Northstar Realty Finance 10Q 2013 Q3 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 September 30, 2013

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 x 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 x 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 x	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 x

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, 239,745,742 shares outstanding as of November 4, 2013.

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NORTHSTAR REALTY FINANCE CORP.

FORM 10-Q

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Index		Page
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	5
	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2013 and 2012	7
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2013 and 2012	8
	Consolidated Statements of Equity as of September 30, 2013 (unaudited) and December 31, 2012	9
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2013 and 2012	10
	Notes to Consolidated Financial Statements (unaudited)	12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	57
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	90
Item 4.	Controls and Procedures	91
Part II.	Other Information	92
Item 1.	Legal Proceedings	93
Item 6.	Exhibits	93
Signatures		98

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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 and investment activities, our ability to grow our asset management business, our ability to manage our collateralized debt obligations, or CDOs, and our ability to raise and effectively deploy 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 industry;


•	access to debt and equity capital and our liquidity;


•	our use of leverage;


•	our ability to obtain mortgage financing on our real estate portfolio;


•	the effect of economic conditions on the valuation of our investments;


•	our ability to source and close on attractive investment opportunities;


•	our ability to grow our asset management business by raising capital for, and effectively implementing the business plans of, the companies we sponsor and advise, in particular our sponsored companies;


•	the impact of adverse conditions effecting a specific asset class in which we have significant investments, such as manufactured housing and limited partnership interests in real estate private equity funds;


•	performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments and available for distribution;


•	the impact of economic conditions on the borrowers of the commercial real estate debt we originate and acquire and the commercial mortgage loans underlying the commercial mortgage backed securities in which we invest, as well as on the tenants/operators of the real property that we own;


•	our ability to realize the value of the bonds and equity we purchased and/or retained in our CDO financing transactions and other securitization financing transactions and our ability to complete securitization financing transactions on terms that are acceptable to us, if at all;


•	our ability to meet various coverage tests with respect to our CDO financing transactions;


•	our ability to realize current and expected return over the life of our investments;


•	any failure in our due diligence to identify all relevant facts in our underwriting process or otherwise;


•	credit rating downgrades;


•	tenant/operator or borrower defaults or bankruptcy;


•	illiquidity of properties in our portfolio;


•	our ability to manage our costs in line with our expectations and the impact on our cash available for distribution;


•	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;

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•	our ability to close the applicable interests in real estate private equity funds described in this Quarterly Report on Form 10-Q, on the terms described, if at all;


•	the possibility that the net asset value of interests in certain real estate private equity funds we acquired or propose to acquire do not necessarily reflect the fair value of such interest or that the actual amount of future capital commitments underlying all of those fund interests that will be called and funded by us could vary materially from our expectations;


•	regulatory requirements with respect to our business and the related cost of compliance;


•	the impact of any conflicts arising from our asset management business;


•	changes in laws or regulations governing various aspects of our business;


•	the loss of our exemption from the definition of an "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 portfolio management systems;


•	failure to maintain effective internal controls; and


•	compliance with the rules governing real estate investment trusts.

The foregoing list of factors is not exhaustive. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on 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 our filings with the United States Securities and Exchange Commission, or SEC, including Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 under the heading "Risk Factors." The risk factors set forth in our filings with the SEC 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

(Dollars in Thousands)



	September 30, 2013			December 31, 2012
	(Unaudited)
Assets
Cash and cash equivalents	$	329,403		$	444,927
Restricted cash	217,401			360,075
Operating real estate, net	2,145,223			1,401,658
Real estate debt investments, net	1,177,517			1,832,231
Investments in private equity funds, at fair value (refer to Note 6)	624,652			—
Investments in and advances to unconsolidated ventures	55,550			111,025
Real estate securities, available for sale	1,010,336			1,124,668
Receivables, net of allowance of $1,006 as of September 30, 2013 and $1,526 as of December 31, 2012	26,846			28,413
Receivables, related parties	19,633			23,706
Unbilled rent receivable, net of allowance of $314 as of September 30, 2013	14,576			16,129
Derivative assets, at fair value	6,393			6,229
Deferred costs and intangible assets, net	90,484			97,700
Assets of properties held for sale	1,595			1,595
Other assets	108,969			65,422
Total assets⁽¹⁾	$	5,828,578		$	5,513,778
Liabilities
Mortgage and other notes payable	$	1,785,711		$	1,015,670
CDO bonds payable	866,161			2,112,441
Securitization bonds payable	97,919			98,005
Credit facilities	23,594			61,088
Secured term loan	—			14,664
Exchangeable senior notes	555,432			291,031
Junior subordinated notes, at fair value	192,279			197,173
Accounts payable and accrued expenses	79,007			45,895
Escrow deposits payable	111,394			90,032
Derivative liabilities, at fair value	68,892			170,840
Other liabilities	34,798			86,075
Total liabilities⁽²⁾	3,815,187			4,182,914
Commitments and contingencies
Equity
NorthStar Realty Finance Corp. Stockholders' Equity
Preferred stock, $736,640 and $536,640 aggregate liquidation preference as of September 30, 2013 and December 31, 2012, respectively	697,352			504,018
Common stock, $0.01 par value, 500,000,000 shares authorized, 239,745,742 and 163,607,259 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	2,397			1,636
Additional paid-in capital	1,906,658			1,195,131
Retained earnings (accumulated deficit)	(625,168		)	(376,685		)
Accumulated other comprehensive income (loss)	(1,439		)	(22,179		)
Total NorthStar Realty Finance Corp. stockholders' equity	1,979,800			1,301,921
Non-controlling interests	33,591			28,943
Total equity	2,013,391			1,330,864
Total liabilities and equity	$	5,828,578		$	5,513,778

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

(Dollars in Thousands)



		September 30, 2013		December 31, 2012
		(Unaudited)		December 31, 2012
⁽¹⁾	Assets of consolidated VIEs included in the total assets above:
	Restricted cash	$	63,375	$	320,815
	Operating real estate, net	6,677		342,461
	Real estate debt investments, net	435,173		1,478,503
	Investments in and advances to unconsolidated ventures	—		59,939
	Real estate securities, available for sale	680,288		1,015,972
	Receivables, net of allowance	8,526		16,609
	Unbilled rent receivable	—		2,125
	Deferred costs and intangible assets, net	—		37,753
	Assets of properties held for sale	1,595		1,595
	Other assets	1,157		12,689
	Total assets of consolidated VIEs	$	1,196,791	$	3,288,461
⁽²⁾	Liabilities of consolidated VIEs included in the total liabilities above:
	Mortgage and other notes payable	$	—	$	228,446
	CDO bonds payable	866,161		2,112,441
	Secured term loan	—		14,664
	Accounts payable and accrued expenses	4,525		13,626
	Escrow deposits payable	15,269		67,406
	Derivative liabilities, at fair value	68,892		170,840
	Other liabilities	3,477		25,144
	Total liabilities of consolidated VIEs	$	958,324	$	2,632,567

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share and Dividends Declared Data)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net interest income
Interest income	$	75,141		$	82,558		$	218,624		$	243,367
Interest expense on debt and securities	10,132			12,304			33,117			38,569
Net interest income on debt and securities	65,009			70,254			185,507			204,798
Other revenues
Rental and escalation income	72,909			29,095			177,018			85,076
Commission income, related party	1,639			12,213			51,214			28,291
Advisory and other fees, related party	6,816			1,507			17,111			4,766
Other revenue	1,778			366			3,452			1,996
Total other revenues	83,142			43,181			248,795			120,129
Expenses
Other interest expense	41,747			23,618			102,811			67,316
Real estate properties—operating expenses	23,926			4,814			50,616			13,184
Commission expense (refer to Note 9)	1,629			11,070			46,504			25,538
Other expenses	1,207			1,120			4,020			4,191
Transaction costs	298			—			10,801			2,433
Provision for (reversal of) loan losses, net	(11,122		)	6,360			(8,786		)	19,737
General and administrative
Salaries and equity-based compensation⁽¹⁾	17,130			13,691			52,589			41,764
Other general and administrative	5,094			5,801			16,774			14,991
Total general and administrative	22,224			19,492			69,363			56,755
Depreciation and amortization	33,905			11,635			70,828			36,419
Total expenses	113,814			78,109			346,157			225,573
Income (loss) from operations	34,337			35,326			88,145			99,354
Equity in earnings (losses) of unconsolidated ventures	31,013			421			54,445			(416		)
Other income (loss)	—			—			—			20,258
Unrealized gain (loss) on investments and other	16,565			(202,019		)	(28,513		)	(413,073		)
Realized gain (loss) on investments and other	30,567			15,221			47,611			35,768
Gain (loss) from deconsolidation of N-Star CDOs (refer to Note 3)	(254,206		)	—			(254,206		)	—
Income (loss) from continuing operations	(141,724		)	(151,051		)	(92,518		)	(258,109		)
Income (loss) from discontinued operations	(25		)	411			(81		)	506
Gain on sale from discontinued operations	—			29			—			314
Net income (loss)	(141,749		)	(150,611		)	(92,599		)	(257,289		)
Less: net (income) loss attributable to non-controlling interests	6,313			7,704			5,493			13,911
Preferred stock dividends	(15,591		)	(6,671		)	(39,925		)	(17,629		)
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(151,027	)	$	(149,578	)	$	(127,031	)	$	(261,007	)
Earnings (loss) per share:
Basic	$	(0.68	)	$	(1.11	)	$	(0.63	)	$	(2.16	)
Diluted	$	(0.68	)	$	(1.11	)	$	(0.63	)	$	(2.16	)
Weighted average number of shares:
Basic	222,206,091			134,272,289			199,409,945			120,491,186
Diluted	231,469,244			140,609,372			208,550,350			126,445,659
Dividends per share of common stock	$	0.21		$	0.17		$	0.60		$	0.48

___________________________________________


⁽¹⁾	^{The three months ended}^{September 30, 2013}^{and 2012 include}^{$3.4 million}^and^{$2.9 million}^{, respectively, of equity-based compensation expense. The}^nine^{months ended}^{September 30, 2013}^{and 2012 include}^{$13.6 million}^and^{$10.0 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)

(Dollars in Thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net income (loss)	$	(141,749	)	$	(150,611	)	$	(92,599	)	$	(257,289	)
Other comprehensive income (loss):
Unrealized gain (loss) on real estate securities, available for sale	(1,095		)	(101		)	2,674			6,589
Reclassification of unrealized (gain) loss on real estate securities, available for sale into realized gain (loss) on investments and other	(926		)	—			(926		)	—
Reclassification of swap (gain) loss into interest expense on debt and securities (refer to Note 14)	1,172			1,845			4,656			5,591
Reclassification of swap (gain) loss into gain (loss) from deconsolidation of N-Star CDOs (refer to Note 3)	15,246			—			15,246			—
Total other comprehensive income (loss)	14,397			1,744			21,650			12,180
Comprehensive income (loss)	(127,352		)	(148,867		)	(70,949		)	(245,109		)
Less: Comprehensive (income) loss attributable to non-controlling interests	5,737			7,625			4,583			13,328
Comprehensive income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(121,615	)	$	(141,242	)	$	(66,366	)	$	(231,781	)

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars and Shares in Thousands)



	Preferred Stock			Common Stock						Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total NorthStar Stockholders' Equity
	Preferred Stock			Common Stock			Additional Paid-in Capital												Non-controlling Interests			Total Equity
	Shares	Amount		Shares	Amount		Additional Paid-in Capital												Non-controlling Interests			Total Equity
Balance as of December 31, 2011	10,000	$	241,372	96,045	$	960	$	809,826		$	(8,626	)	$	(36,160	)	$	1,007,372		$	32,242		$	1,039,614
Net proceeds from offering of common stock	—	—		67,250	673		382,136			—			—			382,809			—			382,809
Net proceeds from offering of preferred stock	11,466	262,646		—	—		—			—			—			262,646			—			262,646
Redemptions of non-controlling interests	—	—		—	—		(2,358		)	—			—			(2,358		)	2,358			—
Non-controlling interests—contributions	—	—		—	—		—			—			—			—			8,755			8,755
Non-controlling interests—distributions	—	—		—	—		—			—			—			—			(7,053		)	(7,053		)
Dividend reinvestment plan	—	—		35	1		202			—			—			203			—			203
Amortization of equity-based compensation	—	—		—	—		—			—			—			—			12,817			12,817
Equity component of exchangeable senior notes	—	—		—	—		2,179			—			—			2,179			—			2,179
Other comprehensive income (loss)	—	—		—	—		—			—			13,981			13,981			690			14,671
Conversion of LTIP Units	—	—		277	2		3,146			—			—			3,148			(3,148		)	—
Dividends on common stock, LTIP Units and RSUs	—	—		—	—		—			(79,472		)	—			(79,472		)	(6,191		)	(85,663		)
Dividends on preferred stock	—	—		—	—		—			(27,025		)	—			(27,025		)	—			(27,025		)
Net income (loss)	—	—		—	—		—			(261,562		)	—			(261,562		)	(11,527		)	(273,089		)
Balance as of December 31, 2012	21,466	$	504,018	163,607	$	1,636	$	1,195,131		$	(376,685	)	$	(22,179	)	$	1,301,921		$	28,943		$	1,330,864
Net proceeds from offering of common stock	—	$	—	74,750	$	748	$	655,571		$	—		$	—		$	656,319		$	—		$	656,319
Net proceeds from offering of preferred stock	8,000	193,334		—	—		—			—			—			193,334			—			193,334
Non-controlling interests—contributions	—	—		—	—		—			—			—			—			12,157			12,157
Non-controlling interests—distributions	—	—		—	—		—			—			—			—			(952		)	(952		)
Dividend reinvestment plan	—	—		20	—		187			—			—			187			—			187
Amortization of equity-based compensation	—	—		—	—		—			—			—			—			13,615			13,615
Equity component of exchangeable senior notes	—	—		—	—		45,740			—			—			45,740			—			45,740
Conversion of exchangeable senior notes	—	—		43	—		(27		)	—			—			(27		)	—			(27		)
Other comprehensive income (loss)	—	—		—	—		—			—			20,740			20,740			910			21,650
Conversion of LTIP Units	—	—		1,326	13		10,056			—			—			10,069			(10,069		)	—
Dividends on common stock and LTIP Units	—	—		—	—		—			(121,452		)	—			(121,452		)	(5,520		)	(126,972		)
Dividends on preferred stock	—	—		—	—		—			(39,925		)	—			(39,925		)	—			(39,925		)
Net income (loss)	—	—		—	—		—			(87,106		)	—			(87,106		)	(5,493		)	(92,599		)
Balance as of September 30, 2013 (unaudited)	29,466	$	697,352	239,746	$	2,397	$	1,906,658		$	(625,168	)	$	(1,439	)	$	1,979,800		$	33,591		$	2,013,391

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	(92,599	)	$	(257,289	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) losses of private equity funds	(52,304		)	—
Equity in (earnings) losses of unconsolidated ventures	(2,141		)	416
Depreciation and amortization	70,828			36,718
Amortization of premium/accretion of discount on investments	(34,629		)	(57,860		)
Interest accretion on investments	(1,443		)	(1,182		)
Amortization of deferred financing costs	4,930			2,196
Amortization of equity-based compensation	13,615			10,049
Unrealized (gain) loss on investments and other	(15,540		)	351,914
Realized gain (loss) on investments and other / other income	(47,611		)	(36,026		)
(Gain) loss from deconsolidation of N-Star CDOs	254,206			—
Gain on sale from discontinued operations	—			(314		)
Reversal of accrued loss contingency and other costs	—			(22,041		)
Distributions from private equity funds	52,304			—
Distributions from unconsolidated ventures	4,358			1,420
Amortization of capitalized above/below market leases	(1,204		)	(948		)
Straight line rental income, net	(2,226		)	(2,220		)
Provision for (reversal of) loan losses, net	(8,786		)	19,737
Allowance for uncollectable accounts	898			301
Other	306			—
Discount received	7,318			13,111
Changes in assets and liabilities:
Restricted cash	(5,064		)	(8,344		)
Receivables	(3,270		)	(1,775		)
Other assets	(1,370		)	8,509
Receivables, related parties	(6,885		)	(2,502		)
Accounts payable and accrued expenses	41,091			(8,055		)
Other liabilities	3,245			16,658
Net cash provided by (used in) operating activities	178,027			62,473
Cash flows from investing activities:
Acquisitions of operating real estate, net	(1,267,910		)	(6,858		)
Improvements of operating real estate	(9,049		)	(3,050		)
Deferred costs and intangible assets	(877		)	(799		)
Net proceeds from disposition of operating real estate	—			8,542
Originations of real estate debt investments, net	(486,484		)	(178,395		)
Acquisitions of real estate debt investments	(56,301		)	(125,158		)
Proceeds from sales of real estate debt investments (refer to Note 9)	90,345			17,072
Repayments on real estate debt investments	158,064			135,941
Investments in and advances to private equity funds	(617,692		)	—
Distributions from private equity funds	37,061			—
Investment in and advances to unconsolidated ventures	(22,546		)	(20,294		)
Distributions from unconsolidated ventures	11,491			450
Acquisitions of real estate securities, available for sale	—			(89,041		)
Proceeds from sales of real estate securities, available for sale	206,380			258,748
Repayments on real estate securities, available for sale	170,531			162,364
Change in restricted cash	(28,735		)	(5,277		)
Other assets	7,277			17,349
Net cash provided by (used in) investing activities	(1,808,445		)	171,594

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2013			2012
Cash flows from financing activities:
Borrowings from mortgage notes	992,836			4,500
Repayments of mortgage notes	(7,492		)	(6,650		)
Proceeds from CDO bond reissuance	23,725			10,360
Proceeds from CDO bonds	—			10,000
Repayments of CDO bonds	(525,757		)	(532,403		)
Repurchases of CDO bonds	(32,719		)	(72,356		)
Paydowns on securitization bonds payable	(194		)	—
Borrowings from credit facilities	92,560			119,775
Repayments of credit facilities	(130,054		)	(33,888		)
Repayments of secured term loan	(105		)	—
Proceeds from exchangeable senior notes	345,000			82,000
Repurchases and repayment of exchangeable senior notes	(36,710		)	(7,500		)
Payment of deferred financing costs	(26,452		)	(3,727		)
Purchase of derivative instruments	(9,589		)	(8,920		)
Settlement of derivative instruments	—			(11,175		)
Change in restricted cash	135,697			59,996
Net proceeds from preferred stock offering	193,334			141,850
Net proceeds from common stock offering	656,319			205,908
Proceeds from dividend reinvestment plan	187			148
Dividends (common and preferred)	(161,377		)	(74,179		)
Contributions from non-controlling interests	12,157			—
Distributions to non-controlling interests	(6,472		)	(9,887		)
Net cash provided by (used in) financing activities	1,514,894			(126,148		)
Net increase (decrease) in cash and cash equivalents	(115,524		)	107,919
Cash and cash equivalents—beginning of period	444,927			144,508
Cash and cash equivalents—end of period	$	329,403		$	252,427

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business and Organization

NorthStar Realty Finance Corp. is a diversified commercial real estate ("CRE") investment and asset management company (the "Company"). The Company is a Maryland corporation and is an internally-managed real estate investment trust ("REIT") formed in October 2003. 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").

