November 20, 2012
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Mail Stop 4561
Washington, D.C. 20549
Attn: Kevin Woody, Branch Chief, Division of Corporation Finance
Re: | NorthStar Realty Finance Corp. |
| Form 10-K for Fiscal Year Ended December 31, 2011 |
Dear Mr. Woody:
Set forth below are the responses of NorthStar Realty Finance Corp. (together with its subsidiaries, the “Company”) to the comments of the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”), received by letter dated November 16, 2012 (the “Letter”), with respect to the Company’s Form 10-K for fiscal year ended December 31, 2011 (the “Form 10-K”) filed on February 17, 2012.
For convenience of reference, each Staff comment contained in the Letter is reprinted below in italics, numbered to correspond with the paragraph numbers assigned in the Letter and is followed by the corresponding response of the Company. Capitalized terms used herein and not defined herein have the meaning set forth in the Company’s Exchange Act periodic filings.
Form 10-K for fiscal year ended December 31, 2011
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 73
Comment No. 1 - General
We note your response to prior comment 1 from our letter dated September 26, 2012 and proposed disclosure. Please address the following:
a. Please tell us whether you will provide year-to-date information for your disclosure of average balances and net interest income, and your basis therein;
b. Please clarify your basis for using amortized cost for interest-earning assets, but incorporate the impacts of amortization premiums and discounts in determining interest income/expense;
c. We note your discussion in your form 10-Q for the period ended September 30, 2012 for table note 5. Regarding such net presentation of CDO financing transactions, please tell us the gross impact to interest-earning assets and interest-bearing liabilities and tell us why you believe net presentation is more beneficial to an investor.
Response to Comment No. 1
(a) The Company notes the Staff’s comment and advises the Staff that it began providing such year-to-date information in its Form 10-Q for the quarter ended September 30, 2012.
(b) The Company used principal amount for N-Star CDOs, credit facilities and secured term loan as opposed to amortized cost for CRE debt and security investments. The Company notes the Staff’s comment and advises the Staff that the primary reason for such treatment is that these liabilities are generally issued at par and therefore there is typically no discount or premium. In addition, with respect to the N-Star CDOs, the Company elected the fair value option under ASC 825, and as such, the CDO bonds are presented at fair value with the change in fair value reported in unrealized gain (loss) on the statement of operations. Since the fair value changes quarter-over-quarter, a financing cost based on fair value is not meaningful. As a result, the Company believes financing cost based on principal amount for these liabilities is more representative of the Company’s financing cost.
(c) The Company notes the Staff’s comment and advises the Staff that the table is not a net presentation of its CDO financing transactions but rather it is the net cash payments of interest rate swaps in the CDO financing transactions. In response to the Staff’s comment, the Company will, in future Exchange Act periodic filings commencing with Form 10-K for fiscal year ended December 31, 2012, modify its disclosure. For illustration purposes, the following presents such modification as applied to the disclosure in the Company’s Form 10-Q for the quarter ended September 30, 2012:
We use interest rate swaps in our CDO financing transactions to manage interest rate risk. Weighted average financing costs reflects includes $18.6 million and $24.1 million of net cash payments on interest rate swaps in our CDO financing transactions reported in unrealized gain (loss) on the statement of operations for the three months ended September 30, 2012 and 2011, respectively.
Item 8. Financial Statements and Supplementary Data, page 103
Comment No. 2 — Consolidated Balance Sheets, page 106
We note your response to prior comment 3 and disagree with your position. Please recast your consolidated balance sheets to comply with Rule 5-02 of Regulation S-X in future filings. In addition, please provide us the draft disclosure within your response.
Response to Comment No. 2
The Company notes the Staff’s comment and advises the Staff that it will, in future Exchange Act periodic filings commencing with the Form 10-K for fiscal year ended December 31, 2012, modify its balance sheets in the form presented in Appendix A as applied to the disclosure in the Company’s Form 10-Q for the quarter ended September 30, 2012.
* * *
As requested in your letter, the Company hereby acknowledges that the Company is responsible for the adequacy and accuracy of the disclosure in the filing. Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filing and the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the Federal securities laws of the United States.
If you should have any questions concerning these responses, please contact the undersigned at (212) 547-2605 or Matt Brandwein, Chief Accounting Officer at (212) 547-2675.
