowns at par were $80.5 million and $121.9 million for the three and six months ended June 30, 2012, respectively. The remaining amount relates to the changes in fair value.

Fair Value of Financial Instruments

In addition to the above disclosures regarding financial assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. Estimated fair value of financial instruments was determined by the Company, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

The fair value of certain financial assets and liabilities and other financial instruments are shown below as of June 30, 2012 and December 31, 2011 (amounts in thousands):

	June 30, 2012						December 31, 2011

	Principal / Notional Amount		Carrying Value		Fair Value		Principal / Notional Amount		Carrying Value		Fair Value
Financial assets:(1)
Real estate securities, available for sale(2)	$	2,949,701	$	1,346,486	$	1,346,486	$	3,234,145	$	1,473,305	$	1,473,305
Real estate debt investments, net		2,409,660		1,780,080		1,693,175		2,354,932		1,710,582		1,609,517
Derivative assets(2)(3)		815,500		11,850		11,850		468,500		5,735		5,735
Financial liabilities:(1)
CDO bonds payable(2)	$	3,645,120	$	2,062,304	$	2,059,989	$	4,125,769	$	2,273,907	$	2,273,253
Mortgage notes payable		783,286		783,286		803,412		783,257		783,257		801,710
Credit facilities		132,318		132,318		132,318		64,259		64,259		64,259
Secured term loan		14,682		14,682		15,472		14,682		14,682		15,443
Exchangeable senior notes		296,165		282,694		298,874		228,665		215,853		221,948
Junior subordinated notes(2)		280,117		161,374		161,374		280,117		157,168		157,168
Derivative liabilities(2)(3)		1,687,212		206,152		206,152		1,836,972		234,674		234,674

(1): The fair value of other financial instruments not included in this table is estimated to approximate their carrying amounts.
(2): Refer to the "Determination of Fair Value" above for a discussion of methodologies used to determine fair value.
(3): Derivative assets and liabilities exclude timing swaps with an aggregate notional amount of $75.3 million and $288.8 million as of June 30, 2012 and December 31, 2011, respectively.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of the reporting date. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

Real Estate Debt Investments, Net

For CRE debt investments, fair value of the fixed- and floating-rate investments was approximated by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment. Prices were calculated assuming fully-extended maturities regardless of structural or economic tests required to achieve such extended maturities. For any CRE debt investments that are deemed impaired, carrying

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Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

value approximates fair value. These fair value measurements of CRE debt are generally based on unobservable inputs and are, therefore, classified as Level 3 of the fair value hierarchy.

Mortgage Notes Payable

For fixed-rate mortgage notes payable, the Company uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using comparable U.S. Treasury rates as of the end of the reporting period. These fair value measurements are based on observable inputs and are classified as Level 2 of the fair value hierarchy.

Credit Facilities

The Company has amounts outstanding under two term credit facilities entered into in the fourth quarter 2011, both of which bear floating rate of interest. As of the reporting date, the Company believes the carrying value approximates fair value. This fair value measurement is based on observable inputs and is classified as Level 2 of the fair value hierarchy.

Secured Term Loan

Secured term loan includes the Company's Term Asset-Backed Securities Loan Facility ("TALF") borrowing. The estimated fair value is based on interest rates available for issuance of debt with similar terms and remaining maturities. This fair value measurement is based on observable inputs and is classified as Level 2 of the fair value hierarchy.

Exchangeable Senior Notes

For the exchangeable senior notes, the Company uses available market information, which includes quoted market prices or recent transactions, if available, to estimate their fair value and are, therefore, based on observable inputs and are classified as Level 2 of the fair value hierarchy.

The following table summarizes the exchangeable senior notes as of June 30, 2012 (amounts in thousands):

	Principal Amount		Carrying Value		Fair Value

11.50% Notes	$	35,710	$	35,497	$	38,063
7.25% Notes		12,955		12,955		12,842
7.50% Notes(1)		172,500		161,298		173,466
8.875% Notes		75,000		72,944		74,503

Total	$	296,165	$	282,694	$	298,874

(1): As of June 30, 2012, the exchange price was $6.36.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

5. Operating Real Estate

Operating Real Estate and REO Held for Investment

In January 2012, the Company acquired a 71-unit independent living facility located in Lancaster, Ohio for $6.5 million. Contemporaneously, the Company entered into a borrowing agreement for $4.5 million.

In April 2012, in connection with a debt investment, the Company took title to a student housing property located in Los Angeles, California. The Company's loan had a $25.2 million carrying value at such time, which approximates fair value.

The Company estimated the fair value of the assets and liabilities for all real estate acquired (including taking title to a property) at the date of acquisition. The final allocation of the purchase price is subject to refinement upon receipt of all information requested related to the properties.

The following summarizes our preliminary allocation of purchase price of the assets and liabilities assumed upon acquisition related to 2011 and 2012 acquisitions that continue to be subject to refinement upon receipt of all information (amounts in thousands):


Assets:
Restricted cash	$	2,015
Operating real estate, net		72,499
Deferred costs and intangible assets		666
Other assets		45

Total assets	$	75,225

Liabilities:
Mortgage notes payable	$	4,500
Accounts payable and accrued expenses		410
Other liabilities		104

Total liabilities		5,014
Total equity		70,211

Total liabilities and equity	$	75,225

Other REO

For the six months ended June 30, 2012, in connection with a debt investment, the Company acquired other REO by taking title to a retail property located in Park City, Utah and a hotel located in Arlington, Texas. The original loan balance of the retail property was $10.7 million and the initial REO value recorded was $4.0 million and the original loan balance of the hotel property and the initial REO value recorded was $6.1 million. Both initial REO values approximated fair value.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

5. Operating Real Estate (Continued)

Operating Real Estate Sales

The Company completed the following sales of operating real estate for the six months ended June 30, 2012 (amounts in thousands):

Date	Type	Location	Sales Proceeds		Realized Gain (Loss)

January 2012	Land	Aventura, FL	$	5,068	$	2,011
June 2012	Land	Florence, AZ		1,356		1,001

				6,424		3,012	(1)
April 2012	Office	Indianapolis, IN		2,118		285	(2)

Total			$	8,542	$	3,297

(1): Included in realized gains (losses) on investments and other.
(2): Included in gain (loss) from discontinued operations.

In addition, for the three months ended June 30, 2012, the Company sold 14 timeshare units for total sales proceeds of $7.3 million, including seller financing of $0.1 million, resulting in a realized gain of $6.2 million. For the six months ended June 30, 2012, the Company sold 22 timeshare units for total sales proceeds of $10.7 million, including seller financing of $0.2 million, resulting in a realized gain of $11.2 million ($2.1 million related to prior gains no longer deferred).

Discontinued Operations

In January 2012, in connection with a partial interest in a debt investment, the Company took title to a healthcare property located in Lexington, Kentucky. The loan had a zero carrying value at such time. Contemporaneous with taking title, the Company purchased the remaining interest in the loan from a third party for $0.8 million implying a total value of $1.0 million and as a result, the Company recorded $0.3 million in other income (loss) in the consolidated statements of operations. For the six months ended June 30, 2012, assets held for sale relate to this healthcare property. The remaining asset held for sale is land which is not deemed to be a discontinued operation.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

5. Operating Real Estate (Continued)

The following table summarizes income (loss) from discontinued operations and related gain (loss) on sale from discontinued operations for the three and six months ended June 30, 2012 and 2011 (amounts in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,

	2012			2011			2012			2011
Revenue:
Rental and escalation income	$	—		$	932		$	—		$	3,732
Interest and other income		—			55			—			123

Total revenue		—			987			—			3,855

Expenses:
Real estate properties—operating expenses		31			163			46			670
Interest expense		—			1,330			—			2,177
Auditing and professional fees		—			3			—			61
Other general and administrative expenses		9			399			15			793
Depreciation and amortization		3			139			4			792

Total expenses		43			2,034			65			4,493

Income (loss) from discontinued operations		(43	)		(1,047	)		(65	)		(638	)
Gain (loss) on sale from discontinued operations		285	(1)		9,416	(2)		285	(1)		14,447	(3)

Total income from discontinued operations	$	242		$	8,369		$	220		$	13,809

(1): Relates to the sale of an office property located in Indianapolis, Indiana.
(2): Represents the sale of 18 healthcare assisted living facilities.
(3): Represents the sale of 18 healthcare assisted living facilities, an office property and a leasehold interest in retail space.

Midwest Holdings

On March 31, 2011, the Company sold its 100% common membership interest in Midwest Care Holdco TRS I LLC ("Midwest Holdings") and assigned all of its rights, title, obligations and other interests in Midwest Holdings to the purchaser and contemporaneously entered into a new lease agreement with an affiliate of the purchaser. As of March 31, 2011, the operations of Midwest Holdings were deconsolidated. The Company recognized a realized loss of $0.5 million in connection with the sale and deconsolidation of its common membership interest.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

6. Real Estate Securities, Available for Sale

As of June 30, 2012, the Company held the following CRE securities (amounts in thousands):

		Principal Amount		Amortized Cost		Cumulative Unrealized (Loss) Gain on Investments(2)			Fair Value(3)

Asset Type:
CMBS	559	$	2,527,232	$	1,793,777	$	(634,931	)	$	1,158,846	85.7	%	4.12	%	11.17	%
Third-party CDO notes	40		261,131		199,457		(128,521	)		70,936	8.9	%	0.57	%	3.86	%
Unsecured REIT debt	16		83,613		79,064		3,940			83,004	2.8	%	5.73	%	5.28	%
Trust preferred securities	3		14,725		10,843		(3,259	)		7,584	0.5	%	2.41	%	6.21	%
Agency debentures	4		63,000		17,093		9,023			26,116	2.1	%	NA		4.11	%

Total	622	$	2,949,701	$	2,100,234	$	(753,748	)	$	1,346,486	100.0	%	3.75	%	10.11	%

(1): Investments in the same securitization tranche held in separate Company CDOs are reported as separate investments in the table above.
(2): Includes 22 CRE securities for which the fair value option was not elected, representing $0.8 million net unrealized losses included in other comprehensive income (loss).
(3): $1,199.4 million in carrying value served as collateral for the Company's consolidated CDO financing transactions and $65.2 million in carrying value served as collateral under the Company's CMBS Facility (refer to Note 9) as of June 30, 2012. The remainder is either financed under other borrowing arrangements or unleveraged.
(4): Based on principal amount.
(5): Based on expected maturity and for floating-rate securities, calculated using the applicable LIBOR as of June 30, 2012.

The CMBS portfolio as of June 30, 2012 is comprised of 559 investments that are predominantly conduit CMBS, meaning each asset is a pool backed by a large number of commercial real estate loans. As a result, the portfolio is typically well-diversified by collateral type and geography. As of June 30, 2012, contractual maturities of the CRE securities portfolio ranged from one month to 44 years, with a weighted average expected maturity of 3.1 years.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

6. Real Estate Securities, Available for Sale (Continued)

As of December 31, 2011, the Company held the following CRE securities (amounts in thousands):

		Principal Amount		Amortized Cost		Cumulative Unrealized (Loss) Gain on Investment(2)			Fair Value(3)

Asset Type:
CMBS	618	$	2,767,828	$	1,964,843	$	(692,107	)	$	1,272,736	85.6	%	4.42	%	9.72	%
Third-party CDO notes	44		269,081		210,080		(146,513	)		63,567	8.3	%	0.86	%	10.80	%
Unsecured REIT debt	22		94,236		88,870		5,428			94,298	2.9	%	5.99	%	2.75	%
Trust preferred securities	5		40,000		35,105		(15,960	)		19,145	1.2	%	2.47	%	10.06	%
Agency debentures	4		63,000		16,659		6,900			23,559	2.0	%	NA		3.84	%

Total	693	$	3,234,145	$	2,315,557	$	(842,252	)	$	1,473,305	100.0	%	4.06	%	9.50	%

(1): Investments in the same securitization tranche held in separate Company CDOs are reported as separate investments in the table above.
(2): Includes ten CRE securities for which the fair value option was not elected, representing $7.5 million net unrealized losses included in other comprehensive income (loss).
(3): $1,358.3 million in carrying value served as collateral for the Company's consolidated CDO financing transactions and $73.1 million in carrying value served as collateral under the Company's CMBS Facility (refer to Note 9) as of December 31, 2011. The remainder is either financed under other borrowing arrangements or unleveraged.
(4): Based on principal amount.
(5): Based on expected maturity and for floating-rate securities, calculated using the applicable LIBOR as of December 31, 2011.

For the three months ended June 30, 2012, proceeds from the sale of CRE securities were $99.7 million, resulting in a net realized gain of $9.9 million. For the three months ended June 30, 2011, proceeds from the sale of CRE securities were $39.6 million, resulting in a net realized gain of $3.4 million. For the six months ended June 30, 2012, proceeds from the sale of CRE securities were $200.3 million, resulting in a net realized gain of $15.8 million. For the six months ended June 30, 2011, proceeds from the sale of CRE securities were $126.4 million, resulting in a net realized gain of $24.1 million.

The Company's CRE securities portfolio includes 22 securities for which the fair value option was not elected. As of June 30, 2012, the aggregate carrying value of these securities was $125.5 million, representing a $0.8 million net unrealized loss included in other comprehensive income (loss). The Company held nine securities with an unrealized loss of $1.9 million as of June 30, 2012 and such securities were in an unrealized loss position for a period of less than 12 months. Based on management's quarterly evaluation, no OTTI was identified related to these securities. The Company

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

6. Real Estate Securities, Available for Sale (Continued)

does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of its amortized cost basis, which may be at maturity.

7. Real Estate Debt Investments

As of June 30, 2012, the Company held the following CRE debt investments (amounts in thousands):

										Weighted Average

	Number		Principal Amount		Carrying Value(1)(2)		Allocation by Investment Type(3)			Fixed Rate			Spread Over LIBOR(4)			Spread Over Prime			Yield(5)			Floating Rate as % of Principal Amount
Asset Type:
First mortgage loans		77	$	1,640,343	$	1,179,938		68.1	%		5.18	%		3.45	%		6.82	%		7.59	%		93.9	%
Mezzanine loans		18		447,559		343,999		18.6	%		8.16	%		1.86	%		—			4.53	%		58.2	%
Subordinate mortgage interests		8		130,737		95,867		5.4	%		6.40	%		3.68	%		—			5.34	%		77.4	%
Credit tenant loans(6)		52		133,289		126,608		5.5	%		6.58	%		—			—			6.99	%		0.0	%
Term loans		4		57,732		33,668		2.4	%		7.73	%		5.00	%		—			9.05	%		9.2	%

Total/Weighted average		159	$	2,409,660	$	1,780,080		100.0	%		7.00	%		3.24	%		6.82	%		6.74	%		79.1	%

(1): $1,554.9 million in carrying value served as collateral for the Company's consolidated CDO financing transactions, $128.3 million in carrying value served as collateral under the Loan Facility (refer to Note 9) and the remainder is unleveraged. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $56.1 million. The Company expects that $54.1 million of these commitments will be funded from the Company's CDO financing transactions and require no additional capital from the Company. Assuming that all loans that have future fundings meet the terms to qualify for such funding, the Company's cash requirement on future fundings would be $2.0 million.
(2): Includes 12 loans with an aggregate carrying value of $135.7 million on non-accrual status, which were primarily first mortgage loans. Two of these loans are classified as non-performing. Certain loans have an accrual of interest at a specified rate that may be in addition to a current rate. Non-accrual excludes $107.3 million carrying value of loans where the Company does not recognize interest income on the accrual rate but does recognize interest income based on the current rate.
(3): Based on principal amount.
(4): $209.1 million principal amount of the Company's CRE debt investments have a weighted average LIBOR floor of 3.23%.
(5): Based on initial maturity and for floating-rate debt, calculated using one-month LIBOR as of June 30, 2012, and for debt with a LIBOR floor, using such floor.
(6): Includes 20 corporate credit notes with an aggregate principal and carrying value of $10.9 million.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

As of December 31, 2011, the Company held the following CRE debt investments (amounts in thousands):

										Weighted Average

	Number		Principal Amount		Carrying Value(1)(2)		Allocation by Investment Type(3)			Fixed Rate			Spread Over LIBOR(4)			Spread Over Prime			Yield(5)			Floating Rate as % of Principal Amount
Asset Type:
First mortgage loans		75	$	1,552,066	$	1,094,957		65.9	%		4.77	%		3.06	%		6.94	%		5.23	%		92.4	%
Mezzanine loans		17		426,709		334,317		18.1	%		6.43	%		2.21	%		—			3.97	%		62.6	%
Subordinate mortgage interests		9		159,289		96,565		6.8	%		6.40	%		3.51	%		—			4.61	%		81.4	%
Credit tenant loans(6)		55		147,426		140,342		6.3	%		6.49	%		—			—			6.87	%		0.0	%
Term loans		6		69,442		44,401		2.9	%		7.75	%		5.00	%		—			8.80	%		15.4	%

Total/Weighted average		162	$	2,354,932	$	1,710,582		100.0	%		6.21	%		2.97	%		6.94	%		5.11	%		78.2	%

(1): $1,627.0 million in carrying value served as collateral for the Company's consolidated CDO financing transactions and the remainder is unleveraged.
(2): Includes ten loans with an aggregate carrying value of $67.8 million on non-accrual status, which were primarily first mortgage loans. Three of these loans are classified as non-performing. Non-accrual excludes $138.2 million carrying value of loans where the Company does not recognize interest income on the accrual rate but does recognize interest income based on the current rate.
(3): Based on principal amount.
(4): $139.8 million principal amount of the Company's CRE debt investments have a weighted average LIBOR floor of 3.79%.
(5): Based on initial maturity and for floating-rate debt, calculated using one-month LIBOR as of December 31, 2011, and for debt with a LIBOR floor, using such floor.
(6): Includes 23 corporate credit notes with an aggregate principal amount of $12.8 million and an aggregate carrying value of $12.7 million.

For the six months ended June 30, 2012, the Company originated five loans and acquired two loans with an aggregate principal amount of $171.3 million (including an interest owned through a joint venture) with a weighted average expected return on invested equity of approximately 17%. There is no assurance the Company will realize this expected return on equity over the term of these investments. The Company's actual return on equity could vary significantly from its expectations.

For the three months ended June 30, 2012 and 2011, the Company sold one loan for a realized gain of $0.3 million and four loans for a realized gain of $51.6 million, respectively. For the six months ended June 30, 2012 and 2011, the Company sold two loans for a realized gain of $0.7 million and five loans for a realized gain of $53.1 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

Maturities of CRE debt investments based on principal amount as of June 30, 2012 are as follows (amounts in thousands):

	Initial Maturity		Maturity Including Extensions(1)

Delinquent	$	12,500	$	12,500
July 1 - December 31, 2012		270,783		133,104
Years Ending December 31:
2013		249,085		253,797
2014		663,260		295,394
2015		573,273		597,005
2016		232,302		433,636
Thereafter		408,457		684,224

Total	$	2,409,660	$	2,409,660

(1): Reflects a modification executed subsequent to June 30, 2012.

The aggregate carrying value of the delinquent loan due to a maturity default was $2.2 million as of June 30, 2012. The weighted average maturity including extensions of the CRE debt investments is 4.0 years.

Actual maturities may differ from contractual maturities because certain borrowers have the right to prepay with or without prepayment penalties and the Company may also extend contractual maturities in connection with loan modifications. The contractual amounts differ from the carrying values due to unamortized origination fees and costs, unamortized premiums and discounts and loan loss reserves being reported as part of the carrying value of the investment. As of June 30, 2012, the Company had $452.9 million of unamortized discounts ($386.2 million related to the CSE CDO) and $4.6 million of unamortized origination fees and costs. Maturity Including Extensions in the table above assumes that all debt with extension options will qualify for extension at initial maturity according to the conditions stipulated in the related debt agreements.