All references herein to the Company refer to NorthStar Realty Finance Corp. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying unaudited 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 fiscal year ended December 31, 2012, which was filed with the Securities and Exchange Commission ("SEC").

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities ("VIE") where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.

Variable Interest Entities

A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. 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 flow of the entity.

The Company reassesses its 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 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. The Company determines whether it is 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 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 pass through 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The Company evaluates its CRE debt and securities, investments in unconsolidated ventures and securitization financing transactions, such as its collateralized debt obligations ("CDOs"), and its liabilities to subsidiary trusts issuing preferred securities ("junior subordinated notes"), to determine whether they are a VIE. The Company analyzes new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.

Voting Interest Entities

A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party.

The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.

Investments in and Advances to Unconsolidated Ventures

The Company has non-controlling, unconsolidated ownership interests in entities that may be accounted for using the equity method, at fair value or the cost method.

Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity's net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. Allocations of net income (loss) may differ from the stated ownership percentage interest in such entities as a result of preferred returns and allocation formulas, if any, as described in such governing documents.

The Company may account for an investment in an unconsolidated entity at fair value by electing the fair value option. The Company elected the fair value option for its investments in joint ventures that own limited partnership interests in real estate private equity funds ("PE Investments"). PE Investments are recorded as investments in private equity funds, at fair value on the consolidated balance sheets. The Company records the change in fair value for its share of the projected future cash flow of PE Investments from one period to another in equity in earnings (losses) from unconsolidated ventures in the consolidated statements of operations. Any change in fair value attributed to market related assumptions are considered unrealized gain (loss).

The Company may account for investments that do not qualify for equity method accounting or for which the fair value option was not elected using the cost method if the Company determines the investment in the unconsolidated entity is insignificant. Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment.

Non-controlling Interests

A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. Non-controlling interests are required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) and other comprehensive income (loss) ("OCI") attributable to controlling and non-controlling interests. Allocations to non-controlling interests may differ from the stated ownership percentage interest in such entities as a result of preferred returns and allocation formulas, if any, as described in such governing documents.

Estimates

The preparation of consolidated 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 and accompanying notes. Actual results could materially differ from those estimates and assumptions.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Reclassifications

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

Comprehensive Income (Loss)

The Company reports consolidated comprehensive income (loss) in separate statements following the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and OCI. The components of OCI principally include: (i) unrealized gain (loss) on real estate 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 a company to irrevocably elect fair value for certain financial assets and liabilities on an instrument-by-instrument basis at initial recognition. The Company will generally not elect the fair value option for its assets and liabilities. However, the Company may elect to apply the fair value option for certain investments. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.

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 fees, premium, discount 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, which approximates fair value.

Operating Real Estate

Operating real estate is carried at historical cost less accumulated depreciation. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in the consolidated statements of operations. The Company follows the purchase method for an acquisition of operating real estate, where the purchase price is allocated to tangible assets such as land, building, tenant and land 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 collateral) ("REO") constitutes a business and whether business combination accounting is appropriate. Any excess upon taking title to collateral 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 on the consolidated balance sheets. Such operating real estate is recorded 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.

Real Estate Securities

The Company classifies its CRE securities investments as available for sale on the acquisition date, which are carried at fair value. The Company has historically elected to apply the fair value option for its CRE securities investments. For those CRE securities for which the fair value option was elected, any unrealized gains (losses) from the change in fair value is recorded in unrealized gains (losses) on investments and other in the 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 was not elected, any unrealized gains (losses) from the change in fair value is recorded as a component of accumulated OCI in the consolidated statements of equity, to the extent impairment losses are considered temporary.

Revenue Recognition

Real Estate Debt Investments

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such loan is reclassified to held for sale.

Loans acquired at a discount with deteriorated credit quality are accreted to expected recovery, which takes into consideration the contractual cash flow of the loan, adjusted for the impact of any prepayments, and expected future cash flow the Company expects to receive. The Company continues to estimate the amount of recovery over the life of such loans. A subsequent change in expected future cash flow is recognized as an adjustment to the accretable yield prospectively over the remaining life of such loan.

Operating Real Estate

Rental and escalation income from operating real estate is derived from leasing of space to various types of 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. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in unbilled rent receivable on the consolidated balance sheets. Escalation income represents revenue from tenant/operator leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by the Company on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.

Real Estate Securities

Interest income is recognized using the effective interest method with any premium or discount amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expected cash flow may result in a change to the yield which is then applied retrospectively for high-credit quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment or prospectively for all other securities to recognize interest income.

Commission Income

Commission income represents income earned from selling equity in sponsored companies through NorthStar Realty Securities, LLC ("NorthStar Realty Securities"), the Company's broker-dealer subsidiary while such companies are raising capital for their primary offering. Commission income is accrued on a trade date basis. The Company is currently raising capital for NorthStar Healthcare Income, Inc. ("NorthStar Healthcare") and NorthStar Real Estate Income II, Inc. ("NorthStar Income II"). NorthStar Real Estate Income Trust, Inc. ("NorthStar Income"), the Company's first sponsored company, successfully completed its primary offering on July 1, 2013. These companies are collectively referred to as Sponsored Companies.

Advisory and Other Fees

Advisory and other fees include fees earned from the management of Sponsored Companies and are recognized in the period during which the related services are performed and the amounts have been contractually earned.

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 on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated 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 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

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 expected future undiscounted cash flow generated by the property is less than the carrying value. In conducting this review, the Company considers U.S. macroeconomic factors, real estate sector conditions and asset specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value and recorded in impairment on operating real estate in the consolidated statements of operations.

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

Investments in and Advances to Unconsolidated Ventures

The Company reviews its investments in unconsolidated ventures for which the Company did not elect the fair value option on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value may be impaired or that its carrying value may not be recoverable. An investment is considered impaired if the projected net recoverable amount over the expected holding period is less than the carrying value. 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 is measured as the excess of the carrying value of the investment over the estimated fair value and recorded in provision for loss on equity investment in the consolidated statements of operations.

Real Estate Securities

CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment ("OTTI") as any change in fair value is recorded in the 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. Impairment of a security is considered to be other-than-temporary when: (i) the holder has the intent to sell the impaired security; (ii) it is more likely than not the holder will be required to sell the security; or (iii) the holder does not expect to recover the entire amortized cost of the security. When a CRE security has been deemed to be other-than-temporarily impaired due to (i) or (ii), the security is written down to its fair value and an OTTI is recognized in the consolidated statements of operations. In the case of (iii), the security is written down to its fair value and the amount of OTTI is then bifurcated into: (i) the amount related to expected credit losses; and (ii) the amount related to fair value adjustments in excess of expected credit losses. The portion of OTTI related to expected credit losses is recognized in the consolidated statements of operations. The remaining OTTI related to the valuation adjustment is recognized as a component of accumulated OCI in the consolidated statements of equity. The portion of OTTI recognized through earnings is accreted back to the amortized cost basis of the security through interest income, while amounts recognized through OCI are amortized over the life of the security with no impact on earnings. CRE securities which are not high-credit quality are considered to have an OTTI if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of OTTI is then bifurcated as discussed above.

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

TDR. Troubled debt that is fully satisfied via taking title to collateral, 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 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 for complete disclosure of the Company's significant accounting policies.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued an accounting update that concluded when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's non-recourse borrowing, the reporting entity must apply sales accounting to the real estate to determine whether it should derecognize the in substance real estate. The reporting entity is precluded from derecognizing the real estate until legal ownership has been transferred to the lender to satisfy the borrowing. The requirements of the accounting update were effective for the Company in the first quarter 2013 and are applied on a prospective basis. The Company adopted the provisions of the update and it did not have a material impact on the consolidated financial statements.

In February 2013, the FASB issued an accounting update to present the reclassification adjustments to OCI by component on the face of the statement of operations or in the notes to the consolidated financial statements. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety into earnings, an entity is required to cross-reference to other disclosures required under U.S. GAAP to provide additional detail about those amounts. The Company adopted the provisions of the update and it did not have a material impact on the consolidated financial statements.

3. Variable Interest Entities

As of September 30, 2013, the Company has identified the following consolidated and unconsolidated VIEs.

CDO Financing Transactions

The Company has sponsored nine CDOs, three of which were primarily collateralized by CRE debt and six of which were primarily collateralized by CRE securities. The Company acquired equity interests of two CRE debt focused CDOs, the CSE RE 2006-A CDO ("CSE CDO") and the CapLease 2005-1 CDO ("CapLease 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. These CDOs are collectively referred to as the N-Star CDOs and their assets are referred to as legacy investments. All N-Star CDOs are considered VIEs. At the time of issuance of the sponsored CDOs, the Company retained the below investment grade bonds, which are referred to as subordinate bonds, and preferred shares and equity notes, which are referred to as equity interests. In addition, the Company has repurchased CDO bonds originally issued to third parties at discounts to par. These repurchased CDO bonds and retained subordinate bonds are herein collectively referred to as N-Star CDO bonds.

The collateral for the CRE debt CDO financing transactions primarily includes first mortgage loans, subordinate mortgage interests, mezzanine loans, credit tenant loans and other loans. The collateral for the CDO financing transactions primarily collateralized by CRE securities includes commercial mortgage-backed securities ("CMBS"), unsecured REIT debt and CDO notes backed primarily by CRE securities and debt. Assets of each of the VIEs may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.

Consolidated N-Star CDOs

As of September 30, 2013, the Company serves as collateral manager and/or special servicer for N-Star CDOs I, III, V and IX which are primarily collateralized by CRE securities and as collateral manager delegate for the CSE CDO. The Company consolidates these entities as the Company has the power to direct the activities that most significantly impact the economic performance of these CDOs and therefore continues to be the primary beneficiary.

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

provide support such as protective and other advances it deems appropriate. The Company did not provide any other financial support to any of its consolidated VIEs for the nine months ended September 30, 2013 and 2012.

Unconsolidated N-Star CDOs

On September 30, 2013, the Company delegated the collateral management rights for N-Star CDOs IV, VI and VIII and the CapLease CDO to a third-party collateral manager who is entitled to a percentage of the senior and subordinate collateral management fees. The Company continues to receive fees as named collateral manager and retained administrative responsibilities. The Company evaluated the reconsideration event and determined that these CDOs were still VIEs as the equity investors do not have the characteristics of a controlling financial interest. The Company evaluated the fees paid to the third-party collateral manager and concluded that the third party was acting as a principal. The Company no longer has the power to direct the activities that most significantly impact the economic performance of these CDOs, which includes but is not limited to selling collateral, and therefore is no longer the primary beneficiary of such CDOs. As a result, on September 30, 2013, the Company deconsolidated the assets and liabilities for such CDO financing transactions.

In July 2013, the Company determined it no longer had the power to direct the activities that most significantly impact the economic performance of N-Star CDO VII due to the ability of a single party to remove the Company as collateral manager as a result of an existing event of default. The Company is no longer the primary beneficiary of N-Star CDO VII, and as a result, in the third quarter 2013, the Company deconsolidated the assets and liabilities of this CDO. Similar events of default in the future, if they occur, could cause the Company to deconsolidate additional CDO financing transactions.

The deconsolidation of the N-Star CDOs resulted in a non-cash loss on deconsolidation recorded in the statements of operations for the three and nine months ended September 30, 2013 summarized as follows (dollars in thousands):



Assets of deconsolidated N-Star CDOs	$	(1,812,921	)
Liabilities of deconsolidated N-Star CDOs	1,353,672
Subtotal of net assets deconsolidated	(459,249		)
N-Star CDO bonds⁽¹⁾	142,436
N-Star CDO equity⁽¹⁾	129,670
Other⁽²⁾	(48,438		)
Subtotal	223,668
Reclassification of unrealized gain (loss) to gain (loss) from deconsolidation	(3,379		)
Reclassification from OCI of swap gain (loss) into gain (loss) from deconsolidation	(15,246		)
Total gain (loss) on deconsolidation of N-Star CDOs	$	(254,206	)

___________________________________________________________


(1)	The fair value of N-Star CDO bonds and retained equity interests ("N-Star CDO equity") are recorded as CRE securities on the consolidated balance sheet (refer to Note 7).


(2)	Primarily represents the fair value of CRE debt investments, a note payable and CDO bonds payable that were previously eliminated in consolidation.

Other Unconsolidated VIEs

Based on management's analysis, the Company is not the primary beneficiary of the VIEs summarized below and as such, these VIEs are not consolidated into the Company's financial statements as of September 30, 2013. These unconsolidated VIEs are summarized as follows:

Real Estate Debt Investments

The Company identified two CRE debt investments with an aggregate carrying value of $14.3 million as variable interests in VIEs. The Company determined that it is not the primary beneficiary of these VIEs, and as such, the VIEs are not consolidated in the Company's financial statements. For all other CRE debt investments, the Company determined that these investments are not VIEs and, as such, the Company continues to account for all CRE debt investments as loans.

Real Estate Securities

The Company identified six CRE securities with an aggregate fair value of $34.7 million as variable interests in VIEs. In connection with certain CMBS investments, the Company became the controlling class and/or was named directing certificate holder of a securitization it did not sponsor. For two of these securitizations, the Company was appointed as special servicer. The Company determined each securitization was a VIE. However, the Company determined at that time and continues to

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

believe that it does not currently or potentially hold a significant interest in any of these securitizations and, therefore, is not the primary beneficiary.

In February 2013, one of the Company's Sponsored Companies, NorthStar Income, acquired a "B-piece" in a new $1.2 billion securitization. An affiliate of the Company was appointed as special servicer for the securitization. The Company determined such 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.

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.

Summary of Unconsolidated VIEs

The following table presents the classification, carrying value and maximum exposure of unconsolidated VIEs as of September 30, 2013 (dollars in thousands):



	Junior Subordinated Notes, at Fair Value			Real Estate Debt Investments, Net		Real Estate Securities, Available for Sale		Total		Maximum Exposure to Loss⁽¹⁾
Real estate debt investments, net	$	—		$	14,325	$	—	$	14,325	$	14,325
Real estate securities, available for sale:
N-Star CDO bonds	—			—		142,436		142,436		142,436
N-Star CDO equity	—			—		129,670		129,670		129,670
CMBS	—			—		34,704		34,704		34,704
Subtotal real estate securities, available for sale	—			—		306,810		306,810		306,810
Total assets	—			14,325		306,810		321,135		321,135
Junior subordinated notes, at fair value	192,279			—		—		192,279		NA
Total liabilities	192,279			—		—		192,279		NA
Net	$	(192,279	)	$	14,325	$	306,810	$	128,856	NA

____________________________________________________________


(1)	The Company's maximum exposure to loss as of September 30, 2013 would not exceed the carrying value of its investment.

The Company did not provide financial support to any of its unconsolidated VIEs during the nine months ended September 30, 2013 and 2012. As of September 30, 2013, 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. Operating Real Estate

The following summarizes significant acquisitions of operating real estate for the nine months ended September 30, 2013. The Company consolidates each of these properties based on its majority voting interest in the respective property owning entity, as applicable.

Manufactured Housing Communities Portfolio

In April 2013, the Company, through a joint venture with a private investor, acquired a portfolio of manufactured housing communities comprised of 71 communities containing approximately 17,000 pad rental sites located throughout five states (primarily in Florida and Salt Lake City, Utah) ("MH Portfolio 2") for an aggregate purchase price of $865.3 million, including all costs, escrows and reserves. MH Portfolio 2 was financed with eight separate ten-year, non-recourse mortgages in the aggregate amount of $640.0 million at a weighted average fixed interest rate of 4.02% and maturing in 2023 ("MH 2 Senior Mortgage"). The Company structured the acquisition as a joint venture with the same third-party operating partner that is currently managing the Company's initial portfolio of manufactured housing communities ("MH Portfolio 1"). The Company contributed $214.9 million of equity for an approximate 98% interest in MH Portfolio 2. For the three and nine months ended September 30, 2013, the Company recorded $22.1 million and $43.1 million of revenue and $7.8 million and $7.1 million of net loss associated with MH Portfolio 2, respectively.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents unaudited consolidated pro forma results of operations based on the Company's historical financial statements and adjusted for the acquisition of MH Portfolio 2 and related borrowings as if it occurred on January 1, 2012. The unaudited pro forma amounts were prepared for comparative purposes only and are not indicative of what actual consolidated results of operations of the Company would have been, nor are they indicative of the consolidated results of operations in the future, and exclude transaction costs (dollars in thousands, except per share data):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Pro forma total revenues	$	158,283		$	147,930		$	491,402		$	429,800
Pro forma net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(151,027	)	$	(152,905	)	$	(129,661	)	$	(270,022	)
Pro forma EPS—Basic	$	(0.68	)	$	(1.13	)	$	(0.65	)	$	(2.24	)
Pro forma EPS—Diluted	$	(0.68	)	$	(1.13	)	$	(0.65	)	$	(2.24	)

Multifamily Investments

In March 2013, the Company, through a joint venture with a private investor, acquired a multifamily property with 972 units, located in Tennessee ("Multifamily Property 1"), for $49.2 million. Multifamily Property 1 was financed with a non-recourse mortgage of $39.6 million at a fixed interest rate of 3.996% and maturing in 2023 ("MF 1 Senior Mortgage"). The Company contributed $12.9 million of equity for a 90% interest in Multifamily Property 1.