| Sincerely, |
|
|
| /s/ Debra A. Hess |
| Debra A. Hess |
| Chief Financial Officer |
cc: | Mark Rakip, Securities and Exchange Commission |
| Albert Tylis, NorthStar Realty Finance Corp. |
| Ronald Lieberman, NorthStar Realty Finance Corp. |
| Robert W. Downes, Sullivan & Cromwell LLP |
| Michael C. Bernstein, Grant Thornton LLP |
Appendix A — Consolidated Balance Sheets
NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
|
| September 30, 2012 |
| December 31, |
| ||
|
| (Unaudited) |
| 2011 |
| ||
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 252,427 |
| $ | 144,508 |
|
Restricted cash |
| 268,727 |
| 298,364 |
| ||
Operating real estate, net |
| 1,108,293 |
| 1,089,449 |
| ||
Real estate securities, available for sale |
| 1,253,940 |
| 1,473,305 |
| ||
Real estate debt investments, net |
| 1,830,048 |
| 1,710,582 |
| ||
Investments in and advances to unconsolidated ventures |
| 114,070 |
| 96,143 |
| ||
Receivables, net of allowance of $1,158 in 2012 and $1,179 in 2011 |
| 34,383 |
| 31,488 |
| ||
Receivables, related parties |
| 8,561 |
| 5,979 |
| ||
Unbilled rent receivable |
| 15,129 |
| 11,891 |
| ||
Derivative assets, at fair value |
| 9,425 |
| 5,735 |
| ||
Deferred costs and intangible assets, net |
| 88,215 |
| 98,384 |
| ||
Assets of properties held for sale |
| 1,595 |
| 3,198 |
| ||
Other assets |
| 26,947 |
| 37,411 |
| ||
Total assets(1) |
| $ | 5,011,760 |
| $ | 5,006,437 |
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
CDO bonds payable (see Note 9) |
| 2,104,782 |
| 2,273,907 |
| ||
Mortgage notes payable |
| 781,107 |
| 783,257 |
| ||
Credit facilities |
| 150,146 |
| 64,259 |
| ||
Exchangeable senior notes |
| 290,256 |
| 215,853 |
| ||
Junior subordinated notes, at fair value |
| 182,100 |
| 157,168 |
| ||
Secured term loan |
| 14,682 |
| 14,682 |
| ||
Accounts payable and accrued expenses |
| 61,498 |
| 66,622 |
| ||
Escrow deposits payable |
| 90,890 |
| 52,856 |
| ||
Derivative liabilities, at fair value |
| 188,412 |
| 234,674 |
| ||
Other liabilities |
| 79,233 |
| 103,545 |
| ||
Total liabilities(2) |
| 3,943,106 |
| 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, $61,675 and $60,000 liquidation preference as of September 30, 2012 and December 31, 2011, respectively |
| 59,453 |
| 57,867 |
| ||
Preferred stock, 8.25% Series B, $0.01 par value, $349,975 and $190,000 liquidation preference as of September 30, 2012 and December 31, 2011, respectively |
| 323,769 |
| 183,505 |
| ||
Common stock, $0.01 par value, 500,000,000 shares authorized, 134,837,497 and 96,044,383 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively |
| 1,348 |
| 960 |
| ||
Additional paid-in capital |
| 1,018,610 |
| 809,826 |
| ||
Retained earnings (accumulated deficit) |
| (326,183 | ) | (8,626 | ) | ||
Accumulated other comprehensive income (loss) |
| (24,563 | ) | (36,160 | ) | ||
Total NorthStar Realty Finance Corp. stockholders’ equity |
| 1,052,434 |
| 1,007,372 |
| ||
Non-controlling interests |
| 16,220 |
| 32,242 |
| ||
Total equity |
| 1,068,654 |
| 1,039,614 |
| ||
Total liabilities and equity |
| $ | 5,011,760 |
| $ | 5,006,437 |
|
(1) Assets of consolidated VIEs included in the total assets above: |
|
|
|
|
| ||
Restricted cash |
| $ | 243,731 |
| $ | 261,295 |
|
Operating real estate, net |
| 340,164 |
| 313,227 |
| ||
Real estate securities, available for sale |
| 1,125,875 |
| 1,358,282 |
| ||
Real estate debt investments, net |
| 1,513,131 |
| 1,631,856 |
| ||
Investments in and advances to unconsolidated ventures |
| 62,831 |
| 62,938 |
| ||
Receivables, net of allowance of $1,158 in 2012 and $1,179 in 2011 |
| 18,575 |
| 22,530 |
| ||
Derivative assets, at fair value |
| — |
| 61 |
| ||
Deferred costs and intangible assets, net |
| 40,120 |
| 47,499 |
| ||
Assets of properties held for sale |
| 1,595 |
| 3,198 |
| ||
Other assets |
| 14,063 |
| 20,549 |
| ||
Total assets of consolidated VIEs |
| $ | 3,360,085 |
| $ | 3,721,435 |
|
|
|
|
|
|
| ||
(2) Liabilities of consolidated VIEs included in the total liabilities above: |
|
|
|
|
| ||
CDO bonds payable (see Note 9) |
| $ | 2,104,782 |
| $ | 2,273,907 |
|
Mortgage notes payable |
| 228,446 |
| 228,525 |
| ||
Secured term loan |
| 14,682 |
| 14,682 |
| ||
Accounts payable and accrued expenses |
| 15,123 |
| 15,754 |
| ||
Escrow deposits payable |
| 75,917 |
| 52,660 |
| ||
Derivative liabilities, at fair value |
| 188,412 |
| 226,481 |
| ||
Other liabilities |
| 25,540 |
| 55,007 |
| ||
Total liabilities of consolidated VIEs |
| $ | 2,652,902 |
| $ | 2,867,016 |
|