In July 2010, in connection with the acquisition of the equity interests in the CSE CDO, the Company consolidated certain CRE debt investments with deteriorated credit quality. As of June 30, 2012, such debt had an aggregate principal amount of $351.6 million and an aggregate carrying value of $51.7 million, of which $105.6 million of the remaining discount will be accreted. The change in the accreted amount for the six months ended June 30, 2012 was primarily due to payoffs and changes to estimated recoverable amounts.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

The following table summarizes the status of the Company's loan portfolio (amounts in thousands):

	Carrying Value as of June 30, 2012													Carrying Value as of December 31, 2011

	Loan Count		All Other Loans			Loan Count		Non- Performing Loans			Total			Loan Count		All Other Loans			Loan Count		Non- Performing Loans			Total
Real Estate Debt Investments:
First mortgage loans		75	$	1,186,856			2	$	15,034		$	1,201,890			73	$	1,103,839			2	$	12,500		$	1,116,339
Mezzanine loans		18		447,981			—		—			447,981			17		426,742			—		—			426,742
Subordinate mortgage interests		8		127,217			—		—			127,217			7		116,663			2		38,462			155,125
Credit tenant loans		52		126,608			—		—			126,608			55		140,342			—		—			140,342
Term loans		4		48,418			—		—			48,418			6		59,818			—		—			59,818

Total real estate debt investments		157		1,937,080			2		15,034			1,952,114			158		1,847,404			4		50,962			1,898,366
Loan loss reserves		16		(160,711	)		2		(11,323	)		(172,034	)		15		(139,001	)		3		(48,783	)		(187,784	)

Total real estate debt investments, net			$	1,776,369				$	3,711		$	1,780,080				$	1,708,403				$	2,179		$	1,710,582

The Company's maximum additional exposure to loss related to the non-performing loans as of June 30, 2012 and December 31, 2011 is $3.7 million and $2.2 million, respectively.

Provision for Loan Losses

For the three and six months ended June 30, 2012, the Company recorded $6.5 million and $13.4 million of provision for loan losses related to two and five loans, respectively. For the three and six months ended June 30, 2011, the Company recorded $14.2 million and $38.7 million of provision for loan losses related to four and nine loans, respectively. Activity in loan loss reserves on CRE debt investments for the three and six months ended June 30, 2012 and 2011 is as follows (amounts in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,

	2012			2011			2012			2011
Beginning balance	$	166,164		$	188,564		$	187,784		$	197,200
Provision for loan losses		6,537			14,200			13,377			38,700
Transfers to REO		—			(20,920	)		—			(20,920	)
Sales		(667	)		—			(667	)		—
Write-offs		—			—			(28,460	)		(33,136	)

Ending balance	$	172,034		$	181,844		$	172,034		$	181,844

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

Credit Quality Monitoring

The Company's CRE debt investments are typically secured by direct senior priority liens on real estate properties or by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company differentiates the relative credit quality of its debt investments principally based upon whether the borrower is currently paying contractual debt service and/or whether the Company believes it will be able to do so in the future, as well as the Company's expectations as to the ultimate recovery of principal at maturity and updates this information quarterly. Those debt investments for which the Company expects to receive full payment of contractual principal and interest payments are categorized as "loans with no loan loss reserve." The Company groups weaker credit quality debt investments that are not considered a NPL, for which it believes there is an impairment such that future collection of all or some portion of principal and interest is in doubt, in a category called "other loans with a loan loss reserve/non-accrual status." The Company categorizes a debt investment as an NPL if it is in maturity default and/or is past due at least 90 days on its contractual debt service payments. The Company's definition of an NPL may differ from that of other companies that track NPLs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

The following table is a summary of the carrying value of the CRE debt investments, by credit quality indicator, as of each applicable balance sheet date (amounts in thousands):

	June 30, 2012		December 31, 2011

Credit Quality Indicator:
Loans with no loan loss reserve:
First mortgage loans	$	1,092,980	$	1,021,841
Subordinate mortgage interests		95,117		94,564
Mezzanine loans		176,942		155,787
Credit tenant loans		126,608		140,342
Term loans		11,910		17,247

Subtotal		1,503,557		1,429,781
Other loans with a loan loss reserve/non-accrual status:(1)
First mortgage loans		83,246		70,938
Subordinate mortgage interests		750		2,000
Mezzanine loans		167,058		178,530
Term loans		21,758		27,154

Subtotal		272,812		278,622
Non-performing loans:
First mortgage loans		3,711		2,177
Subordinate mortgage interests		—		2

Subtotal		3,711		2,179

Total	$	1,780,080	$	1,710,582

(1): Includes six loans with a 100% loan loss reserve representing an aggregate principal amount of $45.4 million for both periods.

Impaired Loans

The Company considers impaired loans to generally include non-performing loans ("NPLs"), loans with a loan loss reserve, loans on non-accrual status (excluding loans acquired with deteriorated credit

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Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

quality) and TDRs. As of June 30, 2012 and December 31, 2011, impaired loans are comprised of the following (amounts in thousands):

	June 30, 2012(2)								December 31, 2011(3)

	Number of Loans		Principal Amount(1)		Carrying Value(1)		Loan Loss Reserve		Number of Loans		Principal Amount(1)		Carrying Value(1)		Loan Loss Reserve
Class of Debt:
First mortgage loans		9	$	149,254	$	112,202	$	21,953		6	$	94,697	$	73,116	$	21,383
Subordinate mortgage interests		3		32,100		750		31,350		4		60,562		2,001		58,560
Mezzanine loans		9		271,059		167,058		103,981		9		270,982		178,530		92,424
Term loans		1		45,550		21,758		14,750		2		51,613		27,154		15,417

Total		22	$	497,963	$	301,768	$	172,034		21	$	477,854	$	280,801	$	187,784

(1): Principal amount differs from carrying value due to unamortized origination fees and costs, unamortized premium/discount and loan loss reserves included in the carrying value of the investment.
(2): Includes two non-accrual loans with an aggregate carrying value of $24.1 million and two loans considered TDRs with an aggregate carrying value of $25.2 million, all of which do not have loan loss reserves. Excludes one loan acquired with deteriorated credit quality with a carrying value of $14.3 million that is on non-accrual status and does not have a loan loss reserve. These are all first mortgage loans.
(3): Includes three non-accrual loans with an aggregate carrying value of $24.0 million that do not have loan loss reserves. Excludes two loans acquired with deteriorated credit quality with an aggregate carrying value of $18.6 million that are on non-accrual status and do not have loan loss reserves. These are all first mortgage loans.

The following table summarizes the Company's average carrying value of impaired loans by type and the income recorded on such loans subsequent to their being deemed impaired for the three months ended June 30, 2012 and 2011 (amounts in thousands):

	June 30, 2012						June 30, 2011

	Number of Loans		Average Carrying Value		Quarter Ended Income		Number of Loans		Average Carrying Value		Quarter Ended Income
Class of Debt:
First mortgage loans		9	$	109,589	$	340		5	$	69,434	$	104
Subordinate mortgage interests		3		14,036		383		3		7,290		153
Mezzanine loans		9		172,022		2,049		12		177,992		2,815
Term loans		1		24,456		1,005		2		27,154		1,026

Total/weighted average		22	$	320,103	$	3,777		22	$	281,870	$	4,098

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Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

The following table summarizes the Company's average carrying value of impaired loans by type and the income recorded on such loans subsequent to their being deemed impaired for the six months ended June 30, 2012 and 2011 (amounts in thousands):

	June 30, 2012						June 30, 2011

	Number of Loans		Average Carrying Value		Six Months Ended Income		Number of Loans		Average Carrying Value		Six Months Ended Income
Class of Debt:
First mortgage loans		9	$	92,659	$	667		5	$	58,497	$	208
Subordinate mortgage interests		3		1,376		734		3		11,629		274
Mezzanine loans		9		172,793		4,174		12		139,191		5,647
Term loans		1		24,456		2,031		2		27,154		2,041

Total/weighted average		22	$	291,284	$	7,606		22	$	236,471	$	8,170

As of June 30, 2012, the Company had one first mortgage loan with a principal amount of $12.5 million past due greater than 90 days. As of December 31, 2011, the Company had one subordinated mortgage interest with a principal amount of $10.0 million past due less than 30 days and one first mortgage loan with a principal amount of $12.5 million and one subordinated mortgage interest with a principal amount of $28.5 million past due greater than 90 days. These amounts exclude non-accrual loans discussed in the charts above.

Troubled Debt Restructurings

The following table summarizes CRE debt investments that were modified during the six months ended June 30, 2012 and 2011 and considered a TDR (amounts in thousands):

	June 30, 2012											June 30, 2011

	Number of Loans(1)		Carrying Value			Original WA Interest Rate			Modified WA Interest Rate			Number of Loans		Carrying Value			Original WA Interest Rate			Modified WA Interest Rate
Class of Debt:
First mortgage loans		4	$	31,410	(1)		2.68	%		2.60	%		2	$	62,794	(2)		4.93	%		0.33	%
Mezzanine loans		—		—			—			—			2		45,847			2.60	%		0.24	%

Total/weighted average		4	$	31,410			2.68	%		2.60	%		4	$	108,641			3.95	%		0.29	%

(1): In the second quarter 2012, the Company took title to a property associated with a loan with a carrying value of $6.1 million that was considered a TDR in the first quarter 2012.
(2): One loan with a carrying value of $44.7 million experienced an interest payment default prior to modification in 2011.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

The Company did not have any CRE debt investments modified that were considered TDRs during the three months ended June 30, 2012. For the three months ended June 30, 2011, the Company had one loan modification considered a TDR with a carrying value of $41.6 million that reduced the interest rate from 2.35% to 0.50%.

For the three and six months ended June 30, 2011, the Company had one CRE debt investment where the Company took title to the property and was considered to be a TDR. The carrying value of such loan at the time of taking title was $13.4 million.

All loans modified in a TDR generally provided interest rate concessions and/or deferral of principal repayments. Any loan modification is intended to maximize the collection of the principal and interest related to such loan.

8. Investment in and Advances to Unconsolidated Ventures

The Company has non-controlling, unconsolidated ownership interests in entities that are generally accounted for using the equity method. Capital contributions, distributions and profits and losses of such 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. The Company may account for such investments using the cost method if the Company does not maintain significant influence over the unconsolidated entity.

Meadowlands

The Company owns a $109.7 million interest in Meadowlands Two, LLC, which holds 100% of Meadowlands One, LLC, which is secured by a retail/entertainment complex located in East Rutherford, New Jersey (the "NJ Property"). During the third quarter 2010, the lender group took effective ownership of the NJ Property. The Company accounts for its 22% equity interest in the investment under the equity method of accounting. As of June 30, 2012 and December 31, 2011, the carrying value of the Company's investment in the NJ Property was $64.6 million and $65.5 million, respectively. For the three months ended June 30, 2012 and 2011, the Company recognized equity in losses of $0.5 million and $1.5 million, respectively. For the six months ended June 30, 2012 and 2011, the Company recognized equity in losses of $0.9 million and $8.2 million including a provision for loss on equity investment of $4.5 million in the first quarter 2011.

LandCap Partners

On October 5, 2007, the Company entered into a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007 ("Whitehall") to form LandCap Partners and LandCap LoanCo. (collectively referred to as "LandCap"). LandCap was established to opportunistically invest in single-family residential land through land loans, lot option agreements and select land purchases. The joint venture is managed by a third-party management group which has extensive experience in the single family housing sector. The Company and Whitehall agreed to provide no additional new investment capital in the LandCap joint venture. As of June 30, 2012 and December 31, 2011, the Company's 49%

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Amounts in Thousands, Except Per Share Data

(Unaudited)

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

interest in LandCap was $14.0 million and $14.4 million, respectively. As of June 30, 2012 and December 31, 2011, LandCap had investments totaling $33.1 million and $34.0 million, respectively. For the three months ended June 30, 2012 and 2011, the Company recognized equity in losses of $0.6 million and $0.3 million, respectively. For the six months ended June 30, 2012 and 2011, the Company recognized equity in losses of $0.7 million and $0.7 million, respectively.

CS Federal Drive, LLC

In February 2006, the Company, through a joint venture with an institutional investor, CS Federal Drive, LLC ("CS/Federal"), 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, mortgage notes totaling $38.0 million and the remainder in cash. The borrowings mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%, respectively. 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. These costs are amortized over the useful lives of the assets held by the joint venture. As of June 30, 2012 and December 31, 2011, the Company had an investment in CS/Federal of $5.5 million and $5.7 million, respectively. For the three months ended June 30, 2012 and 2011, the Company recognized equity in earnings of $0.2 million and $0.2 million, respectively. For the six months ended June 30, 2012 and 2011, the Company recognized equity in earnings of $0.4 million and $0.3 million, respectively.

NorthStar Real Estate Income Trust, Inc.

As of June 30, 2012, the Company owns 1.8% of the common stock in NorthStar Real Estate Income Trust, Inc. ("NorthStar Income"), a CRE debt-oriented REIT sponsored by the Company, with a commitment to purchase up to $10 million of shares of NorthStar Income's common stock during the period through July 19, 2013, in the event that its distributions to stockholders exceed its modified funds from operations (as defined in accordance with the current practice guidelines issued by the Investment Program Association). In connection with this commitment, the Company purchased 212,822 shares for $1.9 million for the six months ended June 30, 2012 resulting in 466,024 aggregate shares acquired for $4.2 million since inception. As of June 30, 2012 and December 31, 2011, the Company had an investment in NorthStar Income of $5.8 million and $4.0 million, respectively. For the three months ended June 30, 2012 and 2011, the Company recognized $0.1 million and an immaterial amount in equity in earnings, respectively. For the six months ended June 30, 2012 and 2011, the Company recognized $0.2 million and an immaterial amount in equity in earnings, respectively.

NorthStar Real Estate Securities Opportunity Fund

A subsidiary of the Company, as general partner of NorthStar Real Estate Securities Opportunity Fund ("Securities Fund"), liquidated the Securities Fund in 2011. The Company owned a 34.3% interest in Securities Fund. For the three and six months ended June 30, 2011, the Company recognized an immaterial amount of equity in losses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

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

Other

In May 2012, the Company acquired a 9.8% interest in a joint venture that owns a pari passu participation in a first mortgage loan secured by a portfolio of luxury residences located in resort destinations. The Company owns an additional interest in the same loan through the CSE CDO with a carrying value of $16.1 million as of June 30, 2012. As of June 30, 2012, the Company had an investment of $5.8 million in this joint venture. For the three months ended June 30, 2012, the Company recognized $0.3 million of in equity in earnings related to this investment.

9. Borrowings

The Company's outstanding borrowings as of June 30, 2012 and December 31, 2011 are as follows (amounts in thousands):

				June 30, 2012				December 31, 2011

	Recourse vs. Non- Recourse	Final Stated Maturity	Contractual Interest Rate(1)	Principal Amount		Carrying Value(2)		Principal Amount		Carrying Value(2)
*VIE Financing Structures:*
*CDO bonds payable:*
N-Star I	Non-recourse	Aug-38	LIBOR + 2.27%(3)	$	153,822	$	143,028	$	171,178	$	154,110
N-Star II	Non-recourse	Jun-39	LIBOR + 1.51%(3)		112,562		92,979		149,438		103,475
N-Star III	Non-recourse	Jun-40	LIBOR + 0.74%(3)		194,798		95,126		274,454		129,537
N-Star IV	Non-recourse	Jul-40	LIBOR + 0.59%(3)		195,988		139,686		232,749		157,862
N-Star V	Non-recourse	Sep-45	LIBOR + 0.67%(3)		286,598		112,832		327,463		126,251
N-Star VI	Non-recourse	Jun-41	LIBOR + 0.51%(3)		266,442		178,226		278,049		184,552
N-Star VII	Non-recourse	Jun-51	LIBOR + 0.39%(3)		285,023		115,085		425,580		180,155
N-Star VIII	Non-recourse	Feb-41	LIBOR + 0.43%(3)		561,390		352,371		583,050		353,684
N-Star IX	Non-recourse	Aug-52	LIBOR + 0.40%(3)		682,980		236,333		682,980		228,704
CSE CDO	Non-recourse	Jan-37	LIBOR + 0.39%(3)		769,102		480,487		850,235		526,909
CapLease CDO	Non-recourse	Jan-40	4.94%(4)		136,415		116,151		150,593		128,668

Subtotal CDO bonds payable					3,645,120		2,062,304		4,125,769		2,273,907

**Mortgage notes payable:(5)**
Phoenix, AZ	Non-recourse	May-17	4.25%		211,921		211,921		212,000		212,000
San Antonio, TX(6)	Non-recourse	Jan-19	4.44%		16,525		16,525		16,525		16,525

Subtotal Mortgage notes payable					228,446		228,446		228,525		228,525

*Secured term loans:*
TALF	Non-recourse	Oct-14	2.64%		14,682		14,682		14,682		14,682

Subtotal Secured term loans					14,682		14,682		14,682		14,682

Total VIE financing structures					3,888,248		2,305,432		4,368,976		2,517,114

*Non-VIE Financing Structures:*
**Mortgage notes payable:(5)**
*Core net lease*
Salt Lake City, UT	Non-recourse	Sep-12	5.16%		14,401		14,401		14,625		14,625
South Portland, ME	Non-recourse	Jun-14	7.34%		4,160		4,160		4,266		4,266
Fort Wayne, IN	Non-recourse	Jan-15	6.41%		3,173		3,173		3,221		3,221
Reading, PA	Non-recourse	Jan-15	5.58%		13,221		13,221		13,366		13,366
Reading, PA	Non-recourse	Jan-15	6.00%		5,000		5,000		5,000		5,000
EDS Portfolio	Non-recourse	Oct-15	5.37%		45,002		45,002		45,416		45,416
Keene, NH	Non-recourse	Feb-16	5.85%		6,420		6,420		6,478		6,478
Green Pond, NJ	Non-recourse	Apr-16	5.68%		16,506		16,506		16,635		16,635

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

9. Borrowings (Continued)

				June 30, 2012				December 31, 2011

	Recourse vs. Non- Recourse	Final Stated Maturity	Contractual Interest Rate(1)	Principal Amount		Carrying Value(2)		Principal Amount		Carrying Value(2)
Aurora, CO	Non-recourse	Jul-16	6.22%		31,940		31,940		32,159		32,159
DSG Portfolio	Non-recourse	Oct-16	6.17%		32,564		32,564		32,823		32,823
Indianapolis, IN	Non-recourse	Feb-17	6.06%		27,222		27,222		27,416		27,416
Milpitas, CA	Non-recourse	Mar-17	5.95%		20,882		20,882		21,141		21,141
Fort Mill, SC	Non-recourse	Apr-17	5.63%		27,700		27,700		27,700		27,700
Fort Mill, SC	Non-recourse	Apr-17	6.21%		1,998		1,998		2,162		2,162
Columbus, OH	Non-recourse	Dec-17	6.48%		22,776		22,776		22,937		22,937

Subtotal Core net lease					272,965		272,965		275,345		275,345

*Healthcare net lease*
Hillsboro, OR	Non-recourse	Jan-14	5.94%		31,881		31,881		32,104		32,104
WF Portfolio	Non-recourse	May-15	LIBOR + 5.95%(7)		57,149		57,149		57,589		57,589
Ohio Portfolio	Non-recourse	Mar-16	6.00%		20,861		20,861		20,921		20,921
Wilkinson Portfolio	Non-recourse	Jan-17	6.99%		156,500		156,500		157,688		157,688
Tuscola/Harrisburg	Non-recourse	Jan-17	7.09%		7,724		7,724		7,781		7,781
East Arlington, TX	Non-recourse	May-17	5.89%		3,282		3,282		3,304		3,304
Lancaster, OH	Non-recourse	Mar-16	LIBOR + 5.00%(8)		4,478		4,478		—		—

Subtotal Healthcare net lease					281,875		281,875		279,387		279,387

Subtotal Mortgage notes payable					554,840		554,840		554,732		554,732

*Credit facilities:*
CMBS Facility	Recourse	Oct-14(9)	1.65%		58,134		58,134		64,259		64,259
Loan Facility	Partial Recourse(10)	Nov-15(11)	LIBOR + 2.55%(3)		74,184		74,184		—		—

Subtotal Credit facilities					132,318		132,318		64,259		64,259

*Exchangeable senior notes:*(12)
11.50% Notes	Recourse	Jun-13	11.50%		35,710		35,497		35,710		35,389
7.25% Notes	Recourse	Jun-27(13)	7.25%		12,955		12,955		20,455		20,396
7.50% Notes	Recourse	Mar-31(14)	7.50%		172,500		161,298		172,500		160,068
8.875% Notes	Recourse	Jun-32(15)	8.875%		75,000		72,944		—		—

Subtotal Exchangeable senior notes					296,165		282,694		228,665		215,853

*Junior subordinated notes:*(16)
Trust I	Recourse	Mar-35	8.15%		41,240		26,394		41,240		25,569
Trust II	Recourse	Jun-35	7.74%		25,780		16,499		25,780		15,984
Trust III	Recourse	Jan-36	7.81%		41,238		26,392		41,238		25,155
Trust IV	Recourse	Jun-36	7.95%		50,100		32,064		50,100		30,561
Trust V	Recourse	Sep-36	LIBOR + 2.70%		30,100		14,749		30,100		14,749
Trust VI	Recourse	Dec-36	LIBOR + 2.90%		25,100		12,801		25,100		12,676
Trust VII	Recourse	Apr-37	LIBOR + 2.50%		31,459		15,100		31,459		15,100
Trust VIII	Recourse	Jul-37	LIBOR + 2.70%		35,100		17,375		35,100		17,374

Subtotal Junior subordinated notes					280,117		161,374		280,117		157,168

Total Non-VIE financing structures					1,263,440		1,131,226		1,127,773		992,012

Grand Total				$	5,151,688	$	3,436,658	$	5,496,749	$	3,509,126

(1): Refer to Note 14 regarding the Company's derivative instruments which are used to manage interest rate exposure.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

9. Borrowings (Continued)

(2): Carrying value represents fair value with respect to CDO bonds payable (excluding CapLease CDO bonds payable for which the fair value option was not elected) and junior subordinated notes due to the election of the fair value option (see Note 4) and amortized cost with regards to the other borrowings.
(3): Represents a weighted average spread. N-Star CDOs I and VI and CSE CDO are based on three-month LIBOR whereas all others are based on one-month LIBOR.
(4): Represents a weighted average coupon.
(5): Mortgage notes payable are subject to customary non-recourse carveouts.
(6): In connection with this borrowing, the borrower is a special purpose entity separate from the Company and its affiliates, and as a result, the borrower's assets and credit are not available to satisfy the liabilities and the obligations of the Company or any of its other affiliates.
(7): Contractual interest rate is based on three-month LIBOR with a 1.0% LIBOR floor.
(8): Contractual interest rate is based on one-month LIBOR with a 1.0% LIBOR floor.
(9): The initial maturity date is October 28, 2013, subject to a one-year extension at the option of the Company, which may be exercised upon the satisfaction of certain conditions set forth in the agreement.
(10): This facility is recourse solely with respect to 25% of "core" assets and 100% of "flex" assets, which may only represent 25% of the total credit facility, as such terms are defined in the governing documents.
(11): The initial maturity date is November 22, 2013, subject to two one-year extensions at the option of the Company, which may be exercised upon the satisfaction of certain conditions set forth in the agreement.
(12): Principal amount differs from carrying value on the consolidated balance sheets due to the equity component of the notes.
(13): The holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2014.
(14): The holders have repurchase rights which may require the Company to repurchase the notes on March 15, 2016.
(15): The holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2019.
(16): Junior subordinate notes 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 three-month LIBOR plus 2.50% to 2.90%.