In the second quarter 2013, the Company, through a joint venture with a private investor, acquired eight multifamily properties with 2,418 units, located in Georgia, Florida and Tennessee ("Multifamily Properties 2"), for $202.1 million. Multifamily Properties 2 was financed with seven separate non-recourse mortgages in the aggregate amount of $158.4 million at a weighted average fixed interest rate of 4.03% and maturing in 2023 ("MF 2 Senior Mortgages"). The Company contributed $55.3 million of equity for a 95% interest in Multifamily Properties 2.

In June 2013, the Company, through a joint venture with a private investor, acquired two multifamily properties with 626 units, located in Arizona ("Multifamily Properties 3"), for $61.5 million. Multifamily Properties 3 was financed with two separate non-recourse mortgages of $46.5 million at a weighted average fixed interest rate of 4.28% and maturing in 2023 ("MF 3 Senior Mortgages"). The Company contributed $15.0 million of equity for an 85% interest in Multifamily Properties 3.

Healthcare Investments

In June 2013, the Company acquired 11 assisted living facilities located in Minnesota for $51.0 million. The Company contributed $14.6 million of equity and financed the portfolio with a non-recourse mortgage of $38.2 million at an interest rate of LIBOR plus 3.00% and maturing in 2016 with two one-year extension options.

In June 2013, the Company acquired a memory care facility located in Connecticut for $10.5 million. The Company contributed $3.0 million of equity and financed the property with a non-recourse mortgage of $7.9 million at an interest rate of LIBOR plus 2.75% and maturing in 2018. Subsequent to quarter end, the Company sold this asset to NorthStar Healthcare at cost. Refer to Note 9 for further disclosure.

REO

The following table presents REO acquired by taking title, in connection with certain CRE debt investments, for the nine months ended September 30, 2013 that are reported on the Company's consolidated balance sheet as of September 30, 2013 (dollars in thousands):



Date	Type	Location	Original Loan Balance		Initial REO Value⁽¹⁾
January	Retail	Sheboygan, WI	$	12,500	$	6,877
April	Land	Volusia County, FL	58,805		1,707		⁽²⁾
Total			$	71,305	$	8,584

____________________________________________________________


(1)	Initial REO values approximate fair value.


(2)	Represents a loan acquired with deteriorated credit quality in the CSE CDO.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents a rollforward of REO in operating real estate for the nine months ended September 30, 2013 (dollars in thousands):



Beginning balance	$	342,461
Additions⁽¹⁾	201,110
Deconsolidation of N-Star CDOs	(529,714		)
Capital expenditures	2,692
Depreciation	(9,872		)
Ending balance	$	6,677

____________________________________________________________


(1)	Represents REO for which the Company took title to for the nine months ended September 30, 2013, of which $8.6 million initial REO value remains as of September 30, 2013, subsequent to the deconsolidation of certain N-Star CDOs (refer to Note 3).

Summary of Acquisitions

The Company estimated the fair value of the assets and liabilities for all real estate acquired (including taking title to collateral) at the date of acquisition. The following table presents the preliminary allocation of purchase price of the real estate assets acquired or for which the Company took title to collateral and related liabilities (including financings entered into contemporaneous with the acquisition) for acquisitions in 2013 that continue to be subject to refinement upon receipt of all information (dollars in thousands):



	Multifamily
Assets:
Land	$	45,090
Buildings	267,770
Other assets acquired⁽¹⁾	22,254
Total assets acquired	$	335,114
Liabilities:
Mortgage notes payable	$	244,554
Other liabilities assumed⁽²⁾	403
Total liabilities	244,957
Total NorthStar Realty Finance Corp. stockholders' equity	83,178
Non-controlling interests	6,979
Total equity	90,157
Total liabilities and equity	$	335,114

____________________________________________________________


(1)	Primarily includes deferred financing costs and restricted cash.


(2)	Primarily includes prepaid rent and security deposits.

Real Estate Sales

For the three months ended September 30, 2013, the Company sold four timeshare units for total sales proceeds of $0.3 million resulting in a net realized gain of $0.3 million. For the nine months ended September 30, 2013, the Company sold 26 timeshare units for total sales proceeds of $17.3 million, including seller financing of $0.6 million, resulting in a net realized gain of $12.0 million.

For the three months ended September 30, 2013, the Company sold 118 manufactured homes for total sales proceeds of $2.0 million, including seller financing of $1.0 million, resulting in an immaterial net realized loss. For the nine months ended September 30, 2013, the Company sold 197 manufactured homes for total sales proceeds of $3.4 million, including seller financing of $2.4 million, resulting in an immaterial net realized gain.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Discontinued Operations

Discontinued operations relates to a healthcare property held for sale as of September 30, 2013 and a multifamily and office property sold in 2012. The following table presents income (loss) from discontinued operations related to such properties for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenue
Rental and escalation income	$	—		$	865		$	—		$	2,543
Total revenue	—			865			—			2,543
Expenses
Real estate properties—operating expenses	25			354			81			1,732
Depreciation and amortization	—			100			—			305
Total expenses	25			454			81			2,037
Income (loss) from discontinued operations	(25		)	411			(81		)	506
Gain (loss) on sale from discontinued operations	—			29		⁽¹⁾	—			314		⁽¹⁾
Total income from discontinued operations	$	(25	)	$	440		$	(81	)	$	820

____________________________________________________________


(1)	Relates to the sale of an office property located in Indiana.

5. Real Estate Debt Investments

The following table presents CRE debt investments as of September 30, 2013, excluding CRE debt underlying CDOs that are not consolidated (dollars in thousands):



								Weighted Average						Floating Rate as % of Principal Amount
	Number	Principal Amount		Carrying Value⁽³⁾		Allocation by Investment Type⁽⁴⁾		Fixed Rate		Spread Over LIBOR⁽⁵⁾		Yield⁽⁶⁾		Floating Rate as % of Principal Amount
Asset Type:
First mortgage loans	16	$	473,455	$	436,848	31.9	%	10.31	%	6.66	%	9.75	%	90.2	%
Mezzanine loans	6	111,465		109,208		7.5	%	5.45	%	11.34	%	8.98	%	53.2	%
Subordinate mortgage interests	6	145,008		143,093		9.8	%	13.08	%	12.32	%	13.27	%	56.6	%
Term loans	2	55,178		53,195		3.7	%	13.86	%	—		15.10	%	—
Subtotal/Weighted average⁽¹⁾	30	785,106		742,344		52.9	%	10.85	%	7.97	%	10.69	%	72.4	%
CRE debt in N-Star CDOs⁽²⁾
First mortgage loans	32	617,444		362,073		41.6	%	4.21	%	2.83	%	8.54	%	91.6	%
Mezzanine loans	1	11,000		11,000		0.7	%	8.00	%	—		8.00	%	—
Subordinate mortgage interests	2	28,218		28,213		1.9	%	—		5.97	%	6.18	%	100.0	%
Term loans	8	42,929		33,887		2.9	%	7.76	%	—		9.83	%	—
Subtotal/Weighted average	43	699,591		435,173		47.1	%	6.05	%	2.98	%	8.48	%	84.9	%
Total⁽⁷⁾	73	$	1,484,697	$	1,177,517	100.0	%	9.28	%	5.42	%	9.87	%	78.3	%

____________________________________________________________

(1)

Certain CRE debt investments serve as collateral for financing transactions including carrying value of $132.5 million for Securitization 2012-1 and $26.8 million for credit facilities. The remainder is unleveraged. 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 $5.1 million. $449.8 million principal amount has a weighted average LIBOR floor of 0.90%.


(2)	$138.8 million principal amount has a weighted average LIBOR floor of 3.32%.

(3)

There is one loan on non-accrual status with a carrying value of $6.6 million that was acquired with deteriorated credit quality. There are no other loans on non-accrual status. Certain loans have an accrual of interest at a specified rate that may be in addition to a current rate. Non-accrual excludes $25.0 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.


(4)	Based on principal amount.


(5)	Includes one first mortgage loan with a carrying value of $3.7 million with a spread over prime rate.


(6)	Based on initial maturity and for floating-rate debt, calculated using one-month LIBOR as of September 30, 2013, and for CRE debt with a LIBOR floor, using such floor.


(7)	The decrease from prior year primarily relates to the deconsolidation of certain N-Star CDOs. Refer to Note 3 for further disclosure.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Year to date through November 1, 2013, the Company originated 14 loans and acquired three loans with an aggregate principal amount of $486.0 million.

In April 2013, the Company, together with NorthStar Income, originated a $255.0 million loan secured by a leasehold mortgage in the recently renovated, 1,331 room Milford Plaza Hotel ("Milford") located in the epicenter of Times Square, New York City. In addition, the investment includes an aggregate 35.0% interest in the Milford hotel and retail component of the hotel. Refer to Note 6 for further disclosure. The Company funded $165.7 million of the investment and NorthStar Income funded the remaining $89.3 million. The loan is comprised of a $104.0 million first mortgage loan and a $61.7 million subordinate mortgage interest.

The loan is held by a general partnership of which both the Company and NorthStar Income are the general partners ("Milford Loan JV"). The Company is the designated partner. The Milford Loan JV is considered a voting interest entity and is not consolidated due to the substantive participating and kick-out rights held by NorthStar Income. The Company and NorthStar Income each control their proportionate interest in the Milford Loan JV and have pledged their proportionate interest to their respective loan facilities. Accordingly, the Company records its respective CRE debt investment on its consolidated balance sheets.

In the third quarter 2013, the most senior portion of the Milford loan was structured into a senior loan and a subordinate mortgage interest of $57.1 million and $46.9 million, respectively, to facilitate the financing of the senior loan into a securitization issued by the Company's sponsored non-traded REIT, NorthStar Income (“Securitization 2013-1”). The subordinate mortgage interest was retained by the Company and is unleveraged. The transfer of the senior loan obtained sale treatment under U.S. GAAP as the Company no longer maintains effective control of its transferred asset.

The following table presents CRE debt investments as of December 31, 2012 (dollars in thousands):



								Weighted Average						Floating Rate as % of Principal Amount
	Number	Principal Amount		Carrying Value⁽¹⁾⁽²⁾		Allocation by Investment Type⁽³⁾		Fixed Rate		Spread Over LIBOR⁽⁴⁾⁽⁵⁾		Yield⁽⁶⁾		Floating Rate as % of Principal Amount
Asset Type:
First mortgage loans	74	$	1,578,872	$	1,205,313	66.6	%	4.29	%	3.25	%	6.10	%	94.5	%
Mezzanine loans	18	440,941		333,064		18.6	%	4.34	%	1.61	%	2.68	%	59.9	%
Subordinate mortgage interests	7	121,473		96,357		5.1	%	6.40	%	3.97	%	5.85	%	75.7	%
Credit tenant loans and other notes	43	124,460		118,093		5.2	%	6.58	%	—		7.39	%	—
Term loans	10	105,718		79,404		4.5	%	10.86	%	3.50	%	11.94	%	4.8	%
Total/Weighted average	152	$	2,371,464	$	1,832,231	100.0	%	6.26	%	3.05	%	5.68	%	78.2	%

____________________________________________________________


(1)	Certain CRE debt investments serve as collateral for financing transactions including carrying value of $1,478.5 million for CDO financing transactions, $145.6 million for Securitization 2012-1 and $51.2 million for credit facilities. The remainder is unleveraged.

(2)

Includes seven loans with an aggregate carrying value of $162.5 million on non-accrual status (one of which was a loan acquired with deteriorated credit quality) which were primarily comprised of mezzanine loans. one of these loans was classified as non-performing. Non-accrual excludes $106.4 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)	$315.8 million principal amount of the CRE debt investments have a weighted average LIBOR floor of 2.59%.


(5)	Includes one first mortgage loan with a carrying value of $0.8 million with a spread over prime rate.


(6)	Based on initial maturity and for floating-rate debt, calculated using one-month LIBOR as of December 31, 2012, and for CRE debt with a LIBOR floor, using such floor.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents maturities of CRE debt investments based on principal amount as of September 30, 2013 (dollars in thousands):



	Initial Maturity		Maturity Including Extensions⁽¹⁾
October 1 - December 31, 2013	$	49,759	$	—
Years Ending December 31:
2014	474,667		294,027
2015	405,641		310,325
2016	262,326		204,178
2017	117,649		306,261
Thereafter	174,655		369,906
Total	$	1,484,697	$	1,484,697

____________________________________________________________


(1)	Assumes that all debt with extension options will qualify for extension at such maturity according to the conditions stipulated in the related debt agreements.

As of September 30, 2013, the weighted average maturity including extensions of CRE debt investments is 3.4 years.

Actual maturities may differ from contractual maturities as certain borrowers may have the right to prepay with or without prepayment penalty. The Company may also extend contractual maturities in connection with loan modifications.

The principal amount of CRE debt investments differs from the carrying value due to unamortized origination fees and costs, unamortized premium and discount and loan loss reserves being recorded as part of the carrying value of the investment. As of September 30, 2013, the Company had $295.5 million of unamortized discounts ($246.4 million related to the CSE CDO) and $7.9 million of unamortized origination fees and costs.

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 September 30, 2013, such debt had an aggregate principal amount of $206.2 million and an aggregate carrying value of $41.9 million, of which $44.9 million of the remaining discount will be accreted. The change in the carrying value for the nine months ended September 30, 2013 was due to payoffs and the write-off of a loan for which the Company took title to the collateral.

The following table presents the status of CRE debt investments (dollars in thousands):



	Carrying Value as of September 30, 2013										Carrying Value as of December 31, 2012
	Number	All Other Loans			Number	Non-Performing Loans		Total			Number	All Other Loans			Number	Non-Performing Loans			Total
Class of Debt:
First mortgage loans	48	$	800,817		—	$	—	$	800,817		73	$	1,204,626		1	$	12,500		$	1,217,126
Mezzanine loans	7	122,088			—	—		122,088			18	441,100			—	—			441,100
Subordinate mortgage interests	8	171,306			—	—		171,306			7	118,457			—	—			118,457
Credit tenant loans and other notes	—	—			—	—		—			49	122,535			—	—			122,535
Term loans	10	87,082			—	—		87,082			4	89,712			—	—			89,712
Total real estate debt investments	73	1,181,293			—	—		1,181,293			151	1,976,430			1	12,500			1,988,930
Loan loss reserves	3	(3,776		)	—	—		(3,776		)	12	(151,076		)	1	(5,623		)	(156,699		)
Total real estate debt investments, net⁽¹⁾		$	1,177,517			$	—	$	1,177,517			$	1,825,354			$	6,877		$	1,832,231

____________________________________________________________


(1)	The decrease from prior year primarily relates to the deconsolidation of certain N-Star CDOs. Refer to Note 3 for further disclosure.

The Company did not have any non-performing loans as of September 30, 2013. The Company's maximum exposure to loss related to the non-performing loans as of December 31, 2012 was $6.9 million.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Provision for Loan Losses

The following table presents activity in loan loss reserves on CRE debt investments for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013				2012
Beginning balance	$	133,202		$	172,034		$	156,699			$	187,784
Provision for (reversal of) loan losses, net	(11,122		)	6,360			(8,786		)	⁽¹⁾	19,737
Transfers to REO	—			—			(5,623		)		—
Sales	—			—			—				(667		)
Write-offs / payoffs	—			(9,735		)	(20,210		)	⁽²⁾	(38,195		)
Deconsolidation of N-Star CDOs⁽³⁾	(118,304		)	—			(118,304		)		—
Ending balance	$	3,776		$	168,659		$	3,776			$	168,659

____________________________________________________________


(1)	Includes $15.1 million of reversals of previously recorded provisions for loan losses.


(2)	Represents a write-off of a previously recorded loan loss reserve upon payoff of a loan.


(3)	Refer to Note 3 for further disclosure.

Credit Quality Monitoring

CRE debt investments are typically loans 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 evaluates its debt investments at least quarterly and differentiates the relative credit quality principally based on: (i) whether the borrower is currently paying contractual debt service in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company's expectations as to the ultimate recovery of principal at maturity.

The Company categorizes a debt investment for which it expects to receive full payment of contractual principal and interest payments as a "loan with no loan loss reserve." The Company categorizes a debt investment as a non-performing loan ("NPL") if it is in maturity default and/or past due at least 90 days on its contractual debt service payments. The Company considers the remaining debt investments to be of weaker credit quality and categorizes such loans as "other loans with a loan loss reserve/non-accrual status." These loans are not considered NPLs because such loans are performing in accordance with contractual terms but the loans have a loan loss reserve and/or are on non-accrual status. Even if a borrower is currently paying contractual debt service or debt service is not due in accordance with its contractual terms, the Company may still determine that the borrower may not be able to perform under its contractual terms in the future and make full payment upon maturity. The Company's definition of an NPL may differ from that of other companies that track NPLs.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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



Credit Quality Indicator:	September 30, 2013		December 31, 2012
Loans with no loan loss reserve:
First mortgage loans	$	784,197	$	1,150,636
Mezzanine loans	118,323		186,131
Subordinate mortgage interests	171,306		96,357
Credit tenant loans and other notes	—		118,093
Term loans	87,082		57,646
Subtotal	1,160,908		1,608,863
Other loans with a loan loss reserve/non-accrual status:⁽¹⁾
First mortgage loans	14,724		47,800
Mezzanine loans	1,885		146,933
Term loans	—		21,758
Subtotal	16,609		216,491
Non-performing loans:
First mortgage loans	—		6,877
Subtotal	—		6,877
Total⁽²⁾	$	1,177,517	$	1,832,231

____________________________________________________________


(1)	December 31, 2012 includes four loans with a 100% loan loss reserve representing an aggregate principal amount of $36.0 million which are not considered NPLs as debt service is currently being received or debt service is not contractually due until maturity.


(2)	The decrease from prior year primarily relates to the deconsolidation of certain N-Star CDOs. Refer to Note 3 for further disclosure.