Scheduled principal on the Company's borrowings, based on final stated maturity, is as follows as of June 30, 2012 (amounts in thousands):

	Total		CDO Bonds Payable		Mortgage Notes Payable		Credit Facilities		Secured Term Loan		Exchangeable Senior Notes(1)		Junior Subordinated Notes

July 1 - December 31, 2012	$	18,638	$	—	$	18,638	$	—	$	—	$	—	$	—
2013		45,091		—		9,381		—		—		35,710		—
2014		130,018		—		44,247		58,134		14,682		12,955		—
2015		199,358		—		125,174		74,184		—		—		—
2016		284,549		—		112,049		—		—		172,500		—
Thereafter		4,474,034		3,645,120		473,797		—		—		75,000		280,117

Total	$	5,151,688	$	3,645,120	$	783,286	$	132,318	$	14,682	$	296,165	$	280,117
											��

(1): The 7.25% Notes, 7.50% Notes and 8.875% Notes have a final maturity date of June 15, 2027, March 15, 2031 and June 15, 2032, respectively. The above table reflects the holders' repurchase rights which may require the Company to repurchase the 7.25% Notes, 7.50% Notes and 8.875% Notes on June 15, 2014, March 15, 2016 and June 15, 2019, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

9. Borrowings (Continued)

As of June 30, 2012, the Company was in compliance, in all material respects, with all covenants under its outstanding borrowings.

Exchangeable Senior Notes

In June 2012, the Operating Partnership issued $75.0 million of 8.875% exchangeable senior notes ("8.875% Notes") which were offered in accordance with Rule 144A under the Securities Act of 1933, as amended, for net proceeds of $72.0 million. The 8.875% Notes are senior unsecured obligations of the Operating Partnership. The 8.875% Notes have an initial exchange rate representing an exchange price of $6.00 per share of the Company's common stock, subject to adjustment under certain circumstances, and may be exchangeable upon the occurrence of specified events, and at any time on or after June 15, 2019, and prior to the close of business on the second business day immediately preceding the maturity date, into cash or common stock of the Company, or a combination thereof, if any, at the Company's option.

On June 15, 2012, $7.5 million principal amount of the 7.25% Notes were redeemed by the Company at par. The next redemption date for the remaining 7.25% Notes will be June 15, 2014.

Mortgage Note Payable

On January 27, 2012, the Company acquired a 71-unit independent living facility located in Lancaster, Ohio and contemporaneously entered into a borrowing agreement for $4.5 million. The borrowing bears interest at one-month LIBOR plus 5.0%, with a fixed minimum LIBOR of 1.0% and matures on March 30, 2016.

CMBS Facility

In October 2011, a subsidiary of the Company entered into a master repurchase and securities contract ("CMBS Facility") with Wells Fargo Bank, N.A. (or "Wells Fargo"). The $100.0 million CMBS Facility finances the acquisition of AAA-rated CMBS investments and has an initial term of two years with a one-year extension option at the Company's election subject to the satisfaction of certain conditions. During the initial term, the CMBS Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments. Borrowings accrue interest at a per annum pricing rate equal to 1.65%, subject to adjustment. The Company paid an upfront fee of 0.5% based on the total commitment and will not incur any non-utilization fees.

In connection with the CMBS Facility, the Company, together with the Operating Partnership and NRFC Sub-REIT Corp. ("Sub-REIT") (collectively, the "CMBS Guarantors"), provided a guaranty agreement under which the CMBS Guarantors guarantee the obligations under the CMBS Facility. The CMBS Facility and related agreement contains representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type.

As of June 30, 2012, the Company held $64.6 million principal amount of CMBS with a weighted average current yield of 3.9%, financed with $58.1 million at a weighted average financing cost over the expected life of 1.9%, resulting in an expected return on invested equity of approximately 20%. There

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Amounts in Thousands, Except Per Share Data

(Unaudited)

9. Borrowings (Continued)

is no assurance the Company will realize this expected return on equity over the term of these investments. The Company's actual return on equity could vary significantly from its expectations.

CRE Debt Facility

In November 2011, NRFC WF Loan, LLC ("NRFC WF"), a wholly-owned subsidiary of the Company, entered into a master repurchase and securities contract ("Loan Facility") with Wells Fargo. The $100.0 million Loan Facility is used to finance the origination of CRE first mortgage loans and has an initial term of two years with two one-year extension options at the Company's election, subject to the satisfaction of certain conditions. During the initial term, the Loan Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments. Borrowings under the Loan Facility accrue interest at a range of one-month LIBOR plus 2.25% to 3.00% per annum with advance rates of up to 75%, depending on asset type and characteristics. For the three and six months ended June 30, 2012, the Company incurred an immaterial amount of non-utilization fees related to the Loan Facility.

As of June 30, 2012, the Company held $116.6 million principal amount of loans financed with $74.2 million on the Loan Facility, resulting in an expected return on invested equity of approximately 20%. There is no assurance the Company will realize this expected return on equity over the term of these investments. The Company's actual return on equity could vary significantly from its expectations.

In connection with the Loan Facility, the Company, together with the Operating Partnership, entered into a guaranty agreement, under which the Company and the Operating Partnership guarantee certain of the obligations under the Loan Facility. Additionally, in connection with the Loan Facility, the Sub-REIT provided a pledge and security agreement over its interests in NRFC WF. The Loan Facility and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. In addition, the Company has agreed to guarantee certain obligations under the Loan Facility if the Company or an affiliate of the Company engage in certain customary bad acts.

The Loan Facility and CMBS Facility contain liquidity covenants that require maintenance of an aggregate of $45 million of unrestricted cash to provide credit support for the borrowings. As of June 30, 2012, the Company was in compliance with this covenant. In addition, the Loan Facility and CMBS Facility require the maintenance of a loan-to-collateral value ratio that may require the Company to provide additional collateral or make cash payments. As of June 30, 2012, the Company was not required to post additional collateral or make cash payments to maintain such ratios.

10. Related Party Transactions

Advisory and Other Fees

The Company has agreements with each of its N-Star CDOs and the CSE and CapLease CDOs to perform certain advisory services. The fee income related to all of the CDO financing transactions is eliminated as a result of the consolidation of the respective CDO financing transaction. For the three

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

10. Related Party Transactions (Continued)

and six months ended June 30, 2012, the Company earned $3.6 million and $7.5 million in fee income, respectively, that was eliminated in consolidation.

The Company has an agreement with NorthStar Income to manage its day-to-day affairs, including identifying, originating and acquiring investments on behalf of NorthStar Income and earns fees for its services. For the three months ended June 30, 2012 and 2011, the Company earned $2.7 million and $0.2 million of fees on these agreements, respectively. For the six months ended June 30, 2012 and 2011, the Company earned $3.3 million and $0.3 million, respectively. Additionally, the Company incurs direct and indirect costs on behalf of NorthStar Income and NorthStar Healthcare Income, Inc. ("NorthStar HealthCare") which are reimbursed subsequently to the Company by these managed entities. As of June 30, 2012 and December 31, 2011, the Company had aggregate unreimbursed costs of $6.8 million and $5.8 million, respectively, from NorthStar Income and NorthStar Healthcare. These amounts are recorded as receivables, related parties on the Company's consolidated balance sheets.

Legacy Fund

The Company has two CRE debt investments with a subsidiary of Legacy Partners Realty Fund I, LLC (the "Legacy Fund"), as borrower. One loan of $15.6 million matures in March 2013 and has two one-year extension options. The interest rate is one-month LIBOR plus 7.50%, of which one-month LIBOR plus 3.00% is current pay. The other loan of $23.2 million matures in January 2015 and has an interest rate of one-month LIBOR plus 3.50%. The Company earned an aggregate of $0.5 million and $1.1 million of interest income for the three and six months ended June 30, 2012, respectively. The Company earned an aggregate of $0.5 million and $0.9 million of interest income for the three and six months ended June 30, 2011, respectively. 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. In addition, the Company leases office space in Colorado with an affiliate of Legacy Fund under an operating lease with annual lease payments of approximately $0.1 million through December 18, 2015. The Company has the option to renew the lease for an additional five years.

Hard Rock Hotel Loan

The Company owns an $89.3 million principal amount of a mezzanine loan backed by the Hard Rock Hotel and Casino in Las Vegas, Nevada. Prior to a modification of the loan in March 2011, Morgans Hotel Group ("Morgans") was a minority partner in the joint venture owning the hotel. David Hamamoto, the Company's chairman and chief executive officer, is the executive chairman of the board of Morgans. Morgans no longer has any interest in the hotel.

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 and such plan, as amended and restated, was further

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Amounts in Thousands, Except Per Share Data

(Unaudited)

11. Equity-Based Compensation (Continued)

adopted by the board of directors of the Company on April 18, 2012 and approved by the stockholders on May 24, 2012 (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, in the form of restricted shares and other equity-based awards such as 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, employees, consultants and advisors of the Company.

An aggregate of 9,002,296 shares of common stock of the Company are currently reserved under the Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. 6,272,259 LTIP Units have been issued, of which 2,076,922 LTIP Units remain subject to vesting. LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of grant.

The status of all of the LTIP Unit grants as of June 30, 2012 and December 31, 2011 is as follows (in thousands except grant prices):

	June 30, 2012					December 31, 2011

	LTIP Unit Grants(2)			Weighted Average Grant Price		LTIP Unit Grants			Weighted Average Grant Price
Beginning balance(1)		4,208		$	7.53		4,289		$	7.92
Granted		2,303			4.86		631			5.03
Converted to common stock		(113	)		6.87		(628	)		7.41
Forfeited		(9	)		5.38		(84	)		10.67

Ending Balance/Weighted Average		6,389		$	6.84		4,208		$	7.53

(1): Reflects the balance at January 1, 2012 and 2011 for the periods ended June 30, 2012 and December 31, 2011, respectively.
(2): Includes 698,142 LTIP Units issued in connection with the 2004 Long-Term Incentive Plan of which 581,311 LTIP Units have been converted.

The Company recognized equity-based compensation expense related to these awards of $3.0 million and $1.8 million for the three months ended June 30, 2012 and 2011, respectively, and $3.8 million and $3.5 million for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, the related equity-based compensation expense to be recognized over the remaining vesting period is $9.4 million, provided there are no forfeitures.

Incentive Compensation Plan

On July 21, 2009, the compensation committee of the board of directors (the "Committee") of the Company approved the material terms of an Incentive Compensation Plan for the Company's executive officers and other employees (the "Plan"). Under the Plan, a potential incentive compensation pool is expected to be established each calendar year. The size of the incentive pool will be calculated as the sum of: (a) 1.75% of the Company's "adjusted equity capital;" and (b) 25% of the Company's adjusted

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

11. Equity-Based Compensation (Continued)

funds from operations, as adjusted ("AFFO"), above a 9% return hurdle on adjusted equity capital. Payout from the incentive pool is subject to achievement of additional performance goals summarized below.

The incentive pool is expected to be divided into the following three separate incentive compensation components: (a) an annual cash bonus, tied to annual performance of the Company and paid after year end at or around completion of the year-end audit ("Annual Bonus"); (b) a deferred cash bonus, determined based on the same year's performance, but paid 50% following the close of each of the first and second years after such incentive pool is determined, subject to the participant's continued employment through each payment date ("Deferred Cash Bonus"); and (c) a long-term incentive in the form of restricted stock units ("RSUs") and/or LTIP Units. RSUs are subject to the Company achieving cumulative performance hurdles or target stock prices established by the Committee for a three- or four-year period, subject to the participant's continued employment through the payment date. Upon the conclusion of the applicable performance period, each executive officer will receive a payout, if any, equal to the value of one share of common stock at the time of such payout, including the dividends paid with respect to a share of common stock following the first year of the applicable performance period, for each RSU actually earned (the "Long-Term Amount Value"). The Long-Term Amount Value, if any, will be paid in the form of shares of common stock or LTIP Units to the extent available under the Company's equity compensation plans or, if all or a portion of such shares or LTIP Units are not available, in cash; provided that the amount of cash paid to any executive officer with respect to the Long-Term Amount shall not exceed certain maximum amounts set forth in the Plan (the "Long Term Amount Payout").

The Committee evaluates the Plan on an annual basis and considers alternatives to the foregoing as the Committee deems appropriate and in the best interests of the Company. Performance goals for each component will be set by the Committee at the beginning of each subsequent calendar year for each new cycle. The goals will generally be divided into ranges of performance, each of which will correspond to a payout level equal to a percentage of a participant's pool allocation for such component.

The Company issued 3,147,454 RSUs to executive officers in connection with the 2009 Plan, subject to the Company achieving cumulative performance hurdles or target stock prices for the three-year period ended December 31, 2011. The Company determined in 2011 that the performance hurdle established was reached which entitled the recipients to 100% of the RSUs granted. The Company did not have a sufficient amount of common stock or LTIP Units available, as a result 2,609,074 RSU's were settled in cash in February 2012. For the year ended December 31, 2011, the Company recognized cash compensation expense of $13.9 million. The Company recorded compensation expense of $1.6 million and $3.2 million for the three and six months ended June 30, 2011, respectively, related to the total award. 538,380 RSUs will not be settled until December 31, 2012, subject to continued employment of certain executive officers through such date. As a result, the Company remeasured compensation expense for such RSUs based upon the June 30, 2012 stock price and recognized compensation expense of $0.3 million and $0.7 million for the three and six months ended June 30, 2012, respectively.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

11. Equity-Based Compensation (Continued)

The Company issued 2,209,998 RSUs to executive officers in connection with the 2010 Plan, subject to the Company achieving cumulative performance hurdles or target stock prices for the three-year period ending December 31, 2012. The Company determined in the fourth quarter of 2011 that it believed it would meet the performance hurdle entitling the recipients to 100% of the RSUs granted, and accordingly recorded a cumulative catch up adjustment of $3.6 million to compensation expense based on the stock price at the grant date. For three months ended June 30, 2012 and 2011, the Company recognized compensation expense of $1.4 million and $0.6 million, respectively. For six months ended June 30, 2012 and 2011, the Company recognized compensation expense of $2.9 million and $0.8 million, respectively.

In February 2012, the Company issued 1,525,797 RSUs to executive officers in connection with the 2011 Plan, subject to the Company achieving target stock prices for the four-year period ending December 31, 2014. The Company does not yet know whether it is probable that such measure will be achieved and that such RSUs will be earned. The fair value of the grant is being amortized into equity-based compensation expense over the performance period. For the three and six months ended June 30, 2012, the Company recognized compensation expense of $0.4 million and $0.5 million, respectively. At the same time, the Company granted 1,525,797 LTIP Units to executive officers which vest to the recipient at a rate of four annual installments ending January 29, 2015 and 608,426 LTIP Units to certain non-executive employees, which vest quarterly over three years beginning April 2012.

12. Stockholders' Equity

Common Stock

On February 27, 2012, the Company completed the sale of 17.25 million shares of its common stock at a public offering price of $5.55 per share, which includes the full over-allotment option exercised by the underwriters of the offering. The net proceeds to the Company were $90.3 million.

On May 3, 2012, the Company completed the sale of 20.0 million shares of its common stock at a public offering price of $5.70 per share. The net proceeds to the Company were $108.9 million.

Preferred Stock

On March 14, 2012, the Company completed the sale of 1.6 million shares of its 8.25% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") at a public offering price of $22.92 per share, excluding accrued dividends. The net proceeds were $35.2 million. The preferred stock is currently redeemable by the Company at a redemption price of $25.00 per share.

On June 12, 2012, the Company and its Operating Partnership entered into an "at-the-market" equity offering program (the "ATM Program") pursuant to which the Company may issue and sell over time and from time-to-time up to 500,000 shares of its 8.75% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") and up to 2,500,000 shares of its Series B Preferred Stock. Through June 30, 2012, the Company completed the sale of 20,923 shares of its Series A Preferred Stock and 133,755 shares of its Series B Preferred Stock for aggregate net proceeds of $3.5 million through the ATM Program.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

Dividend Reinvestment Plan

In April 2007, as amended effective January 1, 2012, the Company implemented a Dividend Reinvestment Plan (the "DRP"), pursuant to which it registered with the SEC and reserved for issuance 14,279,846 shares of its common stock. Under the amended terms of the DRP, stockholders are able to automatically reinvest all or a portion of their dividends for additional shares of the Company's common stock. The Company expects to use the proceeds from the DRP for general corporate purposes. For the six months ended June 30, 2012, the Company issued 17,716 common shares pursuant to the DRP for gross sales proceeds of $0.1 million.

Prior to the amendment, a participant could purchase shares directly from the Company in cash in amounts of up to $10,000 per month. The Company terminated the stock purchase component effective January 1, 2012. During the time between establishing the DRP and terminating the stock purchase component of the DRP, certain issuances of shares of the Company's common stock occurred more than three years after the related registration statement for those plans became effective. As a result, certain investors may have a rescission right. If a rescission right exists with respect to these issuances, it would apply to up to 127,500 of shares of the Company's common stock issued for an aggregate consideration of up to $513,500.

Dividends

The Company declared the following dividends (on a per share basis) for the six months ended June 30, 2012:

Common Stock			Preferred Stock

				Dividend
Declaration Date			Declaration Date	Dividend
Declaration Date	Dividend		Declaration Date	Series A		Series B
February 15, 2012	$	0.135	January 30, 2012	$	0.54688	$	0.51563
May 2, 2012	$	0.150	May 2, 2012	$	0.54688	$	0.51563

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Amounts in Thousands, Except Per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

Earnings Per Share

Earnings per share for the three and six months ended June 30, 2012 and 2011 is computed as follows (amounts in thousands, except per share data):

	Three Months Ended June 30,						Six Months Ended June 30,

	2012			2011			2012			2011
Numerator:
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(77,512	)	$	(51,983	)	$	(111,429	)	$	(155,777	)
Effect of dilutive securities:
Income (loss) allocated to Operating Partnership non-controlling interest		(3,964	)		(2,454	)		(5,667	)		(8,046	)

Dilutive net income (loss) available to stockholders	$	(81,476	)	$	(54,437	)	$	(117,096	)	$	(163,823	)

Denominator:
Weighted average shares available to common stockholders		124,803			86,967			113,525			82,606
Effect of dilutive securities(1):
Weighted average OP/LTIP units		6,375			4,267			5,761			4,302

Weighted average dilutive shares		131,178			91,234			119,286			86,908

Net income (loss) per share attributable to NorthStar Realty Finance Corp. common stockholders—Basic/Diluted	$	(0.62	)	$	(0.60	)	$	(0.98	)	$	(1.89	)

(1): Excludes the effect of RSUs, convertible debt and warrants outstanding and exercisable of 3,000,000 as of June 30, 2012 and 2011 that were not dilutive for the respective periods. These instruments could potentially impact diluted EPS in future periods, depending on changes in the Company's stock price and other factors.

The EPS calculation takes into account the conversion of LTIP Units into common shares which convert on a one-for-one basis into common shares and share equally in the Company's net income (loss).

13. Non-controlling Interests

Operating Partnership

Non-controlling interests includes the aggregate limited partnership interests ("OP Units") in the Operating Partnership held by limited partners (the "Unit Holders"). Net income (loss) allocated to the non-controlling interest is based on the Unit Holders' ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the number of OP Units held by the

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13. Non-controlling Interests (Continued)

Unit Holders by the total number of dilutive shares. The issuance of additional shares of beneficial interest (the "Common Shares" or "Shares") 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 stockholders' equity and non-controlling interests in the accompanying consolidated balance sheets to account for the change in the ownership of the underlying equity in the Operating Partnership. As of June 30, 2012 and December 31 2011, non-controlling interests related to aggregate limited partnership units of 6,389,088 and 4,207,836 OP Units, respectively, or a 4.6% and 4.2% interest in the Operating Partnership, respectively. Net income (loss) allocated to the Operating Partnership non-controlling interest for the three months ended June 30, 2012 and 2011 was a loss of $4.0 million and $2.5 million, respectively. Net income (loss) allocated to the Operating Partnership non-controlling interest for the six months ended June 30, 2012 and 2011 was a loss of $5.7 million and $8.0 million, respectively.

Contingently Redeemable Non-controlling Interest

On July 14, 2011, the Company repaid the $100.0 million preferred membership interest in NRF Healthcare, LLC to Inland American Real Estate Trust, Inc. ("Inland American"), which had a 10.5% distribution rate. Net income (loss) allocated to Inland American's non-controlling interest for the three and six months ended June 30, 2011 was $2.6 million and $5.3 million, respectively.

Other

In the first quarter 2012, the Company repurchased non-controlling interests representing 16.7% of the equity notes of N-Star CDO I and 85% in certain bonds of N-Star CDO III. Other third-party interests include two assets in the CSE CDO and one REO with a 22.6% non-controlling interest. Net income (loss) allocated to the other non-controlling interests (including Inland American) for the three months ended June 30, 2012 and 2011 was a loss of $0.3 million and income of $8.3 million, respectively. Net income (loss) allocated to the other non-controlling interests (including Inland American) for the six months ended June 30, 2012 and 2011 was a loss of $0.5 million and income of $8.4 million, respectively.

14. Risk Management and Derivative Activities

Derivatives

The Company uses derivative instruments primarily to manage interest rate risk exposure and such derivatives are not considered speculative. These derivative instruments 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.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

The following tables summarize the Company's derivative instruments that were not designated as hedges under U.S. GAAP as of June 30, 2012 and December 31, 2011 (amounts in thousands):

		Notional Amount(1)		Fair Value Net Asset (Liability)			Range of Fixed LIBOR	Range of Maturity

As of June 30, 2012:
Interest rate swaps	37	$	1,687,212	$	(206,124	)(2)	4.55% - 5.63%	September 2012 - October 2019
Interest rate caps/floors	5		815,500		11,823		1.64% - 7.00%	January 2013 - October 2014

Total	42	$	2,502,712	$	(194,301	)

As of December 31, 2011:
Interest rate swaps	38	$	1,836,972	$	(234,616	)	4.55% - 5.63%	September 2012 - October 2019
Interest rate caps/floors	5		468,500		5,677		1.64% - 7.00%	May 2012 - October 2014

Total	43	$	2,305,472	$	(228,939	)

(1): Excludes timing swaps with a notional amount of $75.3 million and $288.8 million as of June 30, 2012 and December 31, 2011, respectively.
(2): An aggregate of $1.7 billion notional amount of interest rate swaps were liabilities at period end and are only subject to the credit risks of the respective CDO transaction. As the interest rate swaps are senior to all the liabilities of the respective CDO and the fair value of each of the CDO's investments exceeded the fair value of the CDO's derivative liabilities, a credit valuation adjustment is not recorded.

During the first quarter 2012, the Company terminated a $35.0 million notional amount of an interest rate swap. In June 2012, the Company purchased an interest rate floor with a $350.0 million notional amount. The remaining change from December 31, 2011 relates to contractual notional amortization. The Company had no derivative financial instruments that were designated as hedges in qualifying hedging relationships as of June 30, 2012 and December 31, 2011.

The following table presents the fair value of the Company's derivative instruments, as well as their classification on its consolidated balance sheets, as of June 30, 2012 and December 31, 2011 (amounts in thousands):

	June 30, 2012		December 31, 2011

Derivative assets
Interest rate derivatives, not designated as hedges	$	11,850	$	5,735
Derivative liabilities
Interest rate derivatives, not designated as hedges	$	206,152	$	234,674

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Amounts in Thousands, Except Per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

The following table presents the effect of the Company's derivative instruments in its consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (amounts in thousands):

		Three Months Ended June 30,						Six Months Ended June 30,

	Income Statement Location	Three Months Ended June 30,						Six Months Ended June 30,
	Income Statement Location	2012			2011			2012			2011
Non-hedge derivatives
Amount of gain (loss) recognized in earnings:
Adjustments to fair value	Unrealized gain (loss) on investment and other	$	5,838		$	(13,486	)	$	20,295		$	5,159
Swap net cash payment	Unrealized gain (loss) on investment and other	$	(21,063	)	$	(27,600	)	$	(42,607	)	$	(54,956	)
Amount of gain (loss) reclassified from OCI into earnings	Interest expense	$	(1,873	)	$	(1,873	)	$	(3,746	)	$	(3,746	)

The Company's counterparties held no cash margin as collateral against the Company's derivative contracts as of June 30, 2012 and 2011.

Credit Risk Concentrations

Concentrations of credit risk arise when a number of borrowers, tenants, operators 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, tenant or operator that generates 10% or more of its total revenue. However, two operators in the Company's healthcare net lease portfolio generate 13% and 20% of the Company's rental and escalation income for the six months ended June 30, 2012, respectively, which represents 3% and 5% of total revenue, respectively. 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. Commitments and Contingencies

WaMu Matter

One of the Company's net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth, California and was 100% leased to Washington Mutual Bank ("WaMu"). The tenant vacated the buildings as of March 23, 2009 and the leases ("WaMu Leases") were disaffirmed by the Federal Deposit Insurance Corporation ("FDIC"). In the third quarter 2009, the lender, GECCMC 2005-CI Plummer Office Limited Partnership ("GECCMC"), foreclosed on the property. On August 10, 2009, GECCMC filed a complaint against NRFC NNN Holdings, LLC ("NNN Holdings") and NRFC Sub Investor IV, LLC ("NRFC Sub Investor IV"), both wholly-owned subsidiaries of the Company, in the Superior Court of the State of California, County of Los Angeles. In the complaint, GECCMC alleged, among other things, that the financing provided by GECCMC to NRFC Sub Investor IV, was a recourse obligation of NNN Holdings due to the FDIC's disaffirmance of the WaMu Leases. The judge presiding over the lawsuit entered a judgment against

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(Unaudited)

15. Commitments and Contingencies (Continued)

NNN Holdings in the amount of approximately $46 million plus costs, attorneys' fees, prejudgment interests and accrued interest, estimated to be approximately $6 million.

On March 29, 2012, the Court of Appeal of the State of California, Second Appellate District, issued a unanimous decision in favor of NNN Holdings, overturning the judgment issued by the Superior Court of California for the County of Los Angeles. The ruling directs the Superior Court to enter summary judgment in the Company's favor and reverses the award against the Company. Furthermore, the Court of Appeal awarded the Company costs on appeal. As a result of the ruling, in the first quarter 2012 the Company reversed the $20.0 million loss accrual and $2.0 million previously expensed surety bond costs and recorded such reversals in other income (loss) and other costs, net, respectively, in the consolidated statements of operations. It is possible that the Company may not ultimately recover costs from GECCMC notwithstanding any court order.

On April 13, 2012, GECCMC petitioned the Court of Appeal to rehear its decision but that petition was denied. On May 8, 2012, GECCMC petitioned the California Supreme Court to review the decision and that petition was denied on July 11, 2012. The Company is in the process of obtaining the return of $29 million of cash posted as collateral (including the premiums paid for the surety bond) in connection with a general agreement of indemnity that the Company was required to maintain with an issuer of surety bonds. The Company is also pursuing enforcement of awarded costs and plans to further seek reimbursement of its legal fees incurred in connection with the litigation.

16. Segment Reporting

The Company conducts its business through the following segments:

•: The CRE debt business is focused on originating, structuring, acquiring and managing senior and subordinate debt investments secured primarily by commercial and multifamily properties and includes first mortgage loans, subordinate mortgage interests, mezzanine loans, credit tenant loans and other loans, including preferred equity interests. For assets financed in a CDO, the CRE debt segment is based on the CDO financing transactions that are primarily collateralized by CRE debt and may include other types of investments.
•: The CRE securities business is focused on investing in and managing a wide range of CRE securities including, CMBS, unsecured REIT debt and CDO notes backed primarily by CRE securities and CRE debt. For assets financed in a CDO, the CRE securities segment is based on the CDO financing transactions that are primarily collateralized by CRE securities and may include other types of investments.
•: The net lease properties business is focused on acquiring CRE located throughout the United States that are typically leased under long-term net leases to corporate tenants and healthcare operators. The core net lease business invests primarily in office, industrial and retail properties. The Company also owns, manages and invests in a portfolio of healthcare properties focused on mid-acuity facilities (i.e., skilled and assisted), with the highest concentration in assisted living facilities.

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(Unaudited)

16. Segment Reporting (Continued)

•: The asset management and other activities relate to real estate and real estate finance, including managing the N-Star, CSE and CapLease CDOs and sponsoring and advising on a fee basis, non-traded REITs (i.e., NorthStar Income). Management fees earned from CDO financing transactions are eliminated as a result of the consolidation of the respective CDO. The Company has also filed a Registration Statement on Form S-11 for NorthStar Healthcare, a non-traded REIT that intends to invest in loans and real estate focused on the healthcare sector.

The Company primarily generates revenue from interest income on the CRE debt and security portfolios, rental income from the net lease properties and fee income from the asset management and other related activities. The Company's income is primarily derived through the difference between revenues and the cost at which the Company is able to finance its assets. The Company may also invest in assets that generate attractive returns without any leverage.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

16. Segment Reporting (Continued)

The following summarizes selected results of operations by segment for the three and six months ended June 30, 2012 and 2011 (amounts in thousands):

Three months ended June 30, 2012:	Real Estate Debt(1)			Real Estate Securities(1)			Net Lease Properties			Asset Management/ Other		Corporate(2)			Eliminations(1)			Consolidated Total

Total revenues	$	43,065		$	46,720		$	20,964		$	15,129	$	(92	)	$	(3,620	)	$	122,166
Total expenses		29,793			5,997			19,233	(3)		10,479		25,858			(3,620	)		87,740

Income (loss) from operations		13,272			40,723			1,731			4,650		(25,950	)		—			34,426
Equity in earnings (losses) of unconsolidated ventures		(732	)		—			193			—		203			—			(336	)
Unrealized gain (loss) on investments and other		(15,546	)		(115,656	)		—			—		15,554			—			(115,648	)
Realized gain (loss) on investments and other		(901	)		6,092			4			—		—			—			5,195

Income (loss) from continuing operations		(3,907	)		(68,841	)		1,928			4,650		(10,193	)		—			(76,363	)

Income (loss) from discontinued operations		(43	)		—			—			—		—			—			(43	)
Gain (loss) on sale from discontinued operations		285			—			—			—		—			—			285

Net income (loss)	$	(3,665	)	$	(68,841	)	$	1,928		$	4,650	$	(10,193	)	$	—		$	(76,121	)

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Amounts in Thousands, Except Per Share Data

(Unaudited)

16. Segment Reporting (Continued)

Three months ended June 30, 2011:	Real Estate Debt(1)			Real Estate Securities(1)			Net Lease Properties			Asset Management/ Other			Corporate(2)			Eliminations(1)			Consolidated Total

Total revenues	$	67,584		$	48,480		$	20,952		$	6,335		$	1,093		$	(4,395	)	$	140,049
Total expenses		31,021			9,064			22,066	(3)		3,814			30,491			(4,395	)		92,061

Income (loss) from operations		36,563			39,416			(1,114	)		2,521			(29,398	)		—			47,988
Equity in earnings (losses) of unconsolidated ventures		(1,816	)		—			184			(11	)		88			—			(1,555	)
Unrealized gain (loss) on investments and other		(6,923	)		(132,523	)		(2	)		—			8,841			—			(130,607	)
Realized gain (loss) on investments and other		41,450			(1,711	)		(892	)		—			(2,008	)		—			36,839

Income (loss) from continuing operations		69,274			(94,818	)		(1,824	)		2,510			(22,477	)		—			(47,335	)

Income (loss) from discontinued operations		(21	)		—			(1,026	)		—			—			—			(1,047	)
Gain (loss) on sale from discontinued operations		—			—			9,416			—			—			—			9,416

Net income (loss)	$	69,253		$	(94,818	)	$	6,566		$	2,510		$	(22,477	)	$	—		$	(38,966	)

(1): Includes $3.6 million and $4.4 million of management fees related to the Company's CDO financing transactions for the three months ended June 30, 2012 and 2011, respectively, that are eliminated in consolidation. These amounts are recorded as expense in the real estate debt and real estate securities segments and recorded as revenue in the asset management/other segment.
(2): Includes corporate level investments, corporate level interest income, interest expense and unallocated general and administrative expenses.
(3): Includes depreciation and amortization of $6.9 million and $7.6 million for the three months ended June 30, 2012 and 2011, respectively.

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Amounts in Thousands, Except Per Share Data

(Unaudited)

16. Segment Reporting (Continued)

Six months ended June 30, 2012:	Real Estate Debt(1)			Real Estate Securities(1)			Net Lease Properties			Asset Management/ Other		Corporate(2)			Eliminations(1)			Consolidated Total

Total revenues	$	85,107		$	92,950		$	41,278		$	26,933	$	658		$	(7,491	)	$	239,435
Total expenses		60,368			13,249			38,725	(3)		19,769		50,627			(7,491	)		175,247

Income (loss) from operations		24,739			79,701			2,553			7,164		(49,969	)		—			64,188
Equity in earnings (losses) of unconsolidated ventures		(1,347	)		—			384			—		126			—			(837	)
Other income (loss)		258			—			20,000			—		—			—			20,258
Unrealized gain (loss) on investments and other		(31,187	)		(175,393	)		—			—		(4,474	)		—			(211,054	)
Realized gain (loss) on investments and other		7,811			12,705			—			—		31			—			20,547

Income (loss) from continuing operations		274			(82,987	)		22,937			7,164		(54,286	)		—			(106,898	)

Income (loss) from discontinued operations		(65	)		—			—			—		—			—			(65	)
Gain (loss) on sale from discontinued operations		285			—			—			—		—			—			285

Net income (loss)	$	494		$	(82,987	)	$	22,937		$	7,164	$	(54,286	)	$	—		$	(106,678	)

Six months ended June 30, 2011:	Real Estate Debt(1)			Real Estate Securities(1)			Net Lease Properties			Asset Management/ Other		Corporate(2)			Eliminations(1)			Consolidated Total

Total revenues	$	119,424		$	94,953		$	53,267		$	12,093	$	1,300		$	(9,170	)	$	271,867
Total expenses		73,261			19,504			58,728	(3)		6,506		47,933			(9,170	)		196,762

Income (loss) from operations		46,163			75,449			(5,461	)		5,587		(46,633	)		—			75,105
Equity in earnings (losses) of unconsolidated ventures		(4,245	)		—			317			—		145			—			(3,783	)
Other income (loss)		10,138			—			—			—		—			—			10,138
Unrealized gain (loss) on investments and other		(170,542	)		(92,522	)		(17	)		—		(19,744	)		—			(282,825	)
Realized gain (loss) on investments and other		46,584			5,024			(1,427	)		—		(2,608	)		—			47,573

Income (loss) from continuing operations		(71,902	)		(12,049	)		(6,588	)		5,587		(68,840	)		—			(153,792	)

Income (loss) from discontinued operations		(239	)		—			(399	)		—		—			—			(638	)
Gain (loss) on sale from discontinued operations		50			—			14,397			—		—			—			14,447

Net income (loss)	$	(72,091	)	$	(12,049	)	$	7,410		$	5,587	$	(68,840	)	$	—		$	(139,983	)

(1): Includes $7.5 million and $9.2 million of management fees related to the Company's CDO financing transactions for the six months ended June 30, 2012 and 2011, respectively, that are eliminated in consolidation. These amounts are

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

16. Segment Reporting (Continued)

recorded as expense in the real estate debt and real estate securities segments and recorded as revenue in the asset management/other segment.

(2): Includes corporate level investments, corporate level interest income, interest expense and unallocated general and administrative expenses.
(3): Includes depreciation and amortization of $13.8 million and $14.9 million for the six months ended June 30, 2012 and 2011, respectively.

The following summarizes total assets by segment as of June 30, 2012 and December 31, 2011 (amounts in thousands):

	Real Estate Debt		Real Estate Securities		Net Lease Properties		Asset Management/ Other		Corporate(2)		Consolidated Total

Total Assets as of June 30, 2012	$	2,574,145	$	1,351,744	$	857,308	$	4,243	$	222,637	$	5,010,077

Total Assets as of December 31, 2011	$	2,449,323	$	1,520,650	$	862,411	$	6,458	$	167,595	$	5,006,437

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

A summary of non-cash investing and financing activities for the six months ended June 30, 2012 and 2011 is as follows (amounts in thousands):

	Six Months Ended June 30,

	2012			2011
Real estate acquisition(1)	$	(35,631	)	$	(247,186	)
Assumption of mortgage(1)		—			248,252
Reduction of real estate debt investments(1)		35,631			42,654
Increase of restricted cash(1)		—			(10,462	)
Foreclosure of timeshare interest(1)		—			(6,076	)
Dividends payable on RSUs		1,569			—
Redemptions of non-controlling interests		2,358			—
Escrow deposit payable related to real estate debt investments		29,553			11,464
Equity component of 8.875% Notes		1,986			—
Reclassification of operating real estate to asset held for sale		1,046			—

(1): Non-cash activity occurred in connection with taking title to a property.

18. Subsequent Events

Dividends

On August 1, 2012, the Company declared a dividend of $0.16 per share of common stock. The common stock dividend will be paid on August 17, 2012 to stockholders of record as of the close of business on August 13, 2012. On August 1, 2012, 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 preferred

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

18. Subsequent Events (Continued)

stock dividends will be paid on August 15, 2012, to stockholders of record as of the close of business on August 13, 2012.

Exchangeable Senior Notes

On July 6, 2012, the underwriters exercised their over-allotment option resulting in the issuance of an additional $7.0 million of the 8.875% Notes for net proceeds of $6.8 million.

Preferred Stock Issuance

In July 2012, the Company sold an additional 3,220,000 shares of its Series B Preferred Stock, including the over-allotment option, at a public offering price of $22.60 per share (excluding accrued dividends) resulting in $70.0 million in net proceeds.

New Investment

The Company completed a $50 million loan investment to a diversified commercial real estate services company (the "Borrower"). This investment provides for a five year term, bears interest at a fixed rate of 14% per annum and includes certain financial covenants. In connection with this investment: (i) the Borrower granted the Company a four-year option, exercisable for $25 million, to purchase an equity interest in the Borrower; (ii) the Company and the Borrower have entered into a strategic relationship agreement regarding commercial real estate loan servicing; and (iii) the Company issued 1.25 million shares of its common stock in a private offering to the Borrower at a price of $6.00 per share, resulting in proceeds to the Company of $7.5 million.

Credit Facility

On July 31, 2012, NRFC DOR Loan, LLC ("NRFC DOR"), a wholly-owned subsidiary of the Company, entered into a Credit and Security Agreement with Doral Bank (the "Doral Facility"). The Doral Facility provides up to $40 million on a non-recourse basis, subject to certain exceptions, to finance first mortgage loans and senior loan participations secured by commercial real estate.

Interest rates and advance rates will depend upon asset type and characteristics. The initial maturity date of the Doral Facility is July 30, 2015, with three, one-year extensions at the Company's option, which may be exercised upon the satisfaction of certain customary conditions. During the initial term, the Doral Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments.