Impaired Loans

The Company considers impaired loans to generally include NPLs, loans with a loan loss reserve, loans on non-accrual status (excluding loans acquired with deteriorated credit quality) and TDRs. The following table presents impaired loans as of September 30, 2013 and December 31, 2012 (dollars in thousands):



	September 30, 2013⁽²⁾							December 31, 2012⁽²⁾
	Number	Principal Amount⁽¹⁾		Carrying Value⁽¹⁾		Loan Loss Reserve		Number	Principal Amount⁽¹⁾		Carrying Value⁽¹⁾		Loan Loss Reserve
Class of Debt:
First mortgage loans	2	$	16,619	$	14,724	$	1,896	6	$	112,774	$	85,887	$	11,813
Mezzanine loans	1	3,765		1,885		1,880		9	265,225		157,178		108,036
Subordinate mortgage interests	—	—		—		—		2	22,100		—		22,100
Term loans	—	—		—		—		1	45,550		21,758		14,750
Total⁽³⁾	3	$	20,384	$	16,609	$	3,776	18	$	445,649	$	264,823	$	156,699

____________________________________________________________


(1)	Principal amount differs from carrying value due to unamortized origination fees and costs, unamortized premium or discount and loan loss reserves included in the carrying value of the investment.

(2)

December 31, 2012 includes five loans, primarily first mortgage loans, considered TDRs with an aggregate carrying value of $41.4 million, all of which do not have loan loss reserves. Excludes one first mortgage loan acquired with deteriorated credit quality with a carrying value of $6.6 million and $13.8 million as of September 30, 2013 and December 31, 2012, respectively, that is on non-accrual status and does have a loan loss reserve.


(3)	The decrease from prior year primarily relates to the deconsolidation of certain N-Star CDOs. Refer to Note 3 for further disclosure.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents 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 September 30, 2013 and 2012 (dollars in thousands):



	September 30, 2013					September 30, 2012
	Number⁽¹⁾	Average Carrying Value⁽¹⁾		Quarter Ended Income⁽¹⁾		Number	Average Carrying Value		Quarter Ended Income
Class of Debt:
First mortgage loans	5	$	77,077	$	346	9	$	110,961	$	275
Mezzanine loans	7	105,897		136		9	166,125		1,894
Subordinate mortgage interests	2	—		1		3	375		3
Term loans	1	27,068		914		1	21,758		914
Total/weighted average	15	$	210,042	$	1,397	22	$	299,219	$	3,086

___________________________________________________________


(1)	Includes impaired loans outstanding during the period which were deconsolidated on September 30, 2013. Refer to Note 3 for further disclosure.

The following table presents average carrying value of impaired loans by type and the income recorded on such loans subsequent to their being deemed impaired for the nine months ended September 30, 2013 and 2012 (dollars in thousands):



	September 30, 2013					September 30, 2012
	Number⁽¹⁾	Average Carrying Value⁽¹⁾		Nine Months Ended Income⁽¹⁾		Number	Average Carrying Value		Nine Months Ended Income
Class of Debt:
First mortgage loans	5	$	80,733	$	1,030	9	$	100,503	$	942
Mezzanine loans	7	124,665		414		9	171,942		5,909
Subordinate mortgage interests	2	—		3		3	7,518		47
Term loans	1	24,413		2,712		1	24,456		2,721
Total/weighted average	15	$	229,811	$	4,159	22	$	304,419	$	9,619

___________________________________________________________


(1)	Includes impaired loans outstanding during the period which were deconsolidated on September 30, 2013. Refer to Note 3 for further disclosure.

As of September 30, 2013, the Company did not have any loans past due greater than 90 days. As of December 31, 2012, the Company had one first mortgage loan with a principal amount of $12.5 million past due greater than 90 days. This amount excludes non-accrual loans disclosed in the tables above.

Troubled Debt Restructurings

The Company did not have any CRE debt investments modified that were considered TDRs during the three months ended September 30, 2013. The following table presents CRE debt investments that were modified and considered a TDR for the three months ended September 30, 2012 (dollars in thousands):



	September 30, 2012
	Number		Carrying Value		Original WA Interest Rate		Modified WA Interest Rate
Class of Debt:
First mortgage loans	1	⁽¹⁾	$	9,996	4.00	%	1.61	%	⁽¹⁾
Mezzanine loans	1		12,681		2.50	%	0.00	%	⁽²⁾
Total/weighted average	2		$	22,677	3.16	%	0.72	%

___________________________________________________________


(1)	The loan was modified into a first mortgage and mezzanine loan with a modified rate of LIBOR plus 2.50% and LIBOR plus 0.25%, respectively.


(2)	The loan was modified into a mezzanine loan and preferred equity interest with a modified rate of LIBOR plus 10% and a fixed rate of 7%, respectively, however, interest was deferred until certain hurdles are met.

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The following table presents CRE debt investments that were modified and considered a TDR for the nine months ended September 30, 2013 and 2012 (dollars in thousands):



	September 30, 2013								September 30, 2012
	Number		Carrying Value		Original WA Interest Rate		Modified WA Interest Rate		Number		Carrying Value		Original WA Interest Rate		Modified WA Interest Rate
Class of Debt:
First mortgage loans	—		$	—	—		—		3	⁽²⁾⁽³⁾	$	35,241	3.52	%	2.78	%
Mezzanine loans	1	⁽¹⁾	50,905		10.85	%	0.00	%	1	⁽⁴⁾	12,681		2.50	%	0.00	%
Subordinate mortgage interests	—		—		—		—		1	⁽⁵⁾	—		3.35	%	0.03	%
Total/weighted average	1		$	50,905	10.85	%	0.00	%	5		$	47,922	2.65	%	2.04	%

____________________________________________________________


(1)	Considered a TDR in the first quarter 2013 and was subsequently modified in the second quarter 2013. On September 30, 2013, the Company deconsolidated certain of the N-Star CDOs, and as a result, no longer records this loan on its consolidated balance sheets. Refer to Note 3 for further disclosure.


(2)	Excludes one first mortgage loan with a carrying value of $6.0 million considered a TDR in the first quarter 2012 which the Company subsequently took title to the collateral.


(3)	Includes one loan which was modified into a senior first mortgage and mezzanine loan.


(4)	The loan was modified into a mezzanine loan and preferred equity interest with a modified rate of LIBOR plus 10% and a fixed rate of 7%, respectively, however, interest was deferred until certain hurdles are met.


(5)	The carrying value of this loan was zero as of September 30, 2012.

All loans modified in a TDR generally provided interest rate concessions and/or deferral of interest or principal repayments. Any loan modification is intended to maximize the collection of the principal and interest related to such loan. There are no write-downs related to the CRE debt investments that were modified and considered a TDR for the periods presented.

6. Investments in and Advances to Unconsolidated Ventures

The following is a description of investments in and advances to unconsolidated ventures, including unconsolidated ventures that own PE Investments which are recorded as investments in private equity funds, at fair value on the consolidated balance sheets. All of the below are accounted for under the equity method except for PE Investments for which the fair value option was elected.

The Company evaluates whether disclosure of summarized financial statement information is required for any individually significant investments in unconsolidated ventures. The Company determined there were no significant unconsolidated joint ventures as of September 30, 2013.

Investments in Private Equity Funds

PE Investments are considered voting interest entities. They are not consolidated by the Company due to the substantive participating rights of the partners in joint ventures that own the interests in the real estate private equity funds. The Company elected the fair value option for PE Investments. As a result, the Company records equity in earnings (losses) based on the change in fair value for its share of the projected future cash flow from one period to another.

PE Investment I

In February 2013, the Company completed the initial closing ("Initial Closing") of its investment in joint ventures ("PE Investment I") which owns a portfolio of limited partnership interests in real estate private equity funds managed by institutional-quality sponsors. Pursuant to the terms of the agreement, at the Initial Closing, the full purchase price was funded, excluding future capital commitments. Accordingly, the Company funded $282.1 million and NorthStar Income (together with the Company, the "NorthStar Entities") funded $118.0 million. The NorthStar Entities have an aggregate ownership interest in PE Investment I of 51%, of which the Company owns 70.5%. The Company assigned its rights to the remaining 29.5% to a subsidiary of NorthStar Income. Teachers Insurance and Annuity Association of America (the "Class B Partner") contributed its interests in 47 funds subject to the transaction in exchange for all of the Class B partnership interests in PE Investment I.

PE Investment I provides for all cash distributions on a priority basis to the NorthStar Entities as follows: (i) first, 85% to the NorthStar Entities and 15% to the Class B Partner until the NorthStar Entities receive a 1.5x multiple on all of their invested capital, including amounts funded in connection with future capital commitments; (ii) second, 15% to the NorthStar Entities

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and 85% to the Class B Partner until the Class B Partner receives a return of its then remaining June 30, 2012 capital; and (iii) third, 51% to the NorthStar Entities and 49% to the Class B Partner. All amounts paid to and received by the NorthStar Entities will be based on each partner's proportionate interest.

Since the Company was contractually entitled to its proportional share of all distributions derived from the fund interests since June 30, 2012 regardless of the date fund interests were transferred to PE Investment I, at the Initial Closing the Company recorded its proportional share of all distributions received since June 30, 2012. As of September 30, 2013, the carrying value of the investment in PE Investment I was $263.4 million. For the three and nine months ended September 30, 2013, the Company recognized $15.3 million and $37.3 million, respectively, of equity in earnings. For the nine months ended September 30, 2013, the Company received $74.6 million of net distributions and made $18.7 million of contributions related to PE Investment I. As of September 30, 2013, the Company's estimated future capital commitments to the fund interests in PE Investment I would be approximately $25.0 million.

The Company guaranteed all of its funding obligations that may be due and owed under PE Investment I agreements directly to PE Investment I entities. The Company and NorthStar Income each agreed to indemnify the other proportionately for any losses that may arise in connection with the funding and other obligations as set forth in the governing documents in the case of a joint default by the Company and NorthStar Income. The Company and NorthStar Income further agreed to indemnify each other for all of the losses that may arise as a result of a default that was solely caused by the Company or NorthStar Income, as the case may be.

In December 2012, the Company deposited an aggregate of $40.0 million in connection with this transaction, which included $11.8 million on behalf of NorthStar Income, in the proportion of the respective capital contributions. This amount was settled by NorthStar Income in the first quarter 2013.

PE Investment II

In June 2013, the Company, NorthStar Income and funds managed by Goldman Sachs Asset Management ("Vintage Funds") (each a "Partner") formed joint ventures ("PE Investment II") and entered into an agreement with Common Pension Fund E, a common trust fund created under New Jersey law (the "Seller"), to acquire a portfolio of limited partnership interests in up to 25 real estate private equity funds managed by institutional-quality sponsors with an aggregate reported net asset value ("NAV") of approximately $925.4 million as of September 30, 2012. The Company, NorthStar Income and the Vintage Funds each have an ownership interest in PE Investment II of 70%, 15% and 15%, respectively. All amounts paid and received will be based on each Partner's proportionate interest.

PE Investment II will pay $509.9 million to the Seller for all of the fund interests, or 55% of the September 30, 2012 NAV (the "Initial Amount"), and will pay the remaining $415.5 million, or 45% of the September 30, 2012 NAV (the "Deferred Amount"), by the fourth year after the first day of the fiscal quarter following the closing date of each fund interest. The Company's share of the Initial Amount and the Deferred Amount represents $356.9 million and $290.9 million, respectively. The Company funded all of its proportionate share of the Initial Amount at the initial closing on July 3, 2013. The Deferred Amount is a liability of PE Investment II. Each Partner, directly or indirectly, guaranteed its proportionate interest of the Deferred Amount. The Company determined there was an immaterial amount of fair value related to the guarantee.

PE Investment II is entitled to receive all cash distributions from September 30, 2012 through the closing of each fund interest and is obligated to fund all capital contributions from September 30, 2012. At each closing, there will be a "true up" for any distributions received and any contributions made by the Seller from the contributed funds since September 30, 2012.

Beginning on the first day of the fiscal quarter following the closing date of each fund interest and for a period of three years thereafter, distributions will be made to PE Investment II on a priority basis as follows: 85% to PE Investment II and 15% to the Seller, provided that at the end of each such fiscal year, PE Investment II will pay amounts, if any, necessary to reduce the Deferred Amount by 15% of the then outstanding Deferred Amount (the "Amortization Amount") to the extent distributions to the Seller during each such year were less than the Amortization Amount for such year.

In the fourth year following the applicable closing date, distributions will be split equally between PE Investment II and the Seller. At the conclusion of that four-year period, PE Investment II will be required to pay to the Seller the Deferred Amount less: (i) any distributions received by the Seller during such four-year period; and (ii) any Amortization Amounts received by the Seller during such four-year period. PE Investment II will receive 100% of all distributions following the payment of the Deferred Amount.

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The Company guaranteed all of its funding obligations that may be due and owed under PE Investment II agreements directly to PE Investment II entities. The Company and NorthStar Income each agreed to indemnify the other proportionately for any losses that may arise in connection with the funding and other obligations as set forth in the governing documents in the case of a joint default by the Company and NorthStar Income. The Company and NorthStar Income further agreed to indemnify each other for all of the losses that may arise as a result of a default that was solely caused by the Company or NorthStar Income, as the case may be.

The Company anticipates closing all of the fund interests by the end of 2013, subject to customary closing conditions, including third-party consents. For the three months ended September 30, 2013, the Company recognized $15.0 million of equity in earnings. For the three months ended September 30, 2013, the Company received $15.1 million of net distributions and made $4.4 million of contributions related to PE Investment II. As of September 30, 2013, the carrying value of the investment in PE Investment II was $361.3 million. As of September 30, 2013, the Company's estimated future capital commitments to the fund interests in PE Investment II would be approximately $39.0 million.

Multifamily Joint Venture

In July 2013, the Company through a joint venture with a private investor, acquired a multifamily property with 498 units, located in Philadelphia, Pennsylvania for an aggregate purchase price of $41.0 million, including all costs, escrows and reserves. The joint venture financed the transaction with a non-recourse mortgage totaling $29.5 million and the remainder in cash. The mortgage matures on July 1, 2023 and bears a fixed interest rate of 3.69%. The Company's 90% interest in the joint venture was acquired for $10.4 million. For the three and nine months ended September 30, 2013, the Company recognized equity in losses of $0.6 million which was primarily related to recording transaction costs of $0.8 million.

Meadowlands

The Company owned a 22% interest in Meadowlands Two, LLC, which holds 100% of Meadowlands One, LLC, which is currently in the form of a preferred equity interest secured by a retail/entertainment complex located in New Jersey (the "NJ Property"). As a result of the deconsolidation of certain N-Star CDOs, the Company deconsolidated its investment in the NJ Property on September 30, 2013 (refer to Note 3). As of December 31, 2012, the carrying value of the investment in the NJ Property was $64.8 million. For the three months ended September 30, 2013 and 2012, the Company recognized equity in losses of $0.1 million and $0.4 million, respectively. For the nine months ended September 30, 2013 and 2012, the Company recognized equity in losses of $0.8 million and $1.2 million, respectively.

LandCap Partners

In October 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 September 30, 2013 and December 31, 2012, the carrying value of the 49% interest in LandCap was $13.8 million and $13.5 million, respectively. As of September 30, 2013 and December 31, 2012, LandCap had investments totaling $27.0 million and $30.9 million, respectively. For the three months ended September 30, 2013 and 2012, the Company recognized equity in earnings of $0.1 million for both periods. For the nine months ended September 30, 2013 and 2012, the Company recognized equity in earnings of $0.3 million and equity in losses of $0.6 million, respectively.

CS Federal Drive, LLC

The Company owns a 50% interest in CS Federal Drive, LLC ("CS/Federal"), which owns three adjacent class A office/flex buildings in Colorado. The properties were acquired for $54.3 million and the joint venture financed the transaction with two separate non-recourse mortgages totaling $38.0 million and the remainder in cash. The mortgages mature on February 11, 2016 and bear a fixed interest rate of 5.51% and 5.46%, respectively. As of September 30, 2013 and December 31, 2012, the carrying value of the investment in CS/Federal was $5.5 million and $5.4 million, respectively. For the three months ended September 30, 2013 and 2012, the Company recognized equity in earnings of $0.1 million and $0.2 million, respectively. For the nine months ended September 30, 2013 and 2012, the Company recognized equity in earnings of $0.2 million and $0.6 million, respectively.

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Sponsored Companies

The Company committed to purchase up to $10.0 million in shares of each of its Sponsored Companies common stock during the two year period from when each offering was declared effective, in the event that Sponsored Company's distributions to its stockholders exceeds its modified funds from operations ("MFFO") (as defined in accordance with the current practice guidelines issued by the Investment Program Association).

With respect to NorthStar Income, the Company purchased an aggregate of 507,980 shares of NorthStar Income's common stock for $4.6 million from inception of NorthStar Income through the termination of the agreement which ended on July 19, 2013.

In connection with the commitment with NorthStar Healthcare, the Company purchased 225,292 shares of its common stock (including 222,223 shares for the satisfaction of the minimum offering amount) for $2.0 million. In August 2013, NorthStar Healthcare was deconsolidated as the Company no longer owns a majority voting interest. The commitment with NorthStar Healthcare ends in August 2014, unless extended by the Company in its discretion.

In connection with the commitment with NorthStar Income II, in September 2013, the Company satisfied NorthStar Income II's minimum offering amount as a result of the purchase of 222,223 shares of its common stock for $2.0 million. The Company currently consolidates NorthStar Income II based on its majority voting interest in the entity. The Company expects to deconsolidate NorthStar Income II as additional capital is raised and the Company no longer owns a majority voting interest. The commitment with NorthStar Income II ends in May 2015, unless extended by the Company in its discretion.

In 2013, the Company sold an $11.3 million first mortgage loan originated by the Company to NorthStar Healthcare. Subsequent to quarter end, the Company sold a memory care facility acquired by the Company in 2013 to NorthStar Healthcare at cost (refer to Note 4). In the third quarter 2013, the Company sold a $2.0 million pari passu participation in a first mortgage loan originated by the Company to NorthStar Income II.

Securitization 2012-1

The Company entered into an agreement with NorthStar Income that provides that both the Company and NorthStar Income receive the economic benefit and bear the economic risk associated with the investments each contributed into Securitization 2012-1. In both cases, the respective retained equity interest of the Company and NorthStar Income is subordinate to interests of the senior bondholders of Securitization 2012-1 and the senior bondholders have no recourse to the general credit of the Company or NorthStar Income. In the event that either the Company or NorthStar Income suffer a complete loss of their retained equity interests in Securitization 2012-1, any additional losses would be borne by the remaining retained equity interests held by the Company or NorthStar Income, as the case may be, prior to the senior bondholders.