In connection with the Doral Facility, the Operating Partnership agreed to guarantee interest payments and the obligations under the Doral Facility if either the Company or its affiliates engage in certain customary bad acts. In addition, the Operating Partnership pledged its interests in NRFC DOR as collateral. The Doral Facility and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, the Operating Partnership must maintain at least $3.75 million and as much as $7.5 million in unrestricted cash, or other eligible investments, at all times during the term of the Doral Facility.

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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 unaudited consolidated financial statements and notes thereto included in this report. References to "N-Star," "we," "us" or "our" refer to NorthStar Realty Finance Corp. and its subsidiaries unless the context specifically requires otherwise.

Introduction

NorthStar Realty Finance Corp. is a real estate finance company that originates, acquires and manages portfolios of commercial real estate, or CRE, debt, CRE securities and net lease properties. In addition, we engage in asset management and other activities related to real estate and real estate finance. We are organized as a real estate investment trust, or REIT, for federal income tax purposes and were formed in October 2003 to continue and expand the CRE debt, CRE securities and net lease business of our predecessor. We conduct substantially all of our operations and make our investments through our operating partnership, NorthStar Realty Finance Limited Partnership, or our Operating Partnership, including its subsidiaries. Our primary business lines are as follows:

•: Commercial Real Estate Debt—Our CRE debt business is focused on originating, structuring, acquiring and managing senior and subordinate debt investments secured primarily by commercial and multifamily properties and includes first mortgage loans, subordinate mortgage interests, mezzanine loans, credit tenant loans and other loans, including preferred equity interests. We directly underwrote and originated approximately 72% of the debt investments in our current portfolio (excluding debt originally owned in the CSE RE 2006-A CDO, or CSE CDO, and CapLease 2005-1 CDO, or CapLease CDO, that we consolidate as a result of acquiring the equity interests in 2010 and 2011, respectively, see also "—Sources of Operating Revenues and Cash Flows"). Our CRE debt portfolio represents approximately 38.5% of our assets under management as of June 30, 2012.
•: Commercial Real Estate Securities—Our CRE securities business is focused on investing in and managing a wide range of CRE securities, including commercial mortgage backed securities, or CMBS, unsecured REIT debt and collateralized debt obligation, or CDO, notes backed primarily by CRE securities and CRE debt. Our CRE securities portfolio represents approximately 41.7% of our assets under management as of June 30, 2012.
•: Net Lease Properties—Our net lease properties business is focused on acquiring CRE located throughout the United States that are typically leased under net leases to corporate tenants and healthcare operators. Our core net lease business invests primarily in office, industrial and retail properties. We also own, manage and invest in a portfolio of healthcare properties focused on mid-acuity facilities (i.e., skilled and assisted), with the highest concentration in assisted living facilities. Our net lease properties portfolio represents approximately 13.6% of our assets under management as of June 30, 2012.
•: Asset Management and Other—Our asset management and other activities relate to real estate and real estate finance, including managing our CDO financing transactions on a fee basis and sponsoring and advising on a fee basis, non-traded REITs, or Sponsored REITs (i.e., NorthStar Real Estate Income Trust, Inc., or NorthStar Income, and NorthStar Healthcare Income, Inc., or NorthStar Healthcare).

We believe that these businesses are complementary to each other due to their overlapping sources of investment opportunities, common reliance on real estate fundamentals and ability to utilize secured borrowings to finance assets and enhance returns. We seek to match-fund our CRE debt and security investments primarily by issuing term financing and other forms of secured term financing.

Our financing strategy focuses on match-funding our assets and liabilities by having similar maturities and like-kind interest rate benchmarks (fixed or floating) to manage refinancing and interest

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rate risk. Our legacy CRE debt and security portfolios are predominantly financed through long-term, non-recourse CDOs. Our net lease properties are predominantly financed with non-recourse mortgage notes. Given the nature of our current financing arrangements, we expect to maintain our borrowing at or near our current levels for our existing investments. Borrowing levels may change for new investments depending upon the nature of the assets and the related financing.

Liquidity and access to capital returned to the commercial real estate finance markets in the first quarter of 2012. During the first half of 2012, we raised net proceeds of $199 million from the issuance of common equity, $39 million from the issuance of preferred stock (including pursuant to our at-the-market equity offering program) and $72 million from the issuance of exchangeable senior notes. Subsequent to quarter end, we raised an additional $70 million from the issuance of preferred stock, $7 million from the issuance of exchangeable senior notes and $8 million from the issuance of common stock in a private offering. Total capital raised year to date is $395 million.

In terms of new investment-level financing, we continue to pursue a variety of financing arrangements such as credit facilities, securitized arrangements and other term borrowings. The amount of our borrowings will depend upon the nature and credit quality of our assets, the structure of our financings and where possible, we will seek to limit our reliance on recourse borrowings. In the fourth quarter of 2011, we, through two wholly-owned subsidiaries, entered into two new $100 million term credit facilities to finance loan originations and make investments in CMBS, respectively.

We are also focused on raising capital in alternate channels. Beginning in the second half of 2011, we started to see capital raising velocity increase in NorthStar Income. Total capital raised for the six months ended June 30, 2012 was $169 million, with $325 million raised from inception through June 30, 2012. NorthStar Realty Securities, LLC, or NorthStar Realty Securities, our wholly-owned broker-dealer subsidiary, has executed selling agreements with broker-dealers covering more than 45,000 registered representatives as of June 30, 2012.

Our Investments

The following describes the major CRE asset classes in which we invest and continue to actively manage to maximize stockholder value and to preserve our capital. The following table represents our

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assets under management as of June 30, 2012 based on principal amount of CRE debt and security investments and the cost basis of net lease properties (amounts in thousands):

	Amount

*CRE Debt*
First mortgage loans	$	1,640,343	23.2	%
Mezzanine loans		447,559	6.3	%
Credit tenant and term loans		191,021	2.7	%
Subordinate mortgage interests		130,737	1.8	%
Other(1)		324,012	4.5	%

Total CRE debt		2,733,672	38.5	%
*CRE Securities*
CMBS		2,527,232	35.7	%
Third-party CDO notes		261,131	3.7	%
Other securities		161,338	2.3	%

Total CRE securities		2,949,701	41.7	%
*Net Lease*
Core net lease		404,459	5.7	%
Healthcare net lease		561,641	7.9	%

Total net lease		966,100	13.6	%

Subtotal NorthStar		6,649,473	93.8	%

*Sponsored REITs*
NorthStar Income(2)		435,826	6.2	%

Grand total	$	7,085,299	100.0	%

(1): Relates to real estate owned (either directly or through a joint venture) as a result of taking title to a property through foreclosure, deed in lieu or otherwise ("taking title to a property"), presented at the principal amount of such loan at time of taking title.
(2): Based on consolidated total assets.

Commercial Real Estate Debt

Our Portfolio

As of June 30, 2012, $2.7 billion, or 38.5%, of our assets under management were invested in CRE debt, which includes $0.3 million principal amount of loans related to certain investments accounted for as joint ventures and real estate owned. As of June 30, 2012, our $2.4 billion CRE debt portfolio consisted of 159 investments with an average investment size of $15 million.

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The portfolio's diversity across property type and geographic location is summarized as follows, based on outstanding principal amount:


Loan Portfolio by Property Type		Loan Portfolio by Geographic Location

Commercial Real Estate Securities

Our Portfolio

As of June 30, 2012, $2.9 billion, or 41.7%, of our assets under management were invested in a portfolio of CRE securities. Our CRE securities portfolio consisted of 622 investments with an average investment size of $5 million. CMBS represents $2.5 billion, or 85.7%, of our CRE securities portfolio. The CMBS portfolio had an average credit rating of CCC+/Caa1. The following summarizes our CRE securities by type and CMBS by vintage, based on outstanding principal amount:


Securities by Type		CMBS by Vintage(1)

(1): 2006 and 2007 vintages were purchased at a weighted average discount of approximately 58%.

Net Lease Properties

Core Net Lease Properties

As of June 30, 2012, $404 million, or 5.7%, of our total assets under management were invested in our 24 core net lease properties, consisting of a portfolio of office, retail and industrial facilities totaling 3.2 million square feet. As of June 30, 2012, our core net lease properties had a weighted average remaining lease term of 6.2 years and were 96% leased.

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The following summarizes our core net lease portfolio's diversity across property type and geographic location as of June 30, 2012, based on purchase price, or cost.


Core Net Lease by Property Type		Core Net Lease by Geographic Location

Healthcare Net Lease Properties

As of June 30, 2012, $562 million, or 7.9%, of our assets under management were invested in our healthcare net lease properties, with a focus on the senior housing sector which includes assisted living, skilled nursing and independent living facilities. Our portfolio was comprised of 42 assisted living facilities (ALF), 31 skilled nursing facilities (SNF), three life science buildings (LSB), six independent living facilities (ILF) and one medical office building (MOB). As of June 30, 2012, 100% of our net lease healthcare portfolio was leased to third-party operators with weighted average lease coverage of 1.4x and a 7.4 year weighted average remaining lease term.

The following summarizes our healthcare portfolio by property type and geographic location as of June 30, 2012, based on purchase price.


Healthcare Net Lease by Property Type		Healthcare Net Lease by Geographic Location

Asset Management and Other

Our asset management and other activities are focused on:

•: Managing CDO financing transactions on a fee basis.

We manage eleven CDOs representing $5.7 billion of assets based on principal amount, nine of which were sponsored by us, or the N-Star CDOs. In addition, we have acquired the equity interests of two CDOs that have been integrated into our platform, the CSE CDO and the CapLease CDO, which we herein collectively refer to as our acquired CDOs. In the case of the CSE CDO, we were delegated the collateral management and special servicing rights and for the CapLease CDO, we acquired the collateral management rights. Five of the CDOs are primarily collateralized by CRE debt and six are primarily collateralized by CRE securities.

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We consolidate these CDO financing transactions under accounting principles generally accepted in the United States, or U.S. GAAP. As a result, the collateral management fees we earn and receive in cash are eliminated in consolidation in the statements of operations.

•: Sponsoring and advising on a fee basis, our Sponsored REITs.

In connection with our current public Sponsored REIT, NorthStar Income, we manage the day-to-day affairs including identifying, originating, acquiring and managing investments on its behalf, and we earn advisory and other fees for these services, which vary based on the amount of assets under management, investment activity and investment performance.

In addition, NorthStar Realty Securities distributes equity for our Sponsored REITs. NorthStar Realty Securities is currently raising equity capital for NorthStar Income and we expect that NorthStar Realty Securities will assist us in the future in accessing diverse sources of capital for other companies that may be sponsored and managed by us, such as NorthStar Healthcare.

Other Opportunistic Investments

We also pursue other opportunistic investments that we expect will generate attractive risk-adjusted returns, such as repurchasing our CDO bonds at a significant discount to principal amount as well as other real estate-related investments. These CDO bonds typically have significant credit support and, when we repurchase a CDO bond, we generally expect the CDO bonds will be repaid at par.

As of August 2, 2012, the principal proceeds we could receive from CDO bonds we owned was $800 million, of which $650 million was repurchased at an average price of 36% in the secondary market and had a weighted average original credit rating of A+/A1. Because our CDO financing transactions are consolidated under U.S. GAAP, these CDO bonds are generally not presented as an investment but rather are eliminated in our consolidated financial statements. We will generate cash flows in future periods through the interest payable on these bonds, as well as realizing (in cash) the discount as the bonds repay. If realized, this $417 million discount will generally not be reported as a gain and the interest will not be recorded as income under U.S. GAAP.

Sources of Operating Revenues and Cash Flows

We primarily generate revenues from interest income on our CRE debt and security portfolios, rental income from the net lease properties and fee income from the asset management and other related activities. Our income is primarily derived through the difference between revenues and the cost at which we are able to finance our assets. We may also acquire investments which generate attractive returns without any leverage.

Our legacy CRE debt and security investments are predominantly financed in CDOs. We consolidate the CDO financing transactions under U.S. GAAP regardless of whether we retain the equity interests for our sponsored CDOs or acquire the equity interests of other CDOs. However, we generate cash flows based on the equity interests that we retain/acquire. As a result, the cash flows may be different from the income (loss) generated for U.S. GAAP purposes.

In this Quarterly Report on Form 10-Q, we refer to certain CDOs that we consolidate on our balance sheet as "our CDOs." Our CDOs are financing transactions that we consolidate on our balance sheet in accordance with U.S. GAAP, as we own the equity interests in such CDOs. We do not, however, own undivided interests in any of the assets within our CDOs and all senior and junior bondholders of the CDOs have economic interests that are senior to our equity interests. A more detailed discussion of our CDO financing transactions is provided in this section under "—Liquidity and Capital Resources."

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Profitability and Performance Metrics

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

•: Adjusted funds from operations, or AFFO (see "—Non-GAAP Financial Measures—Funds from Operations and Adjusted Funds from Operations" for a description of this metric).
•: Credit losses are a measure of performance and can be used to compare the credit performance of our assets to our competitors and other finance companies.
•: Assets under management growth is a driver of our ability to grow our income especially related to our Sponsored REITs, but we believe it is of lesser importance than other metrics such as AFFO.
•: Cash from our investments is a driver of our ability to maintain and/or grow our distributions to our stockholders.

Outlook and Recent Trends

In the first half of 2011, liquidity began to return to the commercial real estate finance markets and capital started to become available to the stronger sponsors. Wall Street and commercial banks began to more actively provide credit to real estate borrowers. A proxy of the easing of credit and restarting of the capital markets for CRE debt is the approximately $30 billion in non-agency CMBS issuance that were completed during 2011. Credit started to contract in mid-2011 as the European debt woes began to unfold resulting in severe market volatility.

Global financial markets continue to be strained in 2012 and we expect that the commercial real estate finance markets will continue to be volatile in the near term due to anemic U.S. economic growth, continued high levels of unemployment and global market instability, along with the risk of maturing CRE debt that will have difficulties being refinanced. It is currently estimated that $1.3 trillion of CRE debt will mature in the next three years and $2.1 trillion will mature through 2017. Many of these loans will not be able to be refinanced, exacerbating growth and potentially leading to contracting credit. With that, capital markets continue to make slow gains toward recovery. Through June 30, 2012, there has been $18 billion in non-agency CMBS issuance and many industry experts are predicting approximately $35 billion of total non-agency CMBS issuance for 2012.

Virtually all commercial real estate property types were adversely impacted by the credit crisis, including core property types such as hotel, retail, office, industrial and multifamily properties. Land, condominium and other commercial property types were more severely impacted. As a result, cash flows and values associated with properties serving as collateral for our loans are generally weaker than expected when we originated the loans. Despite the difficult U.S. and global economic conditions, investor interest has been returning to commercial real estate especially in urban areas having high concentrations of institutional quality real estate and especially in certain asset types such as apartments. The degree to which commercial real estate values improve or erode in 2012 in the markets in which our real estate collateral is located, will impact the performance of our asset base and the related level of loan losses.

Our CRE debt and securities investments are negatively impacted by weaker real estate market and economic conditions. Slow economic conditions reduce a tenant's ability to make rent payments in accordance with the terms of their leases and for companies to lease new space. To the extent that market rental and occupancy rates are reduced, property-level cash flows are negatively affected as existing leases renew at lower rates and over longer periods of time impact the value of underlying properties and the borrowers' ability to service their outstanding loans.

Many of our legacy CRE debt investments bear interest based on a spread to one-month LIBOR, a floating-rate index based on rates that banks charge each other to borrow. One-month LIBOR as of

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June 30, 2012 was 0.25%, well below its 1.26% average over the past five years. Lower LIBOR means lower debt service costs for our borrowers. This dynamic has partially offset decreasing cash flows caused by the challenging economic conditions and may also result in extending the life of interest reserves for those debt investments that require interest reserves to service debt. However, many of our new CRE loan originations have a LIBOR floor that is in excess of current LIBOR. The degree in which rates will remain low is driven in a significant part by the actions of the Federal Reserve to enter into programs to support the U.S. economy and keep rates low. Our current expectation is that rates will remain low into 2014.

CRE security values are also influenced by credit ratings assigned by the rating agencies. Beginning in 2009 and continuing into late 2011, the rating agencies dramatically changed their ratings methodologies for all securitized asset classes, including commercial real estate. Combined with challenging economic conditions, their reviews have resulted in large amounts of rating downgrade actions for CMBS, negatively impacting market values of CMBS and in many cases negatively impacting the CDO financing structures used by us and others to finance these assets. To some extent, we took advantage of the rating agency downgrades by purchasing $1.2 billion of CMBS in our CDOs in 2009 and 2010 at a weighted average discount to par of approximately 60%.

Our net lease properties are also adversely impacted by a weaker economy. Corporate space needs contracted 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 terms of their leases. Further, our healthcare net lease portfolio is also subject to impact from regulatory changes which are also impacted by a weak economy, such as changes to the Medicaid and Medicare programs that could negatively affect property values. Although we cannot make assurances that our cash flow will not be impacted by changes to these programs, a majority of our assets do not derive revenues from these government programs and we believe assets dependent on these programs have adequate lease coverage to support the rent of our operators.

Our Strategy

Our primary business objectives are to make commercial real estate-related investments in order to produce attractive risk-adjusted returns, generate stable cash flows for distribution to our stockholders and build long-term franchise value. When we observed deteriorating market conditions, we responded by decreasing investment activity and preserving capital. At the same time, we focused on raising capital in alternative channels, such as the non-traded REIT market.

We currently anticipate that most of our investment activity and uses of available unrestricted cash liquidity will be focused on our businesses of originating new loans and investing in securities, as well as opportunistic investments, including discounted repurchases of our previously-issued CDO bonds and other real estate-related investments. Availability and cost of capital will impact our profitability and earnings since we must raise new capital to fund a majority of this growth. As a result, we also remain focused on the growth of our asset management business and in particular, our Sponsored REITs.

As liquidity was becoming more available and commercial real estate fundamentals were beginning to stabilize in 2011 and 2012, we took advantage of this dynamic in terms of both capital raising and investment activity. We raised $232 million of capital in the first half of 2011 and $387 million of capital through July 2012. In addition, we entered into two $100 million term credit facilities in the fourth quarter 2011 with Wells Fargo Bank, N.A, or Wells Fargo to finance the origination of CRE first mortgage loans and the purchase of AAA-rated CMBS investments. In July 2012, we entered into a credit facility with Doral Bank that provides up to $40 million on a non-recourse basis, subject to certain exceptions, to finance first mortgage loans and senior loan participations secured by commercial real estate.

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Throughout 2012, we have been actively investing across our businesses. Through July 2012, we originated six loans and acquired two loans with an aggregate principal amount of $186 million (including an interest owned through a joint venture) with a weighted average expected return on invested equity of approximately 17%. Also, as the advisor of NorthStar Income, we originated ten loans with a principal amount of $265 million during the same period. The principal proceeds we could receive from CDO bonds acquired during the first half of 2012 is $285 million, which were purchased for $132 million and have an expected yield-to-maturity of over 20%. We invested $77 million of equity in other real estate-related investments with an expected return on equity of over 16%. There is no assurance we will realize this expected return on equity over the term of these investments. Our actual return on equity could vary significantly from our expectations.

We believe the supply/demand imbalance driven by the large amount of maturing CRE loans creates an opportunity for us. The relative lack of supply and high demand for capital is allowing investors with capital, such as us, to make investments with attractive risk/return profiles compared to historical levels.

Financing Strategy

We seek to access a wide range of secured and unsecured debt and public and private equity capital sources to fund our investment activities and asset growth. Since our IPO in 2004, we have completed preferred and common equity offerings raising approximately $1.2 billion of aggregate net proceeds including raising $199 million from the issuance of common equity and $39 million from the issuance of preferred equity in the first half of 2012. We have also raised $286 million of long-term, subordinated debt capital that is equity-like in nature due to its 30-year term (at the time of issuance) and relatively few covenants. In addition, we have raised $500 million of unsecured exchangeable senior notes, of which $296 million was outstanding as of June 30, 2012.

We use asset-level financing as part of our strategy and we seek to match-fund our assets and liabilities by having similar maturities and like-kind interest rate benchmarks (fixed or floating) to manage refinancing and interest rate risk. We seek access to diverse sources of short and long-term financing to enable us to prudently leverage our assets and deliver attractive risk-adjusted returns to our stockholders.

Our legacy CRE debt and security portfolios are predominantly financed through long-term, non-recourse CDOs. We currently use secured term credit facilities provided by major financial institutions to fund new investments until permanent financing is available. However, we believe the terms of these facilities are flexible enough to provide sufficient term financing to match the underlying assets to the extent the securitization market remains inaccessible.