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Securitization 2013-1

In August 2013, the Company bifurcated three first mortgage loans with an aggregate principal amount of $141.7 million into senior loans of $79.1 million and subordinate mortgage interests of $62.6 million to facilitate the financing of the senior loans into Securitization 2013-1, a securitization financing transaction entered into by NorthStar Income. The Company transferred three senior loans at cost to Securitization 2013-1. The Company did not retain any interest in the senior loans and retained the subordinate mortgage interests on an unleveraged basis. The sale of the senior loans obtained sale treatment under U.S. GAAP as the Company no longer maintains effective control of its transferred assets.

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 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. One loan of $16.4 million matures in March 2014 and has a one-year extension option. 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%. For the three months ended September 30, 2013 and 2012, the Company earned an aggregate $0.5 million of interest income for both periods. For the nine months ended September 30, 2013 and 2012, the Company earned an aggregate $1.6 million of interest income for both periods. On September 30, 2013, the Company deconsolidated certain of the N-Star CDOs and as a result no longer records these loans on its consolidated balance sheets (refer to Note 3).

Furthermore, in February 2013, NorthStar Income made a $91.0 million loan to the Legacy Fund. In connection with this loan, the Company acting in its capacity as the advisor to NorthStar Income, received a customary 1.0% origination fee and further earns an annual asset management fee of 1.25%. In addition, the Company leases office space in Colorado with an affiliate of the Legacy Fund under an operating lease with annual lease payments of approximately $0.2 million through December 31, 2016. The Company has the option to renew the lease for an additional five years.

10. Equity-Based Compensation

Omnibus Stock Incentive Plan

In September 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 adopted by the board of directors of the Company on April 17, 2013 and approved by the stockholders on May 29, 2013 (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 limited partnership interests in the Operating Partnership which are structured as profits interests ("LTIP Units") or any combination of the foregoing. LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of grant. The eligible participants in the Stock Incentive Plan include directors, officers, employees, consultants and advisors of the Company.

An aggregate of 15,599,342 shares of common stock of the Company are currently reserved pursuant to the Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. 9,202,026 LTIP Units have been issued, of which 2,771,974 LTIP Units remain subject to vesting.

The following table presents the status of all LTIP Unit grants as of September 30, 2013 and December 31, 2012 (units in thousands):



	September 30, 2013				December 31, 2012
	LTIP Unit Grants⁽²⁾		Weighted Average Grant Price		LTIP Unit Grants		Weighted Average Grant Price
Beginning balance⁽¹⁾	6,228		$	7.66	4,208		$	7.53
Granted	4,332		8.10		2,306		5.59
Converted to common stock	(1,326	)	7.91		(277	)	11.09
Forfeited	(2	)	5.38		(9	)	5.38
Ending Balance/Weighted Average	9,232		$	7.83	6,228		$	7.66

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____________________________________________________________


(1)	Reflects the balance as of January 1, 2013 and 2012 for the periods ended September 30, 2013 and December 31, 2012, respectively.


(2)	Includes 698,142 LTIP Units issued in connection with the NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan of which 667,509 LTIP Units have been converted.

The Company recognized equity-based compensation expense related to these awards of $2.3 million and $1.1 million for the three months ended September 30, 2013 and 2012, respectively, and equity-based compensation expense of $10.6 million and $4.9 million for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, the related equity-based compensation expense to be recognized over the remaining vesting period through April 2017 is $15.6 million, provided there are no forfeitures.

Incentive Compensation Plan

The compensation committee of the board of directors (the "Committee") of the Company approved the material terms of the NorthStar Realty Finance Corp. Executive Incentive Bonus Plan for the Company's executive officers and other employees (the "Plan"). Pursuant to 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" for the year; and (b) 25% of the Company's adjusted funds from operations, as adjusted, 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 prior to or shortly after 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 and/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 (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.

In connection with the 2009 Plan, the Company issued 3,147,454 RSUs to executive officers which vested subject to the Company achieving cumulative performance hurdles and/or target stock prices for the three-year period ended December 31, 2011. The Company determined in 2011 that the performance hurdle 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, and as a result, 2,609,074 RSUs were settled in cash in February 2012. 538,380 RSUs were not settled until December 2012, subject to continued employment of certain executive officers through such date. The Company recognized compensation expense of $0.1 million and $0.9 million for the three and nine months, respectively, ended September 30, 2012 and such RSUs were settled in cash for $1.4 million in December 2012.

In connection with the 2010 Plan, the Company issued 2,209,999 RSUs to executive officers which vest subject to the Company achieving cumulative performance hurdles and/or target stock prices for the three-year period ending December 31, 2012. The Company determined in the fourth quarter of 2011 the performance hurdle was reached 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 the three and nine months ended September 30, 2012, the Company recognized equity-based compensation expense of $1.4 million and $4.3 million, respectively, and the award was fully amortized by December 31, 2012. In achievement of the performance hurdles, the Company issued 2,209,999 LTIP Units to executive officers in February 2013.

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In connection with the 2011 Plan, the Company issued 1,525,797 RSUs to executive officers which vest 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 months ended September 30, 2013 and 2012, the Company recognized compensation expense of $0.4 million for both periods. For the nine months ended September 30, 2013 and 2012, the Company recognized compensation expense of $1.1 million and $0.9 million, respectively. Upon conclusion of the applicable performance period, each executive officer will receive the Long Term Amount Payout (if earned). 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 which may not be sold prior to January 1, 2015. The Company also granted 606,257 LTIP Units (net of forfeitures) to certain non-executive employees, which vest quarterly over three years beginning April 2012.

In connection with the 2012 Plan, the Company issued 1,409,682 RSUs to executive officers, subject to the Company achieving target stock prices for the four-year period ending December 31, 2015. 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 nine months ended September 30, 2013, the Company recognized compensation expense of $0.8 million and $1.9 million, respectively. Upon conclusion of the applicable performance period, each executive officer will receive the Long Term Amount Payout (if earned). At the same time, the Company granted 1,409,682 LTIP Units to executive officers which vest to the recipient at a rate of four annual installments ending January 29, 2016 and which may not be sold prior to December 31, 2015. The Company also granted 581,607 LTIP Units to certain non-executive employees, which vest quarterly over three years beginning April 2013.

11. Stockholders' Equity

Common Stock

In February 2013, the Company issued 34.5 million shares of its common stock at a public offering price of $8.39 per share, which includes the full over-allotment option exercised by the underwriters of the offering. The net proceeds to the Company were $280.2 million.

In August 2013, the Company issued 40.3 million shares of its common stock at a public offering price of $9.60 per share, which includes the full over-allotment option exercised by the underwriter of the offering. The net proceeds to the Company were $376.1 million.

Preferred Stock Offering

In April 2013, the Company issued 8.0 million shares of its new 8.50% Series D Cumulative Redeemable Preferred Stock ("Series D Preferred Stock"), including the over-allotment option, for net proceeds of $193.3 million.

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. Pursuant to 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 nine months ended September 30, 2013, the Company issued 20,438 shares of its common stock pursuant to the DRP for gross sales proceeds of $0.2 million.

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Dividends

The following table presents dividends declared (on a per share basis) for the nine months ended September 30, 2013:



Common Stock			Preferred Stock
				Dividend
Declaration Date	Dividend		Declaration Date	Series A		Series B		Series C		Series D
February 13	$	0.18	February 1	$	0.54688	$	0.51563	$	0.76424	NA
May 1	$	0.19	May 1	$	0.54688	$	0.51563	$	0.55469	$	0.20660
July 31	$	0.20	July 31	$	0.54688	$	0.51563	$	0.55469	$	0.53125

Earnings Per Share

The following table presents earnings per share ("EPS") for the three and nine months ended September 30, 2013 and 2012 (dollars and shares in thousands, except per share data):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Numerator:
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(151,027	)	$	(149,578	)	$	(127,031	)	$	(261,007	)
Net income (loss) attributable to LTIP Units non-controlling interest	(6,296		)	(7,059		)	(5,184		)	(12,726		)
Net income (loss) attributable to common stockholders and LTIP Units⁽¹⁾	$	(157,323	)	$	(156,637	)	$	(132,215	)	$	(273,733	)
Denominator:⁽²⁾
Weighted average shares of common stock	222,206			134,272			199,410			120,491
Weighted average LTIP Units⁽¹⁾	9,263			6,337			9,140			5,955
Weighted average shares of common stock and LTIP Units	231,469			140,609			208,550			126,446
Earnings (loss) per share:
Basic	$	(0.68	)	$	(1.11	)	$	(0.63	)	$	(2.16	)
Diluted	$	(0.68	)	$	(1.11	)	$	(0.63	)	$	(2.16	)

____________________________________________________________


(1)	The EPS calculation takes into account LTIP Units which receive non-forfeitable dividends from the date of grant, share equally in the Company's net income (loss) and convert on a one-for-one basis into common stock.


(2)	Excludes the effect of exchangeable senior notes and certain warrants outstanding and exercisable that were not dilutive as of September 30, 2013. These instruments could potentially impact diluted EPS in future periods, depending on changes in the Company's stock price and other factors.

12. Non-controlling Interests

Operating Partnership

Non-controlling interests includes the aggregate LTIP Units held by limited partners (the "Unit Holders") in the Operating Partnership. Net income (loss) attributable to the non-controlling interest is based on the weighted average Unit Holders' ownership percentage of the Operating Partnership for the respective period. The issuance of additional common stock or LTIP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or common stock at the option of the Company, it is deemed to be equivalent to common stock. 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 September 30, 2013 and December 31, 2012, LTIP Units of 9,232,660 and 6,228,727 were outstanding, respectively, representing a 3.7% non-controlling interest in the Operating Partnership for both periods. Net income (loss) attributable to the Operating Partnership non-controlling interest for the three months ended September 30, 2013 and 2012 was a loss of $6.3 million and $7.1 million, respectively. Net income (loss) attributable to the Operating Partnership non-controlling interest for the nine months ended September 30, 2013 and 2012 was a loss of $5.2 million and $12.7 million, respectively.

Other

The Company has non-controlling interests in various real estate investments that represent third-party equity interests in ventures that are consolidated with the Company's financial statements. In addition, through September 30, 2013, NorthStar Income II issued shares of common stock to third-parties, representing a non-controlling interest of 12.5%. The Company

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

currently consolidates NorthStar Income II based on its majority voting interest in the entity. The Company expects to deconsolidate NorthStar Income II as additional capital is raised and the Company no longer owns a majority voting interest.

Net income (loss) attributable to the other non-controlling interests for the three months ended September 30, 2013 and 2012 was an immaterial amount and $0.6 million, respectively. Net income (loss) attributable to the other non-controlling interests for the nine months ended September 30, 2013 and 2012 was a loss of $0.3 million and $1.2 million, respectively.

The following table presents net income (loss) attributable to the Company's common stockholders for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Income (loss) from continuing operations	$	(151,003	)	$	(149,999	)	$	(126,954	)	$	(261,789	)
Income (loss) from discontinued operations	(24		)	393			(77		)	483
Gain on sale from discontinued operations	—			28			—			299
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(151,027	)	$	(149,578	)	$	(127,031	)	$	(261,007	)

13. Fair Value

Fair Value Measurement

The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized 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 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.

Investments in Private Equity Funds

The Company accounts for PE Investments at fair value which is determined based on a valuation model using assumptions for the timing and amount of expected future cash flow for income and realization events for the underlying assets in the funds and discount rate. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 of the fair value hierarchy. The Company is not using the NAV (practical expedient) of the underlying funds for purposes of determining fair value.

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(Unaudited)

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 may be valued based on a single broker quote or an internal price which may have less observable pricing, and as such, would be classified as Level 3 of the fair value hierarchy. Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as its knowledge of and experience in the market.

N-Star CDO Bonds

The fair value of subordinate N-Star CDO bonds is determined using an internal price interpolated based on third party prices of the more senior N-Star CDO bonds of the respective CDO. For the remaining N-Star CDO bonds, fair value is determined 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 a valuation model with observable inputs such as interest rate and other unobservable inputs for assumptions related to the timing and amount of expected future cash flow, discount rate, estimated prepayments and projected losses. All N-Star CDO bonds are classified as Level 3 of the fair value hierarchy.

N-Star CDO Equity

The fair value of N-Star CDO equity is determined based on a valuation model using assumptions for the timing and amount of expected future cash flow for income and realization events for the underlying collateral of these CDOs and discount rate. This fair value measurement is generally based on unobservable inputs and, as such, is 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 observable inputs such as interest rates and contractual cash flow, 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 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.

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 a valuation model with observable inputs such as interest rate and other unobservable inputs for assumptions related to the timing and amount of expected future cash flow, 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 with observable inputs such as interest rate 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 flow. Junior subordinated notes are classified as Level 3 of the fair value hierarchy.

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(Unaudited)

Fair Value Hierarchy

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 present financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 by level within the fair value hierarchy (dollars in thousands):



	September 30, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Investments in private equity funds, at fair value	$	—	$	—	$	624,652	$	624,652
Real estate securities, available for sale:
N-Star CDO bonds	—		—		153,899		153,899
N-Star CDO equity	—		—		129,670		129,670
CMBS and other securities	—		20,919		25,560		46,479
CRE securities in N-Star CDOs
CMBS	—		559,531		49,620		609,151
Third-party CDO notes	—		960		24,090		25,050
Agency debentures	—		30,770		—		30,770
Unsecured REIT debt	—		9,526		—		9,526
Trust preferred securities	—		—		5,791		5,791
Subtotal	—		621,706		388,630		1,010,336
Derivative assets	—		6,393		—		6,393
Total assets	$	—	$	628,099	$	1,013,282	$	1,641,381
Liabilities:
CDO bonds payable	$	—	$	—	$	866,161	$	866,161
Junior subordinated notes	—		—		192,279		192,279
Derivative liabilities	—		68,892		—		68,892
Total liabilities	$	—	$	68,892	$	1,058,440	$	1,127,332



	December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Real estate securities, available for sale:
CMBS	$	—	$	703,327	$	280,691	$	984,018
Third-party CDO notes	—		420		47,816		48,236
Unsecured REIT debt	—		56,246		135		56,381
Trust preferred securities	—		—		9,571		9,571
Agency debentures	—		26,462		—		26,462
Subtotal	—		786,455		338,213		1,124,668
Derivative assets	—		6,229		—		6,229
Total assets	$	—	$	792,684	$	338,213	$	1,130,897
Liabilities:
CDO bonds payable⁽¹⁾	$	—	$	—	$	1,999,470	$	1,999,470
Junior subordinated notes	—		—		197,173		197,173
Derivative liabilities	—		170,840		—		170,840
Total liabilities	$	—	$	170,840	$	2,196,643	$	2,367,483

____________________________________________________________


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

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(Unaudited)

The following table presents additional information about financial assets and liabilities which are measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands):



	September 30, 2013												December 31, 2012
	Investments in Private Equity Funds			Real Estate Securities			CDO Bonds Payable			Junior Subordinated Notes			Real Estate Securities			CDO Bonds Payable			Junior Subordinated Notes
Beginning balance⁽¹⁾	$	—		$	338,213		$	1,999,470		$	197,173		$	422,607		$	2,145,239		$	157,168
Transfers into Level 3⁽²⁾	—			—			—			—			84,871			—			—
Transfers out of Level 3⁽²⁾	—			(133,667		)	—			—			(91,161		)	—			—
Purchases / borrowings / amortization / contributions	662,052			13,663			43,983			—			59,559			99,775
Sales	—			(40,509		)	—			—			(95,433		)	—			—
Paydowns / distributions	(89,704		)	(35,410		)	(518,129		)	—			(80,911		)	(675,038		)	—
Repurchases	—			—			(32,719		)	—			—			(103,118		)	—
Gains:
Equity in earnings of unconsolidated ventures	52,304			—			—			—			—			—			—
Unrealized gains included in earnings	—			60,127			—			(4,894		)	59,048			—			—
Realized gains included in earnings	—			13,619			—			—			25,431			—			—
Unrealized gain on real estate securities, available for sale included in OCI	—			2,221			—			—			6,982			—			—
Deconsolidation of N-Star CDOs⁽³⁾	—			272,107			(1,157,499		)	—			—			—			—
Losses:
Equity in losses of unconsolidated ventures	—			—			—			—			—			—			—
Unrealized losses included in earnings	—			(19,581		)	105,359			—			(47,795		)	510,105			40,005
Realized losses included in earnings	—			(4,995		)	19,445			—			(4,416		)	22,507			—
Unrealized losses on real estate securities, available for sale included in OCI	—			(4		)	—			—			(569		)	—			—
Deconsolidation of N-Star CDOs⁽³⁾	—			(77,154		)	406,251
Ending balance	$	624,652		$	388,630		$	866,161		$	192,279		$	338,213		$	1,999,470		$	197,173
Gains (losses) included in earnings attributable to the change in unrealized gains (losses) relating to assets or liabilities still held.	$	—		$	(9	)	$	(35,530	)	$	4,894		$	14,481		$	(320,134	)	$	(40,005	)

____________________________________________________________


(1)	Represents the balance as of January 1, 2013 and 2012 for the periods ended September 30, 2013 and December 31, 2012, respectively.


(2)	Transfers between Level 2 and Level 3 represent a fair value measurement from a third-party pricing service or broker quotations that have become more or less observable during the period. Transfers are assumed to occur at the beginning of the year.


(3)	Represents amounts recorded as a result of the deconsolidation of certain N-Star CDOs. Refer to Note 3 for further disclosure.

There were no transfers, other than those identified in the table above, during the periods ended September 30, 2013 and December 31, 2012.

The Company relies on the third-party pricing exception with respect to the requirement to provide quantitative disclosures about significant Level 3 inputs being used to determine fair value measurements related to CRE securities (including N-Star CDO bonds), CDO bonds payable and junior subordinated notes. The Company believes such pricing service or broker quotation for such items may be based on a market transaction of comparable securities, inputs including forecasted market rates, contractual terms, observable discount rates for similar securities and credit (such as credit support and delinquency rates).