In our N-Star CDOs, rated CDO bonds are issued and backed by pools of collateral originated or acquired by us. The CDO bonds are non-recourse and the collateral is used to service the interest payments on the rated CDO bonds. After a reinvestment period, which is typically five years, principal from collateral payoffs is used to amortize the CDO bonds, so there is no maturity risk. We typically have sold all of the investment-grade rated CDO bonds and retained the non-investment grade subordinate classes and equity notes, which we refer to as our retained equity interest in the CDO. CDO financings provided low-cost borrowing because the majority of the liabilities we issued were the most senior bond classes which were rated "AAA/Aaa" by the rating agencies, and, therefore, had the lowest cost of funds.

Our net lease properties and certain real estate owned, or REO, are typically financed with non-recourse mortgages. We seek to match the term of the financing with the remaining lease term of the properties.

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Given the nature of our financing arrangements, we expect to maintain our borrowings at or near our current levels for our existing investments. Borrowing levels may change for new investments depending upon the nature of the assets and the related financing. Our financing strategy for current or future investments is dependent on our ability to obtain match-funded borrowings at rates that provide a positive net funding spread. Match-funded borrowing was difficult to obtain during the credit crisis. During that time, we focused on using our existing CDO structures to fund future investment activity when repayment or sale proceeds became available within the CDOs or we acquired investments that generated attractive returns without leverage.

We actively seek financing for our businesses of originating loans and acquiring CRE securities. As a result, in the fourth quarter of 2011, we, through two wholly-owned subsidiaries, entered into two credit facilities with Wells Fargo including a $100 million credit facility to finance the origination of CRE loans and a $100 million credit facility to finance the acquisition of AAA-rated CMBS and in July 2012 entered into a credit facility with Doral Bank that provides up to $40 million to finance first mortgage loans and senior loan participations secured by commercial real estate.

Risk Management

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. We use many methods to actively manage our asset base to preserve our income and capital. For CRE debt 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. For our healthcare net lease assets, we also consider the impact of regulatory changes on operator performance and property values. Many of our debt investments also require borrowers to replenish cash reserves for items such as taxes, insurance and future debt service costs. Late replenishments of cash reserves also may be an early indicator there could be a problem with the borrower or collateral property. We also may negotiate a modification to debt terms if we believe such modification improves our ability to maximize principal recovery. Modifications may include changes to contractual interest rates, maturity dates and other borrower obligations. When we make a concession, generally through a reduction of an interest rate, we may seek to obtain additional collateral, fees and/or upside participation in any value creation of the property in return for the modification, although in a challenging real estate market obtaining additional collateral from struggling borrowers is difficult. As part of our risk management process, we evaluate the best alternatives for our loans which in some cases, may result in us issuing default notices and beginning proceedings to take title to a property when the borrower is not complying with the debt terms where we believe taking control of the collateral as REO is the best course of action to protect our capital.

In certain circumstances, we may pursue a debt sale or payoff at a discount to our carrying value. We may agree to a discounted sale or payoff where we believe there is an economic benefit from monetizing the asset in advance of its contractual maturity date. When evaluating a sale or payoff at a discount to carrying value, we also consider the impact such transaction may have on our financing structures, corporate borrowing covenants and income.

Securities generally have a more liquid market than debt and net lease properties, but we typically have very little control over restructuring decisions when there are problems with the underlying collateral. We are a rated special servicer by Standard & Poor's and Fitch Ratings and were approved by Moody's Investor Services in connection with an acquisition of a "B-piece" in a new $2.1 billion securitization in 2011. We manage risk in the securities portfolio by selling assets when we can obtain a price that is attractive relative to its risk. 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.

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We maintain a comprehensive risk management process that generally includes day-to-day oversight by the portfolio management team, weekly management meetings and a quarterly credit review process. These processes are designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis. 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 investments that are not identified by our credit reviews. During the quarterly reviews, or more frequently as necessary, investments are put on highly-monitored status and identified for possible loan loss reserve based upon several factors, including missed or late contractual payments, significant declines in collateral performance and other data which may indicate a potential issue in our ability to recover our capital from the investment.

Many of our debt investments were made to borrowers who had a business plan to improve the collateral property and who therefore needed a flexible balance sheet lender. Property cash flows are generally lower today than was projected by the borrower for many of our debt investments when they were originated. As a result, some real estate owners are having trouble refinancing their assets at maturity or selling their properties to recoup their capital. Other owners are having trouble achieving their business plans to the extent they acquired a property to reposition it or otherwise invest capital to increase the property's cash flows.

We generally required the borrowers, at the time of origination and/or as required by property performance during the loan term, to pre-fund reserves to cover interest and operating expenses until the property cash flows increased sufficiently to cover debt service costs. We also generally required the borrower to refill these reserves if they became deficient due to underperformance and if the borrower wanted to exercise an extension option under the loan as some of the borrowers had a recourse obligation to do so. Despite low interest rates and improving real estate fundamentals, we expect that in the future some of our borrowers may still have difficulty servicing our debt.

Each of our debt investments, while primarily backed by CRE collateral, is unique and requires customized risk management strategies for dealing with potential credit situations. The complexity of each situation depends on many factors, including the number of collateral properties, the type of property, macro and local market conditions impacting supply/demand, cash flow and collateral, and the financial condition of our borrowers and their willingness to support our collateral properties.

Our risk management process may lead us to the determination that extending and working out debt, rather than pursuing taking title to a property, is the best course of action to maximize total and long-term value. Our provision for loan loss analysis often requires that we make assumptions regarding collateral value and the timing with regards to when we receive debt service payments, including principal recovery, and as a result, our analysis can be highly subjective and uncertain.

Our legacy CRE debt and security investments are predominantly financed in CDOs. We consolidate the CDO financing transactions under U.S. GAAP regardless of whether we retained the equity interests for our sponsored CDOs or acquired the equity interests of other CDOs. The CDOs require that we meet tests in order to receive regular cash flow distributions on our subordinate CDO bonds, preferred shares and equity notes. Our risk management process is also focused on actively monitoring and managing our CDO financing transactions.

Critical Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of NorthStar Realty Finance Corp. and our subsidiaries, which are majority-owned and controlled by us or a variable interest entity, or VIE,

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where we are the primary beneficiary. All significant intercompany balances are eliminated in consolidation.

A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. We base the qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flows of the entity. We reassess the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents, has a potentially significant interest in the entity and controls such entity's significant decisions. We determine whether we are the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE's economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for us or other interests to provide financial support; consideration of the VIE's purpose and design, including the risks the VIE was designed to create and passthrough to its variable interest holders and the similarity with and significance to our business activities and the other interests. We reassess the determination of whether we are the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.

Fair Value Option

The fair value option provides an election that allows companies to irrevocably elect fair value for financial assets and liabilities on an instrument-by-instrument basis at initial recognition. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur.

Fair Value Measurement

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

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


Level 1.		Quoted prices for identical assets or liabilities in an active market.
Level 2.		Financial assets and liabilities whose values are based on the following:
		a) Quoted prices for similar assets or liabilities in active markets.
		b) Quoted prices for identical or similar assets or liabilities in non-active markets.
		c) Pricing models whose inputs are observable for substantially the full term of the asset or liability.

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		d) Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
Level 3.		Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Financial assets and liabilities recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as our knowledge and experience of the market.

Credit Losses and Impairment on Investments

Real Estate Debt Investments

Loans are considered impaired when based on current information and events, it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management is required in this analysis. We consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the collateral is located. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded with a corresponding charge to the provision for loan losses. The loan loss reserve for each loan is maintained at a level that is determined to be adequate by management to absorb probable losses.

Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.

Real Estate Securities

CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment, or OTTI, as changes in fair value are recorded in our consolidated statements of operations. Realized losses on such securities are reclassified to realized gain (loss) on investments and other as losses occur. CRE securities for which the fair value option is not elected are evaluated for OTTI quarterly.

Operating Real Estate

Our real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our operating real estate may be impaired or that its carrying value may not be recoverable. A property's value is considered impaired if management's estimate of the aggregate future undiscounted cash flows to be generated by the property is less than the carrying value of the property. In conducting this review, management considers U.S. macroeconomic factors, including real estate sector conditions, together with asset

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specific and other factors. To the extent an impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property.

Allowances for doubtful accounts for tenant receivables are established based on periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due. Additionally, we establish, on a current basis, an allowance for future tenant credit losses on billed and unbilled rents receivable based upon an evaluation of the collectability of such amounts.

Other

Refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2011 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.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board, or the FASB, issued an accounting update to amend existing guidance concerning fair value measurements and disclosures. The update is intended to achieve common fair value measurements and disclosure requirements under U.S. GAAP and International Financial Reporting Standards and is effective for the first interim or annual period beginning after December 15, 2011. We adopted this accounting update in the first quarter 2012 and the required disclosures have been incorporated into Note 4 of the consolidated financial statements. The adoption did not have a material impact on our consolidated financial statements.

In June 2011, the FASB issued an accounting update concerning the presentation of comprehensive income. The update requires either a single, continuous statement of comprehensive income be included in the statement of operations or an additional statement of comprehensive income immediately following the statement of operations. The update does not change the components of other comprehensive income that must be reported but it eliminates the option to present other comprehensive income on the statement of equity. In December 2011, the FASB issued an accounting update to defer the requirement to present the reclassification adjustments to other comprehensive income by component and are currently redeliberating this requirement. The remaining requirements of the accounting update were effective for us in the first quarter 2012 and were applied retrospectively to all periods reported after the effective date. Early adoption is permitted. There was no impact on our consolidated financial statements as we currently comply with the update.

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Results of Operations

Comparison of the Three Months Ended June 30, 2012 to June 30, 2011 (amounts in thousands):

	Three Months Ended June 30,						Increase (decrease)

	2012			2011			Amount			%
Revenues
Interest income	$	79,988		$	110,790		$	(30,802	)		(27.8	)%
Rental and escalation income		29,226			25,956			3,270			12.6	%
Commission income		8,679			1,726			6,953			402.8	%
Advisory and other fee income		2,742			212			2,530			1,193.4	%
Other revenue		1,531			1,365			166			12.2	%

Total revenues		122,166			140,049			(17,883	)		(12.8	)%
Expenses
Interest expense		34,665			34,206			459			1.3	%
Real estate properties—operating expenses		5,025			2,613			2,412			92.3	%
Asset management expenses		304			1,328			(1,024	)		(77.1	)%
Commission expense		6,748			1,299			5,449			419.5	%
Other costs, net		200			—			200			NM
Provision for loan losses		6,537			14,200			(7,663	)		(54.0	)%
General and administrative
Salaries and equity-based compensation		16,014			19,528			(3,514	)		(18.0	)%
Other general and administrative		5,570			7,361			(1,791	)		(24.3	)%

Total general and administrative		21,584			26,889			(5,305	)		(19.7	)%
Depreciation and amortization		12,677			11,526			1,151			10.0	%

Total expenses		87,740			92,061			(4,321	)		(4.7	)%

Income (loss) from operations		34,426			47,988			(13,562	)		(28.3	)%
Equity in earnings (losses) of unconsolidated ventures		(336	)		(1,555	)		1,219			(78.4	)%
Unrealized gain (loss) on investments and other		(115,648	)		(130,607	)		14,959			(11.5	)%
Realized gain on investments and other		5,195			36,839			(31,644	)		(85.9	)%

Income (loss) from continuing operations		(76,363	)		(47,335	)		(29,028	)		61.3	%
Income (loss) from discontinued operations		(43	)		(1,047	)		1,004			(95.9	)%
Gain (loss) on sale from discontinued operations		285			9,416			(9,131	)		(97.0	)%

Net income (loss)	$	(76,121	)	$	(38,966	)	$	(37,155	)		95.4	%

Revenues

Interest Income

Interest income decreased $30.8 million, primarily attributable to decreased interest income related to the CSE CDO ($30.0 million, of which $26.3 million relates to discount accretion on debt investments fully repaid, $3.0 million of discount accretion and $0.7 million of contractual interest) and $10.9 million of lower interest income on legacy investments; offset by increased interest income related to the consolidation of the CapLease CDO ($3.0 million) and new investments ($7.1 million).

Rental and Escalation Income

Rental and escalation income increased $3.3 million, primarily attributable to higher income related to new REO ($2.8 million) and a net increase in rent and occupancy ($0.5 million).

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Commission Income

Commission income represents income earned by us for selling equity in NorthStar Income through our broker-dealer subsidiary. The increase of $7.0 million is attributable to our increased capital raising velocity in 2012.

Advisory and Other Fee Income

Advisory and other fee income increased $2.5 million due to increased fees from managing NorthStar Income.

Expenses

Interest Expense

Interest expense increased $0.5 million, primarily attributable to additional interest expense related to the CapLease CDO ($2.3 million), new REO ($2.6 million) and borrowings under our CMBS Facility and Loan Facility ($0.6 million); offset by lower interest expense related to repurchases and principal paydowns of CDO bonds payable ($1.4 million), debt repurchases ($3.1 million) and corporate borrowings ($0.4 million).

Real Estate Properties—Operating Expenses

Real estate properties operating expenses increased $2.4 million, primarily attributable to increased costs related to new REO.

Asset Management Expenses

Asset management expenses decreased $1.0 million and consisted of costs related to managing our investment portfolio, such as legal and consulting fees for loan modifications and restructurings and acquisition costs related to new investments.

Commission Expense

Commission expense represents the fees paid to broker-dealers with whom we have distribution agreements to raise capital in the non-traded REIT market. The change corresponds with the increased commission income.

Other Costs, Net

Other costs, net relate to dead deal costs.

Provision for Loan Losses

Provision for loan losses decreased $7.7 million. Provision for loan losses of $6.5 million for the three months ended June 30, 2012 relate to two debt investments and included $0.2 million for a first mortgage loan and $6.3 million for a mezzanine loan. Provision for loan losses for the three months ended June 30, 2011 totaled $14.2 million for four debt investments and included $4.9 million for subordinated mortgage interests and $9.3 million for mezzanine loans.

General and Administrative

General and administrative expenses decreased by $5.3 million principally related to the following:

Compensation expense decreased $3.5 million due to decreases related to the 2009 long-term incentive plan ($5.4 million) and the allocation of costs to our advised non-traded REIT ($1.6 million);

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offset by a net increase from higher staffing levels to accommodate our new investment activities ($1.2 million), of which $1.1 million related to our broker-dealer, equity compensation for the 2010 long-term incentive plan ($0.8 million), the 2011 long-term incentive plan ($0.4 million) and the amortization of equity compensation in the form of Operating Partnership units structured as profits interests ($1.0 million).

Other general and administrative expenses decreased $1.8 million primarily due to decreased legal fees related to general corporate work and the allocation of costs to our advised non-traded REIT.

Depreciation and Amortization

Depreciation and amortization expense increased $1.2 million, primarily related to new REO ($1.8 million) offset by the return of a property to the lender ($0.7 million).

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) increased $1.2 million, primarily attributable to income from a new investment ($0.3 million) and decreased losses from our equity investment in the NJ Property ($1.0 million).

Unrealized Gain (Loss) on Investments and Other

Unrealized (loss) on investments and other is primarily related to the non-cash change in fair value adjustments, which represented a net unrealized loss of $94.6 million and $103.0 million for the three months ended June 30, 2012 and 2011, respectively. The remaining amount is related to net cash payments for interest rate swaps of $21.1 million and $27.6 million for the three months ended June 30, 2012 and 2011, respectively.

Realized Gain (Loss) on Investments and Other

Realized gains of $5.2 million for the three months ended June 30, 2012 consisted primarily of net realized gains from the sale of CRE debt and security investments ($9.4 million), gains from the sale of timeshare units ($6.2 million) and gain from the sale of a land parcel ($1.0 million); offset by net losses on repurchases of CDO bonds ($7.9 million), losses related to certain CRE securities ($0.2 million) and a foreign currency translation loss ($3.3 million). Realized gains of $36.8 million for the three months ended June 30, 2011 consisted primarily of net realized gains from the sale of CRE bonds and security investments ($57.1 million) and a foreign currency translation gain ($1.3 million); partially offset by losses on bond and note repurchases ($18.1 million), a loss on an interest rate swap termination ($2.8 million) and other realized losses ($0.7 million).

Income (Loss) from Discontinued Operations

Income (loss) from discontinued operations represents the operations of properties sold or classified as held for sale during the period. For the three months ended June 30, 2012, there was one healthcare property located in Kentucky classified as held for sale. For the three months ended June 30, 2011, properties held for sale included a multifamily property, an office property, a portfolio of 18 healthcare assisted living facilities located in Wisconsin and a leasehold interest in retail space located in New York.

Gain (Loss) on Sale from Discontinued Operations

Gain on sale from discontinued operations for the three months ended June 30, 2012 is related to the sale of an office property in Indiana. Gain on sale from discontinued operations for the three months ended June 30, 2011 is primarily related to the sale of a portfolio of 18 healthcare assisted living facilities located in Wisconsin.

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Comparison of the Six Months Ended June 30, 2012 to June 30, 2011 (amounts in thousands):

	Six Months Ended June 30,						Increase (decrease)

	2012			2011			Amount			%
Revenues
Interest income	$	160,700		$	208,430		$	(47,730	)		(22.9	)%
Rental and escalation income		57,659			58,883			(1,224	)		(2.1	)%
Commission income		16,078			2,644			13,434			508.1	%
Advisory and other fee income		3,259			295			2,964			1,004.7	%
Other revenue		1,739			1,615			124			7.7	%

Total revenues		239,435			271,867			(32,432	)		(11.9	)%
Expenses
Interest expense		69,963			67,626			2,337			3.5	%
Real estate properties—operating expenses		9,689			15,110			(5,421	)		(35.9	)%
Asset management expenses		1,801			2,889			(1,088	)		(37.7	)%
Commission expense		12,397			2,016			10,381			514.9	%
Other costs, net		392			—			392			NM
Provision for loan losses		13,377			38,700			(25,323	)		(65.4	)%
Provision for loss on equity investment		—			4,482			(4,482	)		(100.0	)%
General and administrative
Salaries and equity-based compensation		30,144			32,269			(2,125	)		(6.6	)%
Other general and administrative		12,501			14,062			(1,561	)		(11.1	)%

Total general and administrative		42,645			46,331			(3,686	)		(8.0	)%
Depreciation and amortization		24,983			19,608			5,375			27.4	%

Total expenses		175,247			196,762			(21,515	)		(10.9	)%

Income (loss) from operations		64,188			75,105			(10,917	)		(14.5	)%
Equity in earnings (losses) of unconsolidated ventures		(837	)		(3,783	)		2,946			(77.9	)%
Other income (loss)		20,258			10,138			10,120			99.8	%
Unrealized gain (loss) on investments and other		(211,054	)		(282,825	)		71,771			(25.4	)%
Realized gain on investments and other		20,547			47,573			(27,026	)		(56.8	)%

Income (loss) from continuing operations		(106,898	)		(153,792	)		46,894			(30.5	)%
Income (loss) from discontinued operations		(65	)		(638	)		573			(89.8	)%
Gain (loss) on sale from discontinued operations		285			14,447			(14,162	)		(98.0	)%

Net income (loss)	$	(106,678	)	$	(139,983	)	$	33,305			(23.8	)%

Revenues

Interest Income

Interest income decreased $47.7 million, primarily attributable to decreased interest income related to the CSE CDO ($46.1 million of which $37.0 million related to discount accretion on debt investments fully repaid, $6.3 million of discount accretion and $2.8 million of contractual interest) and lower interest income on legacy investments ($18.6 million); offset by increased interest income related to the consolidation of the CapLease CDO ($6.3 million) and new investments ($10.6 million).

Rental and Escalation Income

Rental and escalation income decreased $1.2 million, primarily attributable to the deconsolidation of Midwest Care Holdco TRS I LLC ("Midwest Holdings") ($13.0 million) and the return of a

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property to the lender ($1.0 million); offset by increases from new REO ($10.2 million) and a net increase in rent and occupancy ($2.7 million).

Commission Income

Commission income represents income earned by us for selling equity in NorthStar Income through our broker-dealer subsidiary. The increase of $13.4 million is attributable to our increased capital raising velocity in 2012.

Advisory and Other Fee Income

Advisory and other fee income increased $3.0 million due to increased fees from managing NorthStar Income.

Expenses

Interest Expense

Interest expense increased $2.3 million, primarily attributable to additional interest expense related to the CapLease CDO ($5.1 million), new borrowings under our CMBS Facility and Loan Facility ($1.0 million), borrowings associated with new REO ($4.9 million) and corporate borrowings ($1.1 million); offset by lower interest expense related to repurchases and principal paydowns of CDO bonds payable and other borrowings ($9.0 million) and the return of a property to the lender ($0.9 million).