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(Unaudited)

For the nine months ended September 30, 2013, quantitative information about the Company's remaining Level 3 fair value measurements on a recurring basis are as follows:



	Fair Value		Valuation Technique	Key Unobservable Inputs	Range
PE Investments	$	624,652	Discounted Cash Flow Model	Discount Rate	17% - 23%
N-Star CDO equity	$	129,670	Discounted Cash Flow Model	Discount Rate	18% - 20%

For the nine months ended September 30, 2013, non-recurring fair value measurements included one loan for which a provision for loan loss was recorded but is no longer recorded on the consolidated balance sheets due to the deconsolidation of certain N-Star CDOs (refer to Note 3). The key unobservable inputs used to determine the provision for loan loss included a 7.0% discount rate and a 5.0% capitalization rate. Additionally, in connection with the deconsolidation of certain N-Star CDOs, the Company recorded CRE debt investments, CDO bonds payable and a note payable at fair value related to amounts that previously eliminated in consolidation. The fair value was determined under the methodologies disclosed below.

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

Fair Value Option

The Company has historically elected to apply the fair value option for 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 financed in N-Star CDOs; CDO bonds payable; and junior subordinated notes. Given the market volatility in the past few years, the Company has observed that the impact of electing the fair value option would generally result in additional variability to the Company's consolidated statements of operations which management believes is not a useful presentation for such financial assets and liabilities. Therefore, the Company more recently has not elected the fair value option for new investments in CRE securities and securitization financing transactions. The Company may elect the fair value option for certain of its financial assets or liabilities due to the nature of the instrument. In the case of PE Investments and N-Star CDO equity, the Company elected the fair value option because management believes it is a more useful presentation for such investments. The Company determined recording the PE Investments and N-Star CDO equity based on the change in fair value of projected future cash flow from one period to another better represents the underlying economics of the respective investment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the fair value of financial instruments for which the fair value option was elected as of September 30, 2013 and December 31, 2012 (dollars in thousands):



	September 30, 2013		December 31, 2012
Assets:
Investments in private equity funds, at fair value	$	624,652	$	—
Real estate securities, available for sale:⁽¹⁾
N-Star CDO equity	129,670		—
CMBS and other securities	30,209		20,668
CRE securities in N-Star CDOs
CMBS	609,151		897,800
Third-party CDO notes	25,050		25,756
Agency debentures	30,770		26,462
Unsecured REIT debt	9,526		56,381
Trust preferred securities	5,791		9,571
Subtotal	840,167		1,036,638
Total assets	$	1,464,819	$	1,036,638
Liabilities:
CDO bonds payable⁽²⁾	$	866,161	$	1,999,470
Junior subordinated notes	192,279		197,173
Total liabilities	$	1,058,440	$	2,196,643

___________________________________________________________


(1)	September 30, 2013 excludes 32 CRE securities with an aggregate carrying value of $170.2 million for which the fair value option was not elected. December 31, 2012 excludes 21 CRE securities with an aggregate carrying value of $88.0 million for which the fair value option was not elected.


(2)	December 31, 2012 excludes CapLease CDO bonds payable with a carrying value of $113.0 million for which the fair value option was not elected.

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 September 30, 2013 (dollars in thousands):



	Fair Value		Amount Due Upon Maturity		Difference
CDO bonds payable	$	866,161	$	1,631,195	$	(765,034	)
Junior subordinated notes	192,279		280,117		(87,838		)
Total	$	1,058,440	$	1,911,312	$	(852,872	)

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.

Change in Fair Value Recorded in the Statements of Operations

The following table presents 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 for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013⁽²⁾			2012			2013			2012
Assets:
Real estate securities, available for sale	$	(35,924	)	$	24,109		$	86,344		$	49,048
Liabilities:
CDO bonds payable	44,070			(193,721		)	(105,359		)	(403,196		)
Junior subordinated notes	28,338			(20,726		)	4,894			(24,932		)
Subtotal⁽¹⁾	36,484			(190,338		)	(14,121		)	(379,080		)
Derivatives	(8,540		)	6,871			29,661			27,166
Total	$	27,944		$	(183,467	)	$	15,540		$	(351,914	)

____________________________________________________________


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


(2)	Includes a reversal of net unrealized gains from the deconsolidation of certain N-Star CDOs. Refer to Note 3 for further disclosure.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The remaining amount of unrealized gains (losses) on investments and other in the consolidated statements of operations relates to net cash payments on interest rate swaps (refer to Note 14).

As the value of the Company's outstanding CDO bonds payable increase towards par through a change in fair value, it generates an unrealized loss which is recorded in the consolidated statements of operations. For the three and nine months ended September 30, 2013, unrealized losses for CDO bonds payable attributable to paydowns at par, including the liquidation of N-Star CDO II and the deconsolidation of certain N-Star CDOs (refer to Notes 3 and 8) and repurchases were $8.5 million and $69.8 million, respectively. The remaining amount relates to the change 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. The following disclosure of 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.

The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of September 30, 2013 and December 31, 2012 (dollars in thousands):



	September 30, 2013						December 31, 2012
	Principal / Notional Amount		Carrying Value		Fair Value		Principal / Notional Amount		Carrying Value		Fair Value
Financial assets:⁽¹⁾
Real estate debt investments, net	$	1,484,697	$	1,177,517	$	1,166,953	$	2,371,464	$	1,832,231	$	1,763,851
Real estate securities, available for sale⁽²⁾	2,036,011		1,010,336		1,010,336		2,539,075		1,124,668		1,124,668
Derivative assets⁽²⁾⁽³⁾	832,602		6,393		6,393		815,500		6,229		6,229
Financial liabilities:⁽¹⁾
Mortgage and other notes payable	$	1,785,711	$	1,785,711	$	1,786,755	$	1,015,670	$	1,015,670	$	1,034,428
CDO bonds payable⁽²⁾	1,631,195		866,161		866,161		3,371,753		2,112,441		2,108,817
Securitization bonds payable	97,937		97,919		98,005		98,131		98,005		98,298
Credit facilities	23,594		23,594		23,594		61,088		61,088		61,088
Secured term loan	—		—		—		14,664		14,664		15,276
Exchangeable senior notes	611,455		555,432		768,653		303,165		291,031		357,627
Junior subordinated notes⁽²⁾	280,117		192,279		192,279		280,117		197,173		197,173
Derivative liabilities⁽²⁾⁽³⁾	756,513		68,892		68,892		1,392,269		170,840		170,840

____________________________________________________________


(1)	The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.


(2)	Refer to the "Determination of Fair Value" above for disclosure of methodologies used to determine fair value.


(3)	Derivative assets and liabilities exclude timing swaps with an aggregate notional amount of $28.0 million and $68.9 million as of September 30, 2013 and December 31, 2012, 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

For CRE debt investments, fair value 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. Fair value was determined 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 value approximates fair value. These fair value measurements of CRE debt are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Mortgage and Other Notes Payable

For mortgage and other notes payable, the Company primarily 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. The fair value of the note payable assumed in deconsolidation of certain N-Star CDOs was determined based on comparing the current rate to the estimated rate for a newly originated mortgage loan with similar credit risk. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.

Securitization Bonds Payable

Securitization 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 observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy.

Credit Facilities

The Company has amounts outstanding under one of its four credit facilities. All credit facilities bear floating rates of interest. As of the reporting date, the Company believes the carrying value approximates fair value. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.

Secured Term Loan

Secured term loan represented the Company's Term Asset-Backed Securities Loan Facility borrowing. The estimated fair value was based on interest rates available for issuance of liabilities with similar terms and remaining maturities. This fair value measurement was based on observable inputs, and as such, was 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 as such, are classified as Level 2 of the fair value hierarchy.

The following table presents the exchangeable senior notes as of September 30, 2013 (dollars in thousands):



	Principal Amount		Carrying Value		Fair Value
7.25% Notes	$	12,955	$	12,955	$	13,199
7.50% Notes	172,500		164,644		273,169
8.875% Notes	81,000		79,081		128,936
5.375% Notes	345,000		298,752		353,349
Total	$	611,455	$	555,432	$	768,653

14. Risk Management and Derivative Activities

Derivatives

The Company uses derivative instruments primarily to manage interest rate risk 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 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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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following tables present derivative instruments that were not designated as hedges under U.S. GAAP as of September 30, 2013 and December 31, 2012 (dollars in thousands):



	Number	Notional Amount⁽¹⁾		Fair Value Net Asset (Liability)				Range of Fixed LIBOR	Range of Maturity
As of September 30, 2013:
Interest rate swaps	20	$	756,513	$	(68,892	)	⁽²⁾	4.55% ‑ 5.31%	May 2014 ‑ October 2019
Interest rate caps/floors	5	832,602		6,393				1.64% ‑ 6.00%	December 2013 - June 2018
Total	25	$	1,589,115	$	(62,499	)
As of December 31, 2012:
Interest rate swaps	34	$	1,392,269	$	(170,840	)	⁽²⁾	4.55% - 5.63%	May 2013 - October 2019
Interest rate caps/floors	5	815,500		6,229				1.64% - 7.00%	January 2013⁽³⁾ - October 2014
Total	39	$	2,207,769	$	(164,611	)

____________________________________________________________


(1)	Excludes timing swaps with a notional amount of $28.0 million and $68.9 million as of September 30, 2013 and December 31, 2012, respectively.


(2)	All of the 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 was not recorded.


(3)	Two floors with a total notional amount of $450.0 million were extended to July 2014.

The change in number and notional amount of interest rate swaps from December 31, 2012 primarily relates to the deconsolidation of certain N-Star CDOs (refer to Note 3) and contractual notional amortization. The Company had no derivative financial instruments that were designated as hedges in qualifying hedging relationships as of September 30, 2013 and December 31, 2012.

The following table presents the fair value of derivative instruments, as well as their classification on the consolidated balance sheets, as of September 30, 2013 and December 31, 2012 (dollars in thousands):



	Balance Sheet Location	September 30, 2013		December 31, 2012
Interest rate caps/floors	Derivative assets	$	6,393	$	6,229
Interest rate swaps	Derivative liabilities	$	68,892	$	170,840

The following table presents the effect of derivative instruments in the consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):



		Three Months Ended September 30,						Nine Months Ended September 30,
	Statements of Operations Location	2013			2012			2013			2012
Amount of gain (loss) recognized in earnings:
Adjustments to fair value interest rate swaps	Unrealized gain (loss) on investment and other	$	(8,540	)	$	6,871		$	29,661		$	27,166
Net cash payment for interest rate swaps	Unrealized gain (loss) on investment and other	$	(11,379	)	$	(18,552	)	$	(44,053	)	$	(61,159	)
Amount of swap gain (loss) reclassified from OCI into earnings	Interest expense on debt and securities	$	(1,172	)	$	(1,845	)	$	(4,656	)	$	(5,591	)
Reclassification of swap gain (loss) into gain (loss) from deconsolidation of N-Star CDOs (refer to Note 3)	Gain (loss) from deconsolidation	$	(15,246	)	$	—		$	(15,246	)	$	—

The Company's counterparties held no cash margin as collateral against the Company's derivative contracts as of September 30, 2013 and December 31, 2012.

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 portfolio generate 6% and 10% of the Company's rental and escalation income for the nine months

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

ended September 30, 2013, respectively, which represents 2% and 4% of total revenue, respectively. The Company believes the remainder of its real estate portfolio is reasonably well diversified and does not contain any unusual concentrations of credit risks.

15. Commitments and Contingencies

WaMu Matter

In 2009, one of the Company's net lease investments comprised of three office buildings totaling 257,000 square feet located in Chatsworth, California and 100% leased to Washington Mutual Bank was foreclosed on by the lender. The lender subsequently filed a complaint against subsidiaries of the Company in the Superior Court of the State of California, County of Los Angeles. In March 2012, the Court of Appeal of the State of California, Second Appellate District, issued a unanimous decision in favor of the Company's subsidiary, overturning the judgment issued by the Superior Court of California for the County of Los Angeles. The ruling directed the Superior Court to enter summary judgment in the Company's favor and reversed 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 a $20.0 million loss accrual recorded in other income (loss) in the consolidated statements of operations.

Other

The Company is involved in various litigation matters arising in the ordinary course of its business. Although the Company is unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, the legal proceedings are not expected to have a material adverse effect on the Company's financial position or results of operations.

16. Segment Reporting

Effective January 1, 2013, the Company redefined its segments to conform with its management of such businesses. Accordingly, the Company has reclassified the prior period segment financial results to conform to the current year presentation. The Company currently 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 and other loans and preferred equity interests. The Company may from time to time take title to collateral in connection with a CRE debt investment as REO which would be included in the CRE debt business.

•

The real estate business concentrates on various types of investments in commercial real estate located throughout the United States that includes manufactured housing communities, healthcare, net lease and multifamily properties. In addition, the real estate business includes indirect investments in real estate through joint ventures owning limited partnership interests in real estate private equity funds managed by institutional-quality sponsors, diversified by property type and geography. The manufactured housing communities portfolio focuses on owning pad rental sites located throughout the United States. The healthcare properties focus on mid-acuity facilities (i.e., skilled nursing and assisted living), with the highest concentration in assisted living facilities and are typically leased under net leases to healthcare operators. The net lease properties are primarily office, industrial and retail properties typically under net leases to corporate tenants.

•

The asset management business is focused on commercial real estate related activities such as sponsoring and advising on a fee basis Sponsored Companies. The Company currently manages NorthStar Income, NorthStar Healthcare and NorthStar Income II. NorthStar Income successfully completed its $1.1 billion primary offering on July 1, 2013. The Company is currently raising capital for NorthStar Healthcare, which has a maximum offering amount of $1.1 billion and NorthStar Income II which has a maximum offering amount of $1.65 billion. In connection with the Sponsored Companies, the Company manages the day to day affairs including identifying, originating, acquiring and managing investments on their behalf and earns advisory and other fees for these services, which vary based on the amount of assets under management, investment activity and investment performance. In addition, the Company continues to receive collateral management fees on the Company's CDO financing transactions.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The Company also historically originated or acquired CRE debt and securities investments that were predominantly financed through permanent, non-recourse CDOs. The Company's consolidated CDO financing transactions are reported as a separate business segment. Additionally, the Company owns N-Star CDO bonds and N-Star CDO equity in deconsolidated CDO financing transactions which are recorded in the CRE securities segment. All of the Company's CDOs are past the reinvestment period and given the nature of these transactions, these CDOs are amortizing over time as the underlying assets paydown or are sold. The Company has been winding down its legacy CDO business and investing in a broad and diverse range of CRE assets. As a result, such legacy business is a significantly smaller portion of its business today than in the past.

The Company has the ability to invest in a broad spectrum of commercial real estate assets and as a result, pursues opportunistic investments across its business lines including CRE debt and equity investments. The Company may also invest in opportunistic CRE securities such as an investment in a "B-piece" and AAA/Aaa CMBS.

The Company primarily generates revenue from net interest income on the CRE debt and securities portfolios, rental income from its real estate properties and fee income from asset management activities. Additionally, the Company records equity in earnings of unconsolidated ventures, including from PE Investments. The Company's income is primarily derived through the difference between revenue and the cost at which the Company is able to finance its investments. The Company may also acquire investments which generate attractive returns without any leverage.

The following tables present segment reporting for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):



											N-Star CDOs⁽²⁾
Three months ended September 30, 2013:	CRE Debt		Real Estate				CRE Securities		Asset Management⁽¹⁾		CRE Debt			CRE Securities			Corporate⁽³⁾				Eliminations⁽¹⁾			Consolidated Total
Net interest income on debt and securities	$	13,406	$	234			$	10,613	$	—	$	10,212		$	21,581		$	8,963		⁽⁴⁾	$	—		$	65,009
Advisory and other fees, related party	—		—			��	—		6,816		—			—			—				—			6,816
Other revenues	260		62,600				—		4,721		11,506			—			384				(3,145		)	76,326
Expenses	487		70,348			⁽⁵⁾	14		4,125		16,006			(9,110		)	35,089				(3,145		)	113,814
Income (loss) from operations	13,179		(7,514		)		10,599		7,412		5,712			30,691			(25,742		)		—			34,337
Equity in earnings (losses) of unconsolidated ventures	1,261		29,768				—		152		(168		)	—			—				—			31,013
Unrealized gain (loss) on investments and other	—		—				1,862		—		10,185			(23,820		)	28,338				—			16,565
Realized gain (loss) on investments and other	2,225		(11		)		32,628		—		(2,308		)	(1,967		)	—				—			30,567
Gain (loss) from deconsolidation of N-Star CDOs	—		—				—		—		(281,488		)	27,282			—				—			(254,206		)
Income (loss) from continuing operations	16,665		22,243				45,089		7,564		(268,067		)	32,186			2,596				—			(141,724		)
Income (loss) from discontinued operations	—		—				—		—		(25		)	—			—				—			(25		)
Net income (loss)	$	16,665	$	22,243			$	45,089	$	7,564	$	(268,092	)	$	32,186		$	2,596			$	—		$	(141,749	)

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



												N-Star CDOs⁽²⁾
Three months ended September 30, 2012:	CRE Debt		Real Estate				CRE Securities			Asset Management⁽¹⁾		CRE Debt			CRE Securities			Corporate⁽³⁾				Eliminations⁽¹⁾			Consolidated Total
Net interest income on debt and securities	$	6,846	$	43			$	3,778		$	—	$	22,419		$	28,532		$	8,636		⁽⁴⁾	$	—		$	70,254
Advisory and other fees, related party	—		—				—			1,507		—			—			—				—			1,507
Other revenues	—		21,817				—			15,993		7,558			—			(149		)		(3,545		)	41,674
Expenses	424		19,423			⁽⁵⁾	—			13,872		19,043			1,953			26,939				(3,545		)	78,109
Income (loss) from operations	6,422		2,437				3,778			3,628		10,934			26,579			(18,452		)		—			35,326
Equity in earnings (losses) of unconsolidated ventures	358		(81		)		—			67		77			—			—				—			421
Unrealized gain (loss) on investments and other	—		—				(443		)	—		(154,255		)	(26,595		)	(20,726		)		—			(202,019		)
Realized gain (loss) on investments and other	1,215		4,913				(801		)	—		(5,769		)	15,663			—				—			15,221
Income (loss) from continuing operations	7,995		7,269				2,534			3,695		(149,013		)	15,647			(39,178		)		—			(151,051		)
Income (loss) from discontinued operations	—		—				—			—		411			—			—				—			411
Gain on sale from discontinued operations	—		—				—			—		29			—			—				—			29
Net income (loss)	$	7,995	$	7,269			$	2,534		$	3,695	$	(148,573	)	$	15,647		$	(39,178	)		$	—		$	(150,611	)

_______________________________________________


(1)	Includes $3.1 million and $3.5 million of collateral management fees related to CDO financing transactions for the three months ended September 30, 2013 and 2012, respectively, that are eliminated in consolidation. These amounts are recorded as other revenue in the asset management segment and as an expense in the N-Star CDO segments.