Real Estate Properties—Operating Expenses

Real estate property operating expenses decreased $5.4 million, primarily attributable to lower costs associated with the deconsolidation of Midwest Holdings ($10.8 million) and the return of a property to the lender ($0.8 million); offset by new REO ($6.0 million).

Asset Management Expenses

Asset management expenses decreased $1.1 million and consisted of costs related to managing our investment portfolio, such as legal and consulting fees for loan modifications and restructurings, and acquisition costs related to new investments.

Commission Expense

Commission expense represents the fees paid to broker-dealers with whom we have distribution agreements to raise capital in the non-listed REIT market. The change corresponds with the increased commission income.

Other Costs, Net

Other costs, net relate to dead deal costs incurred ($2.4 million) offset by a reversal of previously recorded surety bond costs expensed related to the Washington Mutual Bank, or WaMu, litigation ($2.0 million).

Provision for Loan Losses

Provision for loan losses decreased $25.3 million. Provision for loan losses for the six months ended June 30, 2012 related to five debt investments which includes $11.6 million for mezzanine loans, $1.2 million for subordinated mortgage interests and $0.6 million for first mortgage debt investments. Provision for loan losses for the six months ended June 30, 2011 related to nine debt investments which

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includes $28.4 million for mezzanine loans, $9.9 million for subordinated mortgage interests and $0.4 million for first mortgage debt investments.

Provision for Loss on Equity Investment

Provision for loss on equity investment represents an impairment on our joint venture investment in the NJ Property. Our investment was impaired as a result of an expected recapitalization value.

General and Administrative

General and administrative expenses decreased $3.7 million primarily related to the following:

Salaries and equity-based compensation decreased $2.1 million due to decreases related to the 2009 long-term incentive plan ($7.8 million) and the allocation of costs to our advised non-traded REIT ($1.6 million); offset by a net increase in salaries to accommodate our new investment activities ($4.9 million), of which $2.1 million related to our broker-dealer, equity compensation for the 2010 long-term incentive plan ($2.0 million) and the 2011 long-term incentive plan ($0.5 million).

Other general and administrative expenses decreased $1.6 million primarily due to decreased legal fees for general corporate work and the allocation of costs to our advised non-traded REIT.

Depreciation and Amortization

Depreciation and amortization expense increased $5.4 million primarily relating to new REO ($6.4 million) offset by a decrease from the return of a property to the lender ($1.0 million).

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) increased $2.9 million, primarily attributable to income from a new investment ($0.3 million) and decreased losses arising from our equity investment in the NJ Property ($2.7 million).

Other Income (Loss)

Other income (loss) of $20.3 million for the six months ended June 30, 2012 is primarily comprised of a reversal of a loss accrual previously recorded related to the WaMu litigation. Other income (loss) of $10.1 million for the six months ended June 30, 2011 is related to a tax refund received in the CSE CDO in the first quarter 2011.

Unrealized Gain (Loss) on Investments and Other

Unrealized (loss) on investments and other is primarily related to the non-cash change in fair value adjustments, which represented a net unrealized loss of $168.4 million and $227.9 million for the six months ended June 30, 2012 and 2011, respectively. The remaining amount is the net cash payments for the interest rate swaps of $42.6 million and $55.0 million for the six months ended June 30, 2012 and 2011, respectively.

Realized Gain (Loss) on Investments and Other

Realized gains of $20.5 million for the six months ended June 30, 2012 consisted primarily of net realized gains from the sale of CRE debt and security investments ($16.3 million), gains from the sale of timeshare units ($11.2 million) and gains from the sale of two land parcels ($3.0 million); offset by losses on the repurchases of CDO bonds ($8.2 million), losses related to certain CRE securities ($0.2 million) and foreign currency translation loss ($1.6 million). Realized gains of $47.6 million for the six months ended June 30, 2011 consisted primarily of net realized gains of on the sale of certain

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real estate securities, real estate debt investments and net lease investments ($78.7 million) and a foreign currency translation gain ($5.0 million); partially offset by net realized losses on debt repurchases ($26.5 million), losses related to certain CRE securities ($6.7 million) and a loss on an interest rate swap termination ($2.8 million).

Income (Loss) from Discontinued Operations

Income (loss) from discontinued operations represents the operations of properties sold or classified as held for sale during the period. For the six months ended June 30, 2012, there was one healthcare property located in Kentucky classified as held for sale. For the six months ended June 30, 2011, the (loss) from discontinued operations principally related to the portfolio of 18 healthcare net lease assisted living facilities in Wisconsin sold in the second quarter 2011 and the leasehold interest in retail space located in New York sold in the first quarter 2011.

Gain (Loss) on Sale from Discontinued Operations

Gain on sale from discontinued operations for the six months ended June 30, 2012 is related to the sale of an office property in Indiana. Gain on sale from discontinued operations in 2011 primarily relates to the sale of a portfolio of 18 healthcare net lease assisted living facilities located in Wisconsin in June 2011 ($9.4 million) and the sale of a leasehold interest in retail space located in New York in March 2011 ($5.0 million).

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, net proceeds from asset repayments and sales, borrowings under credit facilities, financings secured by our assets such as mortgage notes and CDO bonds, long-term senior and subordinate corporate capital such as senior term loans, senior notes exchangeable into common stock, trust preferred securities and perpetual preferred and common stock.

We seek to meet our long-term liquidity requirements, including the repayment of borrowings and our investment funding needs, through existing cash resources, opportunistic issuances of debt or equity capital, including exchangeable notes, our existing CDO financing transactions and the liquidation or refinancing of assets. Nonetheless, 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 our existing credit arrangements, our financial performance, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders' and investors' resources and policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities.

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 past, we have maintained high unrestricted cash balances relative to the historical difference between our distributions and cash provided by operating activities. On a quarterly basis, our board of directors determines an appropriate common stock dividend based upon numerous factors, including AFFO, REIT qualification requirements, the amount of cash flows provided by operating activities, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our business or prospects. Future

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dividend levels are subject to adjustment based upon our evaluation of the factors described above, as well as other factors that our board of directors may, from time-to-time, deem relevant to consider when determining an appropriate common stock dividend.

We currently believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs. As of June 30, 2012, we had $196 million of unrestricted cash. Additionally, we are in the process of obtaining the return of $29 million of cash posted as collateral (including the premiums paid for the surety bond) in connection with the WaMu litigation. We expect this amount to be returned to us in the third quarter of 2012. We are also pursuing enforcement of awarded costs and plan to further seek reimbursement of our legal fees incurred in connection with the litigation.

The reinvestment period for our last CDO ended in June 2012. During the reinvestment period, we were allowed to reinvest principal proceeds from the underlying collateral into qualifying replacement collateral without having to repay the liabilities. $271 million of our debt investments have their initial maturity date during the remainder of 2012; however, many of these CRE debt investments contain extension options of at least one year. We also expect that a majority of the debt investments having final maturities for the rest of 2012 may have their maturities extended beyond 2012 with the expectation that future periods will have more attractive economic conditions and cheaper debt capital available for refinancings. It is therefore difficult to estimate the amount of proceeds we will recover from the underlying collateral and since we are past the reinvestment period, such amounts will be used to amortize the senior CDO bonds.

Our CDO financing transactions require that the underlying assets meet a collateral value coverage test, or OC test (as defined by each applicable indenture) in order for us to receive regular cash flow distributions. Rating downgrades and defaults of CMBS and other securities can reduce the deemed value of the security in measuring the OC test, depending upon the level of downgrade. Also, defaults in our CRE debt investments can reduce the OC test. Failing such tests means that cash flow that would normally be distributed to us would be used to amortize the senior CDO bonds until the tests are back in compliance. While we have devoted a significant amount of resources to managing our existing investments, a poor economic environment and additional credit rating downgrades will make maintaining compliance with the CDO financing transactions more difficult. For more details related to our CDO financing OC tests, see "CDO Financing Structures" below.

Principal proceeds received after the reinvestment period and diversion of cash flows from failing OC tests results in delevering of the CDO financing transactions and increasing the weighted average cost of borrowings.

On July 14, 2011, we repaid the $100 million preferred membership interest in NRF Healthcare, LLC to Inland American Real Estate Trust, Inc. which had a 10.5% distribution rate. Such amount was funded using $25 million of proceeds generated from the sale of a healthcare net lease portfolio and $75 million of restricted cash from one of our CDOs.

We have committed to purchase up to $10 million of shares of NorthStar Income's common stock during the period through July 19, 2013, in the event that its distributions to stockholders exceeds its modified funds from operations (as defined in accordance with the current practice guidelines issued by the Investment Program Association). In connection with this commitment, we have purchased 212,822 shares for $2 million for the six months ended June 30, 2012 resulting in 466,024 aggregate shares acquired for $4 million since inception. We have also committed to purchase up to $10 million of shares of NorthStar Healthcare's common stock on similar terms to NorthStar Income once the registration statement for NorthStar Healthcare is declared effective which is expected in the near term.

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CDO Financing Structures

The following is a summary of our CDO bonds payable owned as of August 2, 2012 (amounts in thousands):

Based on original credit rating:	Principal Amount(1)

AAA	$	213,503
AA through BBB		394,417
Below investment grade		191,790	(3)

Total(2)	$	799,710

Weighted average original credit rating of repurchased CDO bonds		A+ / A1
Weighted average purchase price of repurchased CDO bonds(3)		36	%

(1): Represents the maximum amount of principal proceeds that could be received.
(2): Unencumbered CDO bonds are owned by us, of which $650 million were repurchased at a discount to par. The majority of CDO bonds owned are eliminated with the liability of the respective CDO on our consolidated financial statements.
(3): $42 million was repurchased at a discount and is included in the weighted average purchase price.

The following is a summary of our CRE debt CDO financing transactions as of June 30, 2012 (amounts in thousands):

Issue/Acquisition Date	N-Star IV Jun-05		N-Star VI Mar-06		N-Star VIII Dec-06		CSE Jul-10			CapLease Aug-11			Total

**Balance sheet as of June 30, 2012(1)**
Assets, principal amount	$	381,796	$	470,522	$	965,940	$	1,067,565		$	170,094		$	3,055,917
CDO bonds, principal amount(2)		261,238		362,650		727,702		992,642			150,730			2,494,962

Net assets	$	120,558	$	107,872	$	238,238	$	74,923		$	19,364		$	560,955
**CDO quarterly cash distributions and coverage tests(3)**
Equity notes and retained original below investment grade bonds	$	1,412	$	322	$	5,109	$	8,423		$	679		$	15,945
Collateral management fees		296		478		1,003		541			88			2,406
Interest coverage cushion(1)		1,574		1,078		6,976		9,902			405
Overcollateralization cushion (shortfall)(1)		54,972		56,641		139,942		70,784			8,788
At offering		19,808		17,412		42,193		(151,595	)(4)		5,987	(5)

(1): Based on remittance report issued on date nearest to June 30, 2012.
(2): Includes all outstanding CDO bonds payable to third parties and all CDO bonds owned by us.
(3): Interest coverage, or IC, and OC coverage to the most constrained class.
(4): Based on trustee report as of June 24, 2010, closest to the date of acquisition.
(5): Based on trustee report as of August 31, 2011, closest to the date of acquisition.

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The following is a summary of our CRE security CDO financing transactions as of June 30, 2012 (amounts in thousands):

Issue/Acquisition Date	N-Star I Aug-03		N-Star II Jul-04		N-Star III Mar-05		N-Star V Sep-05		N-Star VII Jun-06		N-Star IX Feb-07		Total

**Balance sheet as of June 30, 2012(1)**
Assets, principal amount	$	189,181	$	197,639	$	303,816	$	444,267	$	454,050	$	1,072,576	$	2,661,529
CDO bonds, principal amount(2)		177,923		182,531		217,065		322,118		324,335		747,051		1,971,023

Net assets	$	11,258	$	15,108	$	86,751	$	122,149	$	129,715	$	325,525	$	690,506
**CDO quarterly cash distributions and coverage tests(3)**
Equity notes and retained original below investment grade bonds	$	—	$	—	$	—	$	—	$	—	$	2,033	$	2,033
Collateral management fees		66		64		117		105		120		742		1,214
Interest coverage cushion (shortfall)(1)		NEG		NEG		1,047		NEG		NEG		2,355
Overcollateralization cushion (shortfall)(1)		NEG		NEG		NEG		NEG		NEG		75,852
At offering		8,687		10,944		13,610		12,940		13,966		24,516

(1): Based on remittance report issued on date nearest to June 30, 2012.
(2): Includes all outstanding CDO bonds payable to third parties and all CDO bonds owned by us.
(3): IC and OC coverage to the most constrained class.

The reinvestment period for our last CDO just ended in June 2012. At the end of the reinvestment period, our ability to maintain the OC and IC tests may be negatively impacted since we will not be able to reinvest principal in these CDOs. If the OC and IC tests are not met with respect to any of our CDOs, periodic cash distributions would be diverted to amortize the senior bonds until the CDO is back in compliance with the tests. In such cases, this could decrease cash available to pay our dividend and affect compliance with REIT requirements.

Our CDOs are collateralized by CRE debt and securities, with a majority of our equity invested in our CRE debt CDOs. The CRE debt CDOs currently have larger OC cushions compared to the CRE securities CDOs. CRE debt investments are not subject to rating agency downgrades in calculating the OC tests, and as these investments were primarily directly originated by us, it provides for more control than a CMBS.

Currently, all of the N-Star CRE debt CDOs are in compliance with their OC and IC tests. Five of our N-Star securities CDOs (I, II, III, V and VII) are out of compliance with their respective OC tests and we expect that complying with OC and IC tests will continue to be difficult.

Capital Raise

In the first quarter 2012, we raised net proceeds of $90 million from the issuance of common equity and $35 million from the issuance of preferred stock. In the second quarter 2012, we raised net proceeds of $109 million from the issuance of common equity, $4 million from the issuance of preferred stock and $72 million from the issuance of exchangeable senior notes. Subsequent to quarter end, we raised additional net proceeds of $70 million from the issuance of preferred stock, $7 million from the issuance of exchangeable senior notes and $8 million from the issuance of common stock in a private offering. Total capital raised year to date is $395 million.

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CMBS Facility

In October 2011, we, through one of our wholly-owned subsidiaries, entered into a master repurchase and securities contract, or the CMBS Facility, with Wells Fargo. The $100 million CMBS Facility finances the acquisition of AAA-rated CMBS and has an initial term of two years with a one-year extension option at our election subject to the satisfaction of certain conditions. During the initial term, the CMBS Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments. Borrowings accrue interest at a per annum pricing rate equal to 1.65%, subject to adjustment. We paid an upfront fee of 0.5% based on the total commitment and will not incur any non-utilization fees.

In connection with the CMBS Facility, we, together with the Operating Partnership and NRFC Sub-REIT Corp., or Sub-REIT, collectively, the CMBS Guarantors, provided a guaranty agreement under which the CMBS Guarantors guarantee the obligations under the CMBS Facility. The CMBS Facility and related agreement contains representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type.

As of June 30, 2012, we held $65 million principal amount of CMBS with a weighted average current yield of 3.9% financed with $58 million at a weighted average financing cost over the expected life of 1.9%, resulting in an expected return on invested equity of approximately 20%. There is no assurance we will realize this expected return on equity over the term of these investments. Our actual return on equity could vary significantly from our expectations.

CRE Debt Facility

In November 2011, we, through one of our wholly-owned subsidiaries, NRFC WF Loan, LLC, or NRFC WF, entered into a master repurchase and securities contract, or Loan Facility, with Wells Fargo. The $100 million Loan Facility is used to finance the origination of CRE first mortgage loans and has an initial term of two years with two one-year extension options at our election subject to the satisfaction of certain conditions. During the initial term, the Loan Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments. Borrowings accrue interest at a range of one-month LIBOR plus 2.25% to 3.00% per annum with advance rates of up to 75%, depending on asset type and characteristics. For the three and six months ended June 30, 2012, we have incurred an immaterial amount of non-utilization fees related to the Loan Facility.

As of June 30, 2012, we held $117 million principal amount of CRE debt investments financed with $74 million of the Loan Facility, resulting in an expected return on invested equity of approximately 20%. There is no assurance we will realize this expected return on equity over the term of these investments. Our actual return on equity could vary significantly from our expectations.

The Loan Facility and CMBS Facility contain a liquidity covenant that requires the maintenance of an aggregate of $45 million of unrestricted cash to provide credit support for the borrowings. In addition, the Loan Facility and CMBS Facility require the maintenance of a loan-to-collateral value ratio that may require us to provide additional collateral or make cash payments. As of June 30, 2012, we were not required to post additional collateral or make cash payments to maintain such ratios. In connection with the Loan Facility, we, together with the Operating Partnership, entered into a guaranty agreement, under which we and the Operating Partnership guarantee certain of the obligations under the Loan Facility. Additionally, in connection with the Loan Facility, the Sub-REIT provided a pledge and security agreement over its interests in NRFC WF. The Loan Facility and related agreements contain representations, warranties, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types.

In addition, we have agreed to guarantee certain obligations under the Loan Facility if we or an affiliate of ours engage in certain customary bad acts.

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We are currently in compliance, in all material respects, with all covenants of our borrowing arrangements.

Cash Flows

Six Months Ended June 30, 2012 Compared to June 30, 2011

Net cash provided by operating activities was $34 million for the six months ended June 30, 2012 compared to $13 million for the six months ended June 30, 2011. The increase in net cash used was primarily due to the discount and unearned revenue related to certain investments and the payment of certain equity-based compensation in cash.

Net cash provided by investing activities was $87 million for the six months ended June 30, 2012 compared to $193 million for the six months ended June 30, 2011. The decrease in net cash provided was primarily due to lower proceeds from the sale/repayment of operating real estate and CRE debt investments offset by a net increase in proceeds from the sale/repayment/acquisition of CRE security investments.

Net cash used in financing activities was $70 million for the six months ended June 30, 2012 compared to $140 million for the six months ended June 30, 2011. The primary outflows of cash for the six months ended June 30, 2012 was $427 million for net repurchase/repayments of CDO bonds, $17 million for net swap activities and $46 million for payment of dividends (common and preferred) offset by $305 million from net new capital and $68 million of net new borrowings. The primary outflows of cash for the six months ended June 30, 2011 was $248 million for net repurchases/repayments of CDO bonds, mortgage notes and term loans, $26 million from the issuance of a surety bond related to the WaMu litigation and $28 million for payment of dividends (common and preferred) offset by $191 million from net new capital.

Off Balance Sheet Arrangements

We have the following arrangements which do not meet the definition of off-balance sheet arrangements, but do have some of the characteristics of off-balance sheet arrangements. We have made investments in various unconsolidated ventures. See "Note 8. Investment in and Advances to Unconsolidated Ventures" for a discussion of such unconsolidated ventures in our consolidated financial statements. In each case, our exposure to loss is limited to the carrying value of our investment.

Related Party Transactions

Advisory and Other Fees

We have agreements with each of our N-Star CDOs and the CSE and CapLease CDOs to perform certain advisory services. The advisory fee related to all of the CDO financing transactions is eliminated as a result of the consolidation of the respective CDO financing transaction. For the three months ended June 30, 2012, we earned $4 million in advisory fee income that was eliminated in consolidation.

We have an agreement with NorthStar Income to manage its day-to-day affairs, including identifying, originating and acquiring investments on behalf of NorthStar Income and we earn fees for our services. For the six months ended June 30, 2012 and 2011, we earned $3.3 million and $0.3 million of fees on these agreements, respectively. Additionally, we incur direct and indirect costs on behalf of NorthStar Income and NorthStar Healthcare which are reimbursed subsequently to us by these managed entities. As of June 30, 2012, we had aggregate unreimbursed costs of $7 million from NorthStar Income and NorthStar Healthcare.

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Legacy Fund

We have two CRE debt investments with a subsidiary of Legacy Partners Realty Fund I, LLC, or the Legacy Fund, as borrower. One loan of $16 million matures in March 2013 and has two one-year extension options. The interest rate is one-month LIBOR plus 7.50%, of which one-month LIBOR plus 3.00% is current pay. The other loan of $23 million has a maturity in January 2015 and has an interest rate of one-month LIBOR plus 3.50%. We earned an aggregate $1 million of interest income for the six months ended June 30, 2012 and 2011. One of our 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. In addition, we lease office space in Colorado with an affiliate of the Legacy Fund under an operating lease with annual lease payments of approximately $0.1 million through December 18, 2015. We have the option to renew the lease for an additional five years.

Hard Rock Hotel Loan

We own an $89 million principal amount of a mezzanine loan backed by the Hard Rock Hotel and Casino in Las Vegas, Nevada. Prior to a modification of the loan in March 2011, Morgans Hotel Group, or Morgans, was a minority partner in the joint venture owning the hotel. David Hamamoto, our chairman and chief executive officer, is the executive chairman of the board of Morgans. Morgans no longer has any interest in the hotel.

Recent Developments

Dividends

On August 1, 2012, we declared a dividend of $0.16 per share of common stock. The common stock dividend will be paid on August 17, 2012 to stockholders of record as of the close of business on August 13, 2012. On August 1, 2012, 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 Series A and Series B preferred dividends will be paid on August 15, 2012, to the stockholders of record as of the close of business on August 13, 2012.

Exchangeable Senior Notes

On July 6, 2012, the underwriters exercised their over-allotment option resulting in the issuance of an additional $7 million of our 8.875% exchangeable senior notes for net proceeds of $7 million.

Preferred Stock Issuance

On July 9, 2012, we sold an additional 3,220,000 shares of our 8.25% Series B preferred stock, including the over-allotment option, at a public offering price of $22.60 per share (excluding accrued dividends) resulting in $70 million in net proceeds.

New Transaction

We completed a $50 million loan investment to a diversified commercial real estate services company (the "Borrower"). This investment provides for a five year term, bears interest at a fixed rate of 14% per annum and includes certain financial covenants. In connection with this investment: (i) the Borrower granted us a four-year option, exercisable for $25 million, to purchase an equity interest in the Borrower; (ii) we and the Borrower have entered into a strategic relationship agreement regarding commercial real estate loan servicing; and (iii) we issued 1.25 million shares of our common stock in a private offering to the Borrower at a price of $6.00 per share, resulting in proceeds to us of $7.5 million.

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Credit Facility

On July 31, 2012, NRFC DOR Loan, LLC ("NRFC DOR"), a wholly-owned subsidiary of ours, entered into a Credit and Security Agreement with Doral Bank (the "Doral Facility"). The Doral Facility provides up to $40 million on a non-recourse basis, subject to certain exceptions, to finance first mortgage loans and senior loan participations secured by commercial real estate.

Interest rates and advance rates will depend upon asset type and characteristics. The initial maturity date of the Doral Facility is July 30, 2015, with three, one-year extensions at our option, which may be exercised upon the satisfaction of certain customary conditions. During the initial term, the Doral Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments.

In connection with the Doral Facility, the Operating Partnership agreed to guarantee interest payments and the obligations under the Doral Facility if either us or our affiliates engage in certain customary bad acts. In addition, the Operating Partnership pledged its interests in NRFC DOR as collateral. The Doral Facility and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, the Operating Partnership must maintain at least $3.75 million and as much as $7.5 million in unrestricted cash, or other eligible investments, at all times during the term of the Doral Facility.

Inflation

We believe that most inflationary increases in expenses will be offset by the expense reimbursements and contractual rent increases described below assuming we maintain high occupancy. The tenant leases to our net lease properties are 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 the risk associated with an increase in market interest rates on the floating-rate debt used to finance our assets in our CDO financing transactions and our direct investments in CRE 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.

Refer to Item 3. "Quantitative and Qualitative Disclosures About Market Risk" for additional details.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

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

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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 rent income and expense and fair value lease revenue;
•: the amortization or accrual of various deferred costs including intangible assets and equity-based compensation;
•: an adjustment to reverse the effects of unrealized gains (losses); and
•: an adjustment to reverse the effects of acquisition gains or losses.

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 U.S. GAAP that may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our investors with an additional useful measure to compare our financial performance to certain other REITs.

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

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Set forth below is a reconciliation of FFO and AFFO to income (loss) from continuing operations before non-controlling interest in our Operating Partnership for three and six months ended June 30, 2012 and 2011 (amounts in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,

	2012			2011			2012			2011
Funds from Operations:
Income (loss) from continuing operations	$	(76,363	)	$	(47,335	)	$	(106,898	)	$	(153,792	)
Non-controlling interests(1)		280			(8,267	)		540			(8,395	)

Net income (loss) before non-controlling interest in Operating Partnership		(76,083	)		(55,602	)		(106,358	)		(162,187	)
Adjustments:
Preferred stock dividends		(5,635	)		(5,231	)		(10,958	)		(10,463	)
Depreciation and amortization		11,238			11,526			22,158			19,608
Funds from discontinued operations		(40	)		(909	)		(61	)		154
Real estate depreciation and amortization, unconsolidated ventures		207			207			414			439

Funds from Operations		(70,313	)		(50,009	)		(94,805	)		(152,449	)

Adjusted Funds from Operations:
Funds from Operations		(70,313	)		(50,009	)		(94,805	)		(152,449	)
Straight-line rental income, net		(687	)		(1,009	)		(1,357	)		(1,232	)
Straight-line rental income/expense and fair value lease revenue, unconsolidated ventures		234			(31	)		468			(52	)
Amortization of above/below market leases		(260	)		(170	)		(518	)		(384	)
Amortization of equity-based compensation		4,829			2,613			7,158			4,647
Unrealized (gain) loss from fair value adjustments		94,479			104,176			168,342			226,464

Adjusted Funds from Operations	$	28,282		$	55,570		$	79,288		$	76,994

(1): Amount excludes non-controlling limited partner interest in our Operating Partnership.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are primarily subject to interest rate risk and credit risk. These risks are dependent on various factors beyond our control, including monetary and fiscal policies, domestic and international economic conditions and political considerations. Our market risk sensitive assets, liabilities and related derivative positions are held for investment and not for trading purposes.

Interest Rate Risk

Changes in interest rates affect our net interest income, which is the difference between the income earned on assets and the interest expense incurred in connection with our borrowings and hedges.

Our debt and security investments bear interest at either a floating or fixed rate. The interest rates on our floating-rate assets typically float at a fixed spread over an index such as LIBOR and typically reprice every 30 days based on LIBOR in effect at the time. Given the frequent and periodic repricing of our floating-rate assets, changes in benchmark interest rates are unlikely to materially affect the value of our floating-rate portfolio. Changes in short-term rates will, however, affect income from these

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investments. Many of our new loan originations have a LIBOR floor which is in excess of current LIBOR.

Our general financing strategy has focused on the use of "match-funded" structures. This means that we seek to align the maturities of our liabilities with the maturities on our assets as closely as possible in order to manage the risks of being forced to refinance our liabilities prior to the maturities of our assets. Substantially all of our investments are financed with either non-recourse CDO borrowings or non-recourse mortgage notes. In addition, we seek to match interest rates on our assets with like-kind borrowings, so fixed-rate assets are financed with fixed-rate borrowings and floating-rate assets are financed with floating-rate borrowings, directly or indirectly, through the use of interest rate swaps, caps and other financial instruments or through a combination of these strategies. As of June 30, 2012, a hypothetical 100 basis point increase in interest rates applied to our variable-rate assets would increase annual interest income by $23 million offset by an increase in interest expense of $26 million on our variable-rate liabilities. A hypothetical 100 basis point decrease in interest rates applied to our variable-rate assets would decrease annual interest income by $23 million offset by an decrease in interest expense of $22 million on our variable-rate liabilities.

Changes in interest rates could affect the value of our fixed-rate CRE debt and security investments and our net lease properties. For example, increasing interest rates would result in a higher required yield on investments, which would decrease the value on existing fixed-rate assets in order to adjust their yields to current market levels. In addition, the value of our net lease properties may be influenced by changes in interest rates and credit spreads (as discussed below) because value is typically derived by discounting expected future cash flows generated by the property using interest rates (such as the 10-year U.S. Treasury Note yield) plus a risk premium based on the property type and creditworthiness of the tenants. Lower risk-free rates generally result in lower discount rates and, therefore, higher valuations, and vice versa, although the scarcity of financing for net lease properties and investor concerns over commercial real estate generally have recently decreased commercial real estate valuations, including valuations for net lease properties.

Changes in interest rates and credit spreads may also impact our net book value as almost all of our investments in CRE securities are marked-to-market each quarter with changes in fair value reflected in unrealized gains (losses). Generally, as interest rates increase, the value of fixed-rate securities within our CDO financing transaction, such as CMBS, decreases and as interest rates decrease, the value of these securities will increase. Conversely, we mark almost all of our CDO bonds payable and all related interest rate swaps to market which may cause a partial offset to the income and balance sheet impact of marking the CRE securities to market. Additionally, changes in unrealized gains (losses) do not directly affect our operating cash flows or our ability to pay a dividend to stockholders. Changes in fair value of our CRE securities portfolio could impact our ability to realize gains on such securities.

We use derivative instruments primarily to manage interest rate 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 our investments 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. As of June 30, 2012, our counterparties do not hold any cash margin as collateral against our swap contracts. As of June 30, 2012, all of our derivatives do not qualify for hedge accounting treatment, therefore, gains (losses) resulting from their fair value measurement at the end of each reporting period are recognized as an increase or decrease in unrealized gain (loss) on investments and other in our consolidated statements of operations. In addition, we are, and may in the future be, subject to additional expense based on the notional amount of the derivative and a specified spread over the applicable LIBOR. Because the fair value of these instruments can vary significantly between periods, we may experience significant fluctuations in the amount of our unrealized gain (loss) in any given period. During the six months ended June 30, 2012, we recognized $20 million of unrealized gains from derivatives from fair value adjustments.

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Credit Spread Risk

The value of our fixed and floating-rate investments also change with market credit spreads. This means that when market-demanded risk premiums, or credit spreads, increase, the value of our fixed- and floating-rate assets decrease and vice versa. The fixed-rate securities, debt investments and net lease properties are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasury of like maturity. This means that their value is dependent on the yield demanded on such assets by the market, based on their credit relative to U.S. Treasuries. The floating-rate CRE debt and security investments are valued based on a market credit spread over the applicable LIBOR. Excessive supply of these investments combined with reduced demand will generally cause the market to require a higher yield on these investments, resulting in the use of a higher or "wider" spread over the benchmark rate (usually the applicable U.S. Treasury yield) to value these assets. Under these conditions, the value of our portfolio should decrease. Conversely, if the spread used to value these assets were to decrease or "tighten," the value of these assets should increase.

Market credit spreads are currently much wider than existed at the time we originated or acquired a majority of our investments. These market spreads imply that investment for which we did not elect fair value option, primarily our CRE debt and net lease investments, may be worth less than the amounts at which we carry these investments on our consolidated balance sheet. However, we typically financed these investments with borrowings priced in similar credit environment and intend to hold them to maturity, and, therefore, we do not believe that intra- and inter-period changes in value caused by changing credit spreads materially impacts the economics associated with our investment.

Credit Risk

Credit risk in our CRE debt and security investments relates to each individual borrower's ability to make required interest and principal payments on scheduled due dates. We seek to manage credit risk through a comprehensive credit analysis prior to making an investment, actively monitoring our asset portfolio and the underlying credit quality of our holdings and subordination and diversification of our portfolio. Our analysis is based on a broad range of real estate, financial, economic and borrower-related factors which we believe are critical to the evaluation of credit risk inherent in a transaction.

CMBS investments financed with our CMBS Facility are AAA-rated while most of our other CMBS investments 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 we invest in reflects comparable credit risk. The underlying CRE securities to our CDO note investments are diversified by asset type, industry, location and issuer. We further seek to minimize credit risk by monitoring the CDO note investments and the underlying credit quality of their holdings. Our debt investments are collateral dependent, meaning the principal source of repayment is from a sale or refinancing of the collateral securing our debt. In the event that a borrower cannot repay our debt, we may exercise our remedies under the debt agreements, which may include taking title to the collateral. We describe many of the options available to us in this situation in the "Risk Management" section of this Quarterly Report on Form 10-Q. To the extent the value of our collateral exceeds the amount of our debt (including all debt senior to us) and the expense we incur in collecting the debt, we would collect 100% of our debt amount. To the extent the amount of our debt investments plus all senior debt to our position exceeds the realizable value to our collateral, then we would incur a loss.

We are subject to the credit risk of the corporate lessee of our net lease properties including the operators of healthcare properties. We undertake a rigorous credit evaluation of each tenant and healthcare operator prior to acquiring net lease properties. This analysis includes an extensive due diligence investigation of the tenant/operator's business as well as an assessment of the strategic importance of the underlying real estate to the tenant/operator's core business operations. Where

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appropriate, we may seek to augment the tenant/operator's commitment to the facility by structuring various credit enhancement mechanisms into the underlying leases. These mechanisms could include security deposit requirements or guaranties from entities we deem creditworthy. In addition, we actively monitor lease coverage at each facility within our healthcare portfolio. However, a portion of our portfolio derives revenues from government sources, notably Medicaid or Medicare. Recently announced and potential future changes to these programs may have a material impact on the valuation and financial performance of this portion of our portfolio.

Item 4. Controls and Procedures

Disclosure 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 of 1934, as amended (the "Exchange Act"), under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness 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 the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

WaMu Matter

One of our net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth, California and was 100% leased to Washington Mutual Bank, or WaMu. The tenant vacated the buildings as of March 23, 2009 and the leases, or WaMu Lease, were disaffirmed by the Federal Deposit Insurance Corporation, or FDIC. In the third quarter 2009, the lender, GECCMC 2005-CI Plummer Office Limited Partnership, or GECCMC, foreclosed on the property. On August 10, 2009, GECCMC filed a complaint against NRFC NNN Holdings, LLC, or NNN Holdings, and NRFC Sub Investor IV, LLC, or NRFC Sub Investor IV, both wholly-owned subsidiaries of ours, in the Superior Court of the State of California, County of Los Angeles. In the complaint, GECCMC alleged, among other things, that the financing provided by GECCMC to NRFC Sub Investor IV, was a recourse obligation of NNN Holdings due to the FDIC's disaffirmance of the WaMu Leases. The judge presiding over the lawsuit entered a judgment against NNN Holdings in the amount of approximately $46 million plus costs, attorneys' fees, prejudgment interests and accrued interest, estimated to be approximately $6 million.

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enter summary judgment in the Company's favor and reverses the award against the Company. Furthermore, the Court of Appeal awarded us costs on appeal.

On April 13, 2012, GECCMC petitioned the Court of Appeal to rehear its decision but that petition was denied. On May 8, 2012, GECCMC petitioned the California Supreme Court to review the decision and that petition was denied on July 11, 2012. We are in the process of obtaining the return of $29 million of cash posted as collateral (including the premiums paid for the surety bond) in connection with a general agreement of indemnity that the Company was required to maintain with an issuer of surety bonds. We are also pursuing enforcement of awarded costs and plan to further seek reimbursement of our legal fees incurred in connection with the litigation.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On August 3, 2012, we issued 1.25 million shares of our common stock to a diversified commercial real estate services company in a private offering exempt from registration in reliance on Section 4(2) of the Securities Act and Regulation D thereunder. The common stock was sold at a price of $6.00 per share, resulting in proceeds to us of $7.5 million. We intend to use the proceeds to make investments related to our business, repurchase or pay our liabilities and for general corporate purposes.

Item 6. 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.'s Registration Statement on Form S-11 (File No. 333-114675))

	3.2		Amended and Restated Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011)

	3.3		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)

	3.4		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)

	3.5		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)

	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 3.1 to NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed on March 19, 2012)

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Exhibit Number			Description of Exhibit

	3.7		Articles Supplementary Classifying and Designating Additional Shares of NorthStar Realty Finance Corp.'s 8.75% Series A Preferred Stock, liquidation preference $25.00 per share and 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.1 to NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed on June 13, 2012)

	3.8		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 3.1 to NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed on July 13, 2012)

	4.1		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.'s Registration Statement on Form S-3 (File No. 333-146679))

	4.2		Indenture dated as of June 18, 2007, among NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp., as Guarantor, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed on June 22, 2007)

	4.3		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.'s Registration Statement on Form S-3 (File No. 333-152545))

	4.4		Indenture dated as of May 28, 2008, among NRFC NNN Holdings, LLC, as Issuer, NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, and NRFC Sub-REIT Corp., as Guarantors, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed on May 28, 2008)

	4.5		Registration Rights Agreement relating to the 7.50% Exchangeable Senior Notes due 2031 of NorthStar Realty Finance Limited Partnership dated as of March 9, 2011, (incorporated by reference to Exhibit 4.4 to the NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed March 9, 2011)

	4.6		Indenture dated as of March 9, 2011, among NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp. and NRFC Sub-REIT Corp., as Guarantors, and Wilmington Trust FSB, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed March 9, 2011)

	4.7		Registration Rights Agreement relating to the 8.875% Exchangeable Senior Notes due 2032 of NorthStar Realty Finance Limited Partnership, dated as of June 12, 2012 (incorporated by reference to Exhibit 4.4 to the NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed June 12, 2012)

	4.8		Indenture dated as of June 12, 2012, among NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp. and NRFC Sub-REIT Corp., as Guarantors, and Wilmington Trust, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed June 12, 2012)

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		Description of Exhibit

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.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)

10.2		NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.13 to the NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)

10.3		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)

10.4		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.'s Current Report on Form 8-K filed September 14, 2006)

10.5		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.'s Current Report on Form 8-K filed February 9, 2007)

10.6		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.'s Current Report on Form 8-K filed May 29, 2007)

10.7	+	Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between NorthStar Realty Finance Corp. and David T. Hamamoto (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed October 5, 2007)

10.8	+	Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between NorthStar Realty Finance Corp. and Daniel R. Gilbert (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed October 5, 2007)

10.9	+	Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between NorthStar Realty Finance Corp. and Albert Tylis (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed July 27, 2009)

10.10		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)

10.11	+	NorthStar Realty Finance Corp. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.31 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)

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		Description of Exhibit

10.12		Common Stock Purchase Warrant, Certificate No. W-1, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.36 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)

10.13		Common Stock Purchase Warrant, Certificate No. W-2, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)

10.14		Common Stock Purchase Warrant, Certificate No. W-3, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.38 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)

10.15		Common Stock Purchase Warrant, Certificate No. W-4, dated June 30, 2010, issued to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.30 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010)

10.16	+	Amendment to the NorthStar Realty Finance Corp. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.26 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011)

10.17	+	Form of Amended and Restated Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.25 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011)

10.18	+	Executive Employment Agreement, dated as of April 29, 2011, between NorthStar Realty Finance Corp. and Debra A. Hess (incorporated by reference to Exhibit 10.26 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011)

10.19		Master Repurchase and Securities Contract, dated as of October 28, 2011, by and between NRFC WF CMBS, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.22 to the NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2011)

10.20		Guaranty Agreement, made as of October 28, 2011, by NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRFC Sub-REIT Corp. in favor of Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.23 to the NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2011)

10.21		Master Repurchase and Securities Contract, dated as of November 22, 2011, by and between NRFC WF Loan, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.24 to the NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2011)

10.22		Limited Guaranty, made as of November 22, 2011, by NorthStar Realty Finance Corp. and NorthStar Realty Finance Limited Partnership for the benefit of Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.25 to the NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2011)

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		Description of Exhibit

10.23	+	Sixth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, Dated as of March 21, 2012 (incorporated by reference to Exhibit 10.26 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012)

10.24		Amended and Restated 2004 Omnibus Stock Incentive Plan of NorthStar Realty Finance Corp. (incorporated by reference to Appendix A to NorthStar Realty Finance Corp.'s Definitive Proxy Statement on Schedule 14A filed April 20, 2012)

10.25		Seventh Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of June 12, 2012 (incorporated by reference to Exhibit 99.1 to NorthStar Realty Finance Corp.'s Current Report on Form 8-K filed June 13, 2012)

10.26	+*	Executive Employment Agreement, dated as of April 18, 2012, between NorthStar Realty Finance Corp. and Ronald J. Lieberman

10.27	*	Omnibus Amendment to Repurchase Documents by and between NRFC WF Loan, LLC, as Seller, and Wells Fargo, National Association, as Buyer, Custodian, Servicer, Guarantor and Pledgor, dated as of April 13, 2012

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

101	**	The following materials from the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011; (ii) Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2012 and 2011; (iv) Consolidated Statements of Equity (unaudited) as of June 30, 2012 and December 31, 2011; (v) Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements (unaudited)

*: Filed herewith
**: Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
+: Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.

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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: August 7, 2012	By:	/s/ DAVID T. HAMAMOTO David T. Hamamoto Chief Executive Officer
	By:	/s/ DEBRA A. HESS Debra A. Hess Chief Financial Officer

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Northstar Realty Finance (NRF) Inactive 10-Q2012 Q2 Quarterly report

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