(2)	Based on CDO financing transactions that were primarily collateralized by either CRE debt or securities and may include other types of investments.


(3)	Includes corporate level interest income, interest expense and unallocated general and administrative expenses.


(4)	Represents income earned from CDO bonds repurchased at a discount, recognized using the effective interest method, that is eliminated in consolidation. The corresponding interest expense is recorded in net interest income in the N-Star CDO segments.


(5)	Includes depreciation and amortization of $27.9 million and $6.8 million for the three months ended September 30, 2013 and 2012, respectively.



											N-Star CDOs⁽²⁾
Nine months ended September 30, 2013:	CRE Debt		Real Estate				CRE Securities		Asset Management⁽¹⁾		CRE Debt			CRE Securities			Corporate⁽³⁾				Eliminations⁽¹⁾			Consolidated Total
Net interest income on debt and securities	$	29,903	$	1,102			$	23,467	$	—	$	35,857		$	58,213		$	36,965		⁽⁴⁾	$	—		$	185,507
Advisory and other fees, related party	—		—				—		17,111		—			—			—				—			17,111
Other revenues	261		147,305				—		63,644		32,159			39			865				(12,589		)	231,684
Expenses	999		154,973			⁽⁵⁾	43		55,417		51,865			(5,098		)	100,547				(12,589		)	346,157
Income (loss) from operations	29,165		(6,566		)		23,424		25,338		16,151			63,350			(62,717		)		—			88,145
Equity in earnings (losses) of unconsolidated ventures	3,027		51,499				—		291		(372		)	—			—				—			54,445
Unrealized gain (loss) on investments and other	—		—				4,542		—		(30,576		)	(7,373		)	4,894				—			(28,513		)
Realized gain (loss) on investments and other	1,326		12,220				32,582		—		(6,508		)	8,027			(36		)		—			47,611
Gain (loss) from deconsolidation of N-Star CDOs	—		—				—		—		(281,488		)	27,282			—				—			(254,206		)
Income (loss) from continuing operations	33,518		57,153				60,548		25,629		(302,793		)	91,286			(57,859		)		—			(92,518		)
Income (loss) from discontinued operations	—		—				—		—		(81		)	—			—				—			(81		)
Net income (loss)	$	33,518	$	57,153			$	60,548	$	25,629	$	(302,874	)	$	91,286		$	(57,859	)		$	—		$	(92,599	)

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



													N-Star CDOs⁽²⁾
Nine months ended September 30, 2012:	CRE Debt			Real Estate				CRE Securities			Asset Management⁽¹⁾		CRE Debt			CRE Securities			Corporate⁽³⁾				Eliminations⁽¹⁾			Consolidated Total
Net interest income on debt and securities	$	10,033		$	118			$	13,065		$	—	$	65,211		$	90,463		$	25,908		⁽⁴⁾	$	—		$	204,798
Advisory and other fees, related party	—			—				—			4,766		—			—			—				—			4,766
Other revenues	—			63,093				—			39,495		23,840			7			(35		)		(11,037		)	115,363
Expenses	313			60,829			⁽⁵⁾	—			33,592		65,006			2,216			74,654				(11,037		)	225,573
Income (loss) from operations	9,720			2,382				13,065			10,669		24,045			88,254			(48,781		)		—			99,354
Equity in earnings (losses) of unconsolidated ventures	617			(1,157		)		—			60		64			—			—				—			(416		)
Other income (loss)	—			20,000				—			—		258			—			—				—			20,258
Unrealized gain (loss) on investments and other	—			—				7,347			—		(185,710		)	(209,778		)	(24,932		)		—			(413,073		)
Realized gain (loss) on investments and other	(414		)	16,147				(801		)	—		(7,562		)	28,367			31				—			35,768
Income (loss) from continuing operations	9,923			37,372				19,611			10,729		(168,905		)	(93,157		)	(73,682		)		—			(258,109		)
Income (loss) from discontinued operations	—			—				—			—		506			—			—				—			506
Gain on sale from discontinued operations	—			—				—			—		314			—			—				—			314
Net income (loss)	$	9,923		$	37,372			$	19,611		$	10,729	$	(168,085	)	$	(93,157	)	$	(73,682	)		$	—		$	(257,289	)

___________________________________________________________


(1)	Includes $12.6 million and $11.0 million of collateral management fees related to CDO financing transactions for the nine months ended September 30, 2013 and 2012, respectively, that are eliminated in consolidation. These amounts are recorded as other revenue in the asset management segment and as an expense in the N-Star CDO segments.


(2)	Based on CDO financing transactions that were primarily collateralized by either CRE debt or securities and may include other types of investments.


(3)	Includes corporate level interest income, interest expense and unallocated general and administrative expenses.


(4)	Represents income earned from CDO bonds repurchased at a discount, recognized using the effective interest method, that is eliminated in consolidation. The corresponding interest expense is recorded in net interest income in the N-Star CDO segments.


(5)	Includes depreciation and amortization of $53.7 million and $20.7 million for the nine months ended September 30, 2013 and 2012, respectively.

The following table presents total assets by segment as of September 30, 2013 and December 31, 2012 (dollars in thousands):



									N-Star CDOs⁽²⁾
	CRE Debt		Real Estate		CRE Securities		Asset Management		CRE Debt		CRE Securities		Corporate⁽¹⁾		Consolidated Total
Total Assets as of September 30, 2013	$	897,189	$	3,043,468	$	371,331	$	37,963	$	462,020	$	735,406	$	281,201	$	5,828,578
Total Assets as of December 31, 2012	$	383,998	$	1,189,193	$	195,803	$	26,750	$	2,290,268	$	1,041,625	$	386,141	$	5,513,778

____________________________________________________________


(1)	Primarily includes cash and cash equivalents.


(2)	Based on CDO financing transactions that were primarily collateralized by either CRE debt or securities and may include other types of investments.

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17. Supplemental Disclosures of Non-cash Investing and Financing Activities

The following table presents non-cash investing and financing activities for the nine months ended September 30, 2013 and 2012 (dollars in thousands):



	Nine Months Ended September 30,
	2013⁽²⁾		2012
Real estate acquisition⁽¹⁾	$	135,361	$	35,304
Reduction of CRE debt investments⁽¹⁾	135,361		35,304
Increase in restricted cash⁽¹⁾	6,065		—
Non-cash related to PE Investments	44,021		—
Reclassification of operating real estate to asset held for sale	—		1,046
Reclassification of operating real estate to other assets	60,621		—
Reclassification of operating real estate to deferred costs and intangible assets	18,375		—
Escrow deposit payable related to CRE debt investments	62,811		38,034
Dividends payable related to RSUs	—		1,923
Activity in non-controlling interest	—		2,358
CRE debt investment payoff due from servicer	15,600		—
Equity component of 8.875% Notes	—		2,179
Equity component of 5.375% Notes	45,740		—
Decrease of restricted cash in connection with swap collateral	—		22,037
Discount on CRE debt investment	—		2,516

____________________________________________________________


(1)	Non-cash activity occurred in connection with taking title to collateral.


(2)	Refer to Note 3 for non-cash investing and financing activities related to the deconsolidation of certain N-Star CDOs.

18. Subsequent Events

Dividends

On October 30, 2013, the Company declared a dividend of $0.21 per share of common stock. The common stock dividend will be paid on November 15, 2013 to stockholders of record as of the close of business on November 11, 2013. On October 30, 2013, the Company declared a dividend of $0.54688 per share of Series A preferred stock, $0.51563 per share of Series B preferred stock, $0.55469 per share of Series C preferred stock and $0.53125 per share of Series D Preferred Stock. Dividends will be paid on all series of preferred stock on November 15, 2013, to stockholders of record as of the close of business on November 11, 2013.

Liquidation of N-Star CDO VII

In October 2013, N-Star CDO VII was liquidated by the holder of the controlling class.

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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 the unaudited consolidated financial statements and notes thereto included in Item 1. "Financial Statements" of 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 diversified commercial real estate, or CRE, investment and asset management company. We are an internally-managed REIT formed in October 2003. We invest in multiple asset classes across commercial real estate that we expect will generate attractive risk-adjusted returns and engage in asset management activities that seek to generate stable cash flow for distribution to our stockholders and build long-term franchise value. Our investments may take the form of originating senior or subordinate loans and acquiring real estate, as well as pursuing opportunistic CRE investments. We are focused on our asset management business predominately by raising and managing capital on a fee basis from alternate sources, which currently includes our non-traded real estate investment trusts, or REITs, which we refer to as our Sponsored Companies. We conduct substantially all of our operations and make our investments through 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 and other loans and preferred equity interests. We may from time to time take title to collateral in connection with a CRE debt investment as real estate owned, or REO. Such REO would be included in our CRE debt business. We directly underwrote and originated approximately 85% of our CRE debt investments, excluding any debt investments financed in a collateralized debt obligation, or CDO.

•

Real Estate—Our real estate business concentrates on various types of investments in commercial real estate located throughout the United States that includes manufactured housing communities, healthcare, net lease and multifamily properties. In addition, our real estate business includes indirect investments in real estate through joint ventures owning limited partnership interests in real estate private equity funds managed by institutional-quality sponsors, or PE Investments, diversified by property type and geography. Our manufactured housing communities portfolio focuses on owning pad rental sites located throughout the United States. Our healthcare properties focus on mid-acuity facilities (i.e., skilled nursing and assisted living), with the highest concentration in assisted living facilities and are typically leased under net leases to healthcare operators. Our net lease properties are primarily office, industrial and retail properties typically under net leases to corporate tenants.

•

Asset Management—Our asset management business is focused on commercial real estate related activities such as sponsoring and advising on a fee basis our Sponsored Companies. We currently manage NorthStar Real Estate Income Trust, Inc., or NorthStar Income, NorthStar Healthcare Income, Inc., or NorthStar Healthcare, and NorthStar Real Estate Income II, Inc., or NorthStar Income II. In connection with the Sponsored Companies, we manage the day to day affairs including identifying, originating, acquiring and managing investments on their behalf and 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, we continue to receive collateral management fees on our CDO financing transactions.

We also historically originated or acquired CRE debt and securities investments that were predominantly financed through permanent, non-recourse CDOs. In addition, we acquired equity interests of two CRE debt focused CDOs, the CSE RE 2006-A CDO, or CSE CDO, and the CapLease 2005-1 CDO, or CapLease CDO. We refer to those CRE debt and securities investments that serve as collateral for N-Star CDO financing transactions as legacy CRE debt and securities, respectively. All of our CDOs are past the reinvestment period and given the nature of these transactions, these CDOs are amortizing over time as the underlying assets paydown or are sold. We have been winding down our legacy CDO business and investing in a broad and diverse range of CRE assets. As a result, such legacy business is a significantly smaller portion of our business today than in the past. Refer to "Liquidity and Capital Resources" for a further discussion of our legacy CDO business.

We have the ability to invest in a broad spectrum of commercial real estate assets and as a result, we pursue opportunistic investments across our business lines including CRE debt and equity investments. We may also invest in opportunistic CRE securities such as an investment in a "B-piece" and AAA/Aaa commercial mortgage backed securities, or CMBS.

Our ability to invest across the CRE market creates complementary and overlapping sources of investment opportunities based upon common reliance on real estate fundamentals and application of similar portfolio management skills to maximize value and to protect capital.

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Liquidity and access to capital returned to the commercial real estate markets in 2011 and continues in 2013. To date in 2013, we raised aggregate net proceeds of $1.2 billion, including $656 million from the issuance of common equity, $193 million from the issuance of preferred stock and $335 million from the issuance of exchangeable senior notes. In 2012, we raised aggregate net proceeds of $724 million, including $383 million from the issuance of common equity, $262 million from the issuance of preferred stock (including through our at-the-market equity offering program) and $79 million from the issuance of exchangeable senior notes.

We are also focused on raising capital for our Sponsored Companies. Our first Sponsored Company, NorthStar Income, successfully completed its primary offering on July 1, 2013. Through NorthStar Realty Securities, LLC, or NorthStar Realty Securities, our broker-dealer subsidiary, we raised $1.1 billion in capital for NorthStar Income. Inception to date, NorthStar Income has invested substantially all of its offering proceeds.

We are currently raising capital for our second Sponsored Company, NorthStar Healthcare, a healthcare debt and equity focused non-traded public company organized to qualify as a REIT, or non-traded REIT, which has a maximum offering amount of $1.1 billion and our third Sponsored Company, NorthStar Income II, our second CRE debt-oriented non-traded REIT, which has a maximum offering amount of $1.65 billion. In February 2013, NorthStar Healthcare satisfied the minimum offering amount through our purchase of $2 million in shares of its common stock. NorthStar Healthcare picked up momentum in raising capital in July 2013, following the execution of a number of selling agreements in June 2013. From inception through November 1, 2013, NorthStar Healthcare raised approximately $56 million of capital. In September 2013, NorthStar Income II satisfied the minimum offering amount through our purchase of $2 million in shares of its common stock. We executed a number of selling agreements in September and October 2013 for NorthStar Income II and expect current capital raising to begin to ramp up. From inception through November 1, 2013, NorthStar Income II raised approximately $5 million of capital. As of September 30, 2013, NorthStar Healthcare owns one first mortgage loan with a principal amount of $11 million and NorthStar Income II owns one participation in a first mortgage loan with a principal amount of $2 million. NorthStar Realty Securities has currently executed selling agreements with financial advisory firms to cover more than 48,000 and 47,000 registered representatives for NorthStar Healthcare and NorthStar Income II, respectively. As additional selling agreements with financial advisory firms are executed, we expect capital raising to accelerate.

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 rate risk. In terms of our CRE debt and securities investments and our real estate portfolio, we pursue a variety of financing arrangements such as securitization financing transactions, credit facilities, mortgage notes and other term borrowings. The amount of our borrowings depends upon the nature and credit quality of our assets, the structure of our financings and where possible, we seek to limit our reliance on recourse borrowings. Our real estate portfolio is predominately financed with non-recourse mortgage notes. In late 2011, we began using secured term credit facilities provided by major financial institutions to partially finance CRE debt which currently provide for an aggregate of up to $340 million to finance loan originations. In November 2012 and in August 2013, we and on behalf of NorthStar Income, entered into two securitization financing transactions, or Securitization 2012-1 and Securitization 2013-1, collectively Securitized Financing Transactions. These Securitized Financing Transactions provide permanent, non-recourse, non-mark-to-market financing for newly-originated CRE debt investments. The CRE debt investments financed by Securitization 2012-1 were previously financed on our credit facilities. Borrowing levels may change for our CRE debt and real estate investments depending upon the nature of the assets and the related financing.

We conduct our operations so as to continue to qualify as a REIT for federal income tax purposes.

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Our Investments

The following table presents our our assets under management, including assets of deconsolidated CDOs, as of September 30, 2013 (dollars in thousands):



	Amount⁽¹⁾		%
CRE Debt
First mortgage loans	$	473,455	4.7	%
Mezzanine loans	111,465		1.1	%
Subordinate mortgage interests	145,008		1.4	%
Term loans	55,178		0.5	%
Subtotal	785,106		7.7	%
CRE debt of N-Star CDOs⁽²⁾	699,591		6.9	%
Other⁽³⁾	108,026		1.1	%
Total CRE debt	1,592,723		15.7	%
Real Estate
Manufactured housing communities	1,189,500		11.9	%
Private equity fund investments⁽⁴⁾	915,502		9.1	%
Healthcare	638,033		6.3	%
Net lease	401,331		4.0	%
Multifamily	367,660		3.7	%
Total real estate	3,512,026		35.0	%
Asset Management⁽⁵⁾
NorthStar Income	1,714,381		17.0	%
NorthStar Healthcare	17,509		0.2	%
NorthStar Income II	2,406		—	%
Total asset management	1,734,296		17.2	%
CRE securities
N-Star CDO bonds	325,723		3.2	%
N-Star CDO equity	129,670		1.3	%
Other securities	98,651		1.0	%
Assets underlying CRE securities CDOs	1,481,967		14.7	%
Total CRE securities	2,036,011		20.2	%
Subtotal	8,875,056		88.1	%
Assets Underlying Deconsolidated CRE Debt CDOs⁽⁶⁾	1,196,174		11.9	%
Grand total assets	$	10,071,230	100.0	%

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(1)	Based on principal amount for our CRE debt and securities investments, fair value for PE Investments and N-Star CDO equity and the cost basis for real estate investments.


(2)	Primarily includes CRE debt investments of the CSE CDO.


(3)	Primarily relates to certain CRE debt investments accounted for as joint ventures.


(4)	Includes the initial and deferred amount of PE Investment II.


(5)	Based on consolidated total assets.


(6)	Based on the respective remittance report issued on date nearest to September 30, 2013. This amount excludes $456 million of N-Star CDO bonds and N-Star CDO equity reported in CRE securities.

For financial information regarding our reportable segments, refer to Note 16. "Segment Reporting," in our accompanying Consolidated Financial Statements included in Item 1. "Financial Statements."

Commercial Real Estate Debt

Our Portfolio

As of September 30, 2013, $785 million, or 7.7%, of assets under management were invested in CRE debt, excluding CRE debt financed in N-Star CDOs and other CRE debt accounted for as joint ventures. This portfolio consists of 30 loans with an average investment size of $26 million and weighted average extended maturity of 4.2 years. As of September 30, 2013, $1.9 billion, or 18.8%, of total assets under management represented CRE debt underlying our CDO financing transactions.

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The following table presents our CRE debt investments, excluding amounts related to joint ventures and CRE debt underlying our CDOs (dollars in thousands):



								Weighted Average						Floating Rate as % of Principal Amount
	Number	Principal Amount		Carrying Value		Allocation by Investment Type⁽²⁾		Fixed Rate		Spread Over LIBOR		Yield		Floating Rate as % of Principal Amount
Asset Type:
First mortgage loans	16	$	473,455	$	436,848	60.3	%	10.31	%	6.66	%	9.75	%	90.2	%
Mezzanine loans	6	111,465		109,208		14.2	%	5.45	%	11.34	%	8.98	%	53.2	%
Subordinate mortgage interests	6	145,008		143,093		18.5	%	13.08	%	12.32	%	13.27	%	56.6	%
Term loans	2	55,178		53,195		7.0	%	13.86	%	—	%	15.10	%	—	%
Subtotal/Weighted average⁽¹⁾	30	$	785,106	$	742,344	100.0	%	10.85	%	7.97	%	10.69	%	72.4	%

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(1)	Certain CRE debt investments serve as collateral for financing transactions including carrying value of $133 million for Securitization 2012-1 and $27 million for credit facilities. The remainder is unleveraged.


(2)	Based on principal amount.

The following presents our $785 million CRE debt portfolio's diversity across property type and geographic location based on principal amount:



Loan Portfolio by Property Type		Loan Portfolio by Geographic Location

Real Estate

As of September 30, 2013, $3.5 billion, or 35.0%, of our assets under management were invested in real estate and PE Investments. Our real estate business concentrates on various types of investments in commercial real estate located throughout the United States that includes manufactured housing communities, healthcare, net lease and multifamily properties. Opportunities to purchase real estate more recently have been bolstered by attractive long-term, non-recourse, non mark-to-market financing available through the CMBS and agency financing markets. In addition, we pursue opportunistic real estate investments through owning limited partnership interests in real estate private equity funds managed by institutional-quality sponsors.

Manufactured Housing Communities

As of September 30, 2013, $1.2 billion, or 11.9%, of our assets under management were invested in manufactured housing communities. Our aggregate portfolio includes 107 communities in nine states totaling approximately 23,000 pad rental sites. The aggregate portfolio also consists of approximately 2,900 homes on the sites with the remaining homes owned by the respective tenants. As of September 30, 2013, our manufactured housing communities were 86% occupied. The manufactured housing industry has traditionally demonstrated low cash flow volatility and steady annual rent increases, although there is no assurance that will continue to be the case.

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The following presents our investments in manufactured housing communities (dollars in millions):



	Total Portfolio			Net Operating Income By Geographic Location
Number of communities	107
Number of pad rental sites	23,146
First year projected net operating income	$	79
Cost basis⁽¹⁾	$	1,152
Net operating income related to:
Pad rental sites	94.0		%
Other	6.0		%
Weighted average occupancy	86.0		%

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(1)	Excludes pre-funded capital expenditures and our joint venture partner's subordinate capital.

PE Investments

As of September 30, 2013, $916 million, or 9.1%, of our assets under management were invested in PE Investments. We elected the fair value option for PE Investments. As a result, we record equity in earnings that approximates a level yield based on the change in fair value for our share of the projected future cash flow from one period to another.

PE Investment I

In February 2013, we completed the initial closing of our first joint venture owning limited partnership interests in real estate funds managed by institutional-quality sponsors, or PE Investment I. We, together with NorthStar Income, have an ownership interest in PE Investment I of 51%, of which we own 70.5% and NorthStar Income owns 29.5%.

The following tables present a summary of PE Investment I (dollars in millions):



Total PE Investment I⁽¹⁾				Our Proportionate Share of PE Investment I
Number of funds	47				September 30, 2013
Number of general partners	25				Three Months Ended		Nine Months Ended
June 30, 2012 NAV as a percentage of net cost⁽²⁾	66.0		%	Income	$	15	$	37
Reported NAV growth (June 30, 2012 to June 30, 2013)	10.2		%	Return of capital	3		38
Underlying assets, at cost	$	25,250		Total distributions⁽⁴⁾	18		75
Implied leverage⁽³⁾	53.0		%	Contributions	1		19
Expected remaining future capital contributions as of September 30, 2013	$	25		Net	$	17	$	56

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(1)	Based on financial data reported by the underlying funds as of June 30, 2013, except as otherwise noted.


(2)	Net cost represents total funded capital less distributions received, excluding any distributions in excess of contributions for funds representing 4% of reported NAV.


(3)	Represents implied leverage for funds with investment-level financing, calculated as the underlying borrowing divided by assets at fair value.


(4)	Net of a $3 million reserve for taxes.

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The following presents the underlying fund interests in PE Investment I by investment type and geographic location based on net asset value, or NAV, as of June 30, 2013:



PE Investment I by Underlying Investment Type⁽¹⁾		PE Investment I by Underlying Geographic Location⁽¹⁾

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(1)	Based on individual fund financial statements.

PE Investment II

On July 3, 2013, we completed the initial closing of our second joint venture owning limited partnership interests in real estate private equity funds, or PE Investment II. We, together with NorthStar Income and funds managed by Goldman Sachs Asset Management, or the Vintage Funds, entered into an agreement with Common Pension Fund E, a common trust fund created under New Jersey law, to acquire limited partnership interests in up to 25 real estate private equity funds with an aggregate reported NAV of approximately $925 million as of September 30, 2012. We, NorthStar Income and the Vintage Funds each have an ownership interest in PE Investment II of 70%, 15% and 15%, respectively. We anticipate closing the fund interests by the end of 2013 subject to customary closing conditions, including third-party consents.

PE Investment II will pay $510 million to the seller for all of the fund interests, or 55% of the September 30, 2012 NAV, or the Initial Amount, and will pay the remaining $415 million, or 45% of the September 30, 2012 NAV, or the Deferred Amount, by the fourth year after the first day of the fiscal quarter following the closing date. We funded all of our proportionate share of the Initial Amount at the initial closing. Our share of the Initial Amount and the Deferred Amount represents $357 million and $291 million, respectively.

The following table presents the expected fund interests in PE Investment II (dollars in millions):



Total PE Investment II⁽¹⁾				Our Proportionate Share of PE Investment II
					Three Months
Number of funds	25				Ended
Number of general partners	16				September 30, 2013
September 30, 2012 NAV as a percentage of net cost⁽²⁾	70.6		%	Income	$	15
Reported annualized NAV growth (September 30, 2012 to June 30, 2013)	9.0		%	Return of capital	—
Underlying assets, at cost	$	28,400		Total distributions⁽⁴⁾	15
Implied leverage⁽³⁾	37.5		%	Contributions⁽⁴⁾	4
Expected remaining future capital contributions as of September 30, 2013	$	39		Net	$	11

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(1)	Based on financial data reported by the underlying funds as of June 30, 2013, except as otherwise noted.


(2)	Net cost represents total funded capital less distributions received.


(3)	Represents implied leverage for funds with investment-level financing, calculated as the underlying borrowing divided by assets at fair value.


(4)	Due to the timing of the closing of fund interests, contributions and distributions are recorded based on the period of settlement and may not represent the period such contributions and distributions were made at the underlying fund.

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The following presents the underlying fund interests in PE Investment II by investment type and geographic location based on NAV as of June 30, 2013:



PE Investment II by Underlying Investment Type⁽¹⁾		PE Investment II by Underlying Geographic Location⁽¹⁾

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(1)	Based on individual fund financial statements.

Healthcare Properties

As of September 30, 2013, $638 million, or 6.3%, of our assets under management were invested in our healthcare properties, with a focus on the mid-acuity senior housing sector which includes assisted living, skilled nursing and independent living facilities. Our portfolio was comprised of 52 assisted living facilities (ALF), 33 skilled nursing facilities (SNF), three life science buildings (LSB), five independent living facilities (ILF), one memory care facility (MCF) and one medical office building (MOB). As of September 30, 2013, our healthcare portfolio was 99% leased to third-party operators with weighted average lease coverage of 1.13x and a 6.5 year weighted average remaining lease term.

The following presents our healthcare portfolio's diversity across property type and geographic location based on purchase price, or cost:



Healthcare by Property Type		Healthcare by Geographic Location

Net Lease Properties

As of September 30, 2013, $401 million, or 4.0%, of our total assets under management were invested in 23 net lease properties, including one property owned through an unconsolidated joint venture, comprised of office, retail and industrial properties totaling 3.2 million square feet. As of September 30, 2013, our net lease properties were 97% leased with a 5.0 year weighted average remaining lease term.

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The following presents our net lease portfolio's diversity across property type and geographic location based on cost:



Net Lease by Property Type		Net Lease by Geographic Location

Multifamily Properties

As of September 30, 2013, $368 million, or 3.7%, of our assets under management were invested in multifamily properties, including one property owned through an unconsolidated joint venture. Our portfolio includes 12 properties in six states totaling approximately 4,500 rental units. As of September 30, 2013, our multifamily properties were 92% leased.

Asset Management

Our asset management business is focused on sponsoring and advising on a fee basis, our Sponsored Companies. In connection with our current public Sponsored Companies, we manage the day-to-day affairs including identifying, originating, acquiring and managing assets on their behalf and earn advisory and other fees for these services, which vary based on the amount of assets under management, investment activity and investment performance. We currently manage NorthStar Income, NorthStar Healthcare and NorthStar Income II.

NorthStar Realty Securities sells equity in our Sponsored Companies. NorthStar Realty Securities is currently raising equity capital for NorthStar Healthcare which has a $1.1 billion maximum offering amount and NorthStar Income II which has a $1.65 billion maximum offering amount. NorthStar Income, our first Sponsored Company, completed its $1.1 billion primary offering on July 1, 2013. 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.

In addition, we continue to receive collateral management fees as named collateral manager or collateral manager delegate. In connection with certain deconsolidated CDOs, we retained administrative responsibilities and delegated certain collateral management responsibilities to a third-party collateral manager who is entitled to a percentage of the senior and subordinate collateral management fees. Refer to "Liquidity and Capital Resources" for a discussion of the deconsolidation of certain of our CDO financing transactions.

Opportunistic Investments

We have the ability to invest in a broad spectrum of commercial real estate assets and seek to provide attractive risk-adjusted returns. As a result, we pursue opportunistic investments across our business lines including CRE debt and equity investments. Examples of opportunistic investments include PE Investments and repurchasing our CDO bonds at a significant discount to principal amount. Refer to the "PE Investments" section above for a discussion of our PE Investments and "Liquidity and Capital Resources" for a discussion of repurchased CDO bonds.

Sources of Operating Revenues and Cash Flows

We primarily generate revenue from net interest income on our CRE debt and securities portfolios, rental income from our real estate properties and fee income from our asset management activities. Additionally, we record equity in earnings of unconsolidated ventures, including from PE Investments. Our income is primarily derived through the difference between revenue and the cost at which we are able to finance our investments. We may also acquire investments which generate attractive returns without any leverage.

Profitability and Performance Metrics

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

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•	Cash available for distribution, or CAD (refer to "Non-GAAP Financial Measures—Cash Available for Distribution" for a description of this metric).


•	Adjusted funds from operations, or AFFO (refer to "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 Companies, but we believe it is of lesser importance than other metrics such as CAD or AFFO.

Outlook and Recent Trends

Liquidity and capital started to become more available in the commercial real estate markets to stronger sponsors in 2012 and 2013 and 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 $45 billion and $57 billion in non-agency CMBS issuance that was completed in 2012 and the nine months ended September 30, 2013, respectively. Credit contracted in mid-2011 as the European debt woes began to unfold resulting in heightened market volatility and global financial markets continued to be strained in 2012. To stimulate growth, several of the world's largest central banks acted in a coordinated effort through massive injections of stimulus in the financial markets in late 2012, which had the effect of keeping interest rates low. Since mid-2013, there has been a focus on when the Federal Reserve may begin to taper its stimulus efforts and this potential for change in policy led to and may continue in the future result in an increase in interest rates on U.S. government bonds and interest rates more generally.

The commercial real estate markets continue to improve in 2013, but headwinds still remain due to the uncertainty of the political climate, including budget deficits, debt ceiling, gridlock, Federal Reserve policy on stimulus and other matters and their impact to the U.S. economy. We would expect that this dynamic, along with global market instability and the risk of maturing CRE debt that may have difficulties being refinanced, to continue to cause periodic volatility in the market for some time. It is currently estimated that approximately $1.0 trillion of CRE debt will mature in the next three years and $1.9 trillion will mature through 2017. While there is an increased supply of lenders to provide such financing, we still anticipate that certain of these loans will not be able to be refinanced, potentially inhibiting growth and contracting credit.

The capital markets began opening up in 2012 and we, and on behalf of NorthStar Income, began to again access the capital markets as evidenced by Securitization 2012-1 and Securitization 2013-1. Refer to "Financing Strategy" for additional details. The stimulus in the United States helped to increase demand for new CMBS, even though current new issue is still well below historic levels. Industry experts are predicting approximately $77 billion of non-agency CMBS issuance in 2013.

Virtually all commercial real estate property types were adversely impacted by the credit crisis, while others such as land, condominium and other commercial property types were more severely impacted. The degree to which commercial real estate values continue to improve going forward 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 loss reserve. Our CRE debt and securities investments are negatively impacted by weaker real estate market and economic conditions. Slow economic conditions reduce a tenant/operator'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 flow is 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 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 September 30, 2013 was 0.18%, below its 0.36% average over the past five years. Lower LIBOR has meant lower debt service costs for our borrowers. This dynamic has partially offset decreasing cash flow caused by the more recent challenging economic conditions and helped in extending the life of interest reserves for those CRE debt investments that required interest reserves to service debt.

Our CRE debt business generally lends and borrows based on a spread to LIBOR. As a result, increasing LIBOR should increase the net interest earned from our CRE debt investments. However, some of our CRE debt originations have LIBOR floors that are in excess of current LIBOR. We will not benefit from an increase in LIBOR until it is in excess of the floors. The degree in which rates will increase is driven in a significant part by the actions of the Federal Reserve. CRE securities values are also influenced by credit ratings assigned by the rating agencies.

The value of our real estate portfolio could be adversely impacted by rising interest rates if that translates into rising cap rates. However, because the spread between the 10-year U.S. Treasury and cap rates is currently wider than the historical average, it is not certain that rising U.S. Treasury yields will cause significant upward pressure on cap rates. Rising interest rates should

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be a leading indicator that the economy is improving and in turn support continued improvement in commercial real estate fundamentals. Weak economic conditions may negatively impact the creditworthiness of our tenants/operators which could result in their inability to meet the terms of their leases. Further, our healthcare properties are also subject to impact from regulatory changes, such as changes to the Medicare and Medicaid programs and state licensing requirements as well as the impact of The Patient Protection and Affordable Care Act 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 invest in commercial real estate assets that we expect will generate attractive risk-adjusted returns and engage in asset management activities that seek to generate stable cash flow for distribution to our stockholders and build long-term franchise value. Our investments may take the form of originating or acquiring senior or subordinate loans and acquiring real estate, as well as pursuing opportunistic CRE investments. We are focused on our asset management business predominately by raising and managing capital on a fee basis from alternate sources, currently our Sponsored Companies.

During the credit crisis covering 2007 to 2010, upon observing the deteriorating market conditions, we responded by decreasing investment activity and preserving capital. At the same time, we focused on raising capital in alternate 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 and acquiring new loans and investing in real estate, as well as pursuing opportunistic investments in the commercial real estate market across our businesses, including investing in real estate private equity funds and repurchasing our CDO bonds at discounts to par. 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 liquidity was more available to stronger sponsors and commercial real estate fundamentals were stabilizing beginning in 2011, we took advantage of this dynamic in terms of both capital raising and investment activity. We raised $1.2 billion of capital to date in 2013 and $724 million of capital in 2012. In addition, as of September 30, 2013, we have three credit facilities with an aggregate of $340 million to finance the origination of CRE first mortgage loans. In November 2012 and August 2013, we, and on behalf of NorthStar Income, entered into Securitization Financing Transactions to finance debt investments on a permanent, non-recourse, non-mark-to-market basis that were previously financed on credit facilities.

Throughout 2012 and to date in 2013, we actively invested across our businesses. With respect to our loan originations, year to date through November 1, 2013, we originated 14 loans and purchased three loans with an aggregate principal amount of $486 million. The weighted average expected return on invested equity of these debt investments, including expected financing, is approximately 14%. There is no assurance we will realize the expected returns on invested equity over the term of these investments. Our actual return on invested equity could vary significantly from our expectations.

The following table presents our invested equity in real estate investments made year to date through November 1, 2013 (dollars in thousands):



PE Investments⁽¹⁾	$	639,007
Manufactured housing communities	214,873
Multifamily	93,536
Healthcare	21,788
Total⁽²⁾	$	969,204

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(1)	Excludes contributions related to future funding commitments.


(2)	The aggregate initial current yield on invested equity of these real estate investments is 14%. There is no assurance we will realize the expected returns on invested equity over the term of these investments. Our actual return on invested equity could vary significantly from our expectations.

In addition, year to date through November 1, 2013, we have made investments on behalf of NorthStar Income including 11 loan originations with a principal amount of $556 million, PE Investments of $257 million and a "B-piece" in a securitization with a principal amount of $74 million. Additionally, we originated one first mortgage loan with a principal amount of $11 million, made two real estate acquisitions for an aggregate purchase price of $26 million, including one assisted living facility and one memory care facility, on behalf of NorthStar Healthcare and participated a $2 million origination in a first mortgage loan to NorthStar Income II.

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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 initial public offering in 2004, we completed preferred and common equity offerings raising aggregate proceeds of approximately $2.4 billion, including in 2013 raising $849 million from the issuance of common and preferred equity through November 1, 2013. In addition, we raised $852 million of unsecured exchangeable senior notes, including $345 million in 2013. As of September 30, 2013, we had $611 million of exchangeable senior notes outstanding. 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 limited covenants.

We use investment-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 investments and deliver attractive risk-adjusted returns to our stockholders.

In late 2011, we began using secured term credit facilities to partially finance our CRE debt and securities investments. As of September 30, 2013, the credit facilities provide for an aggregate of up to $340 million to finance first mortgage loans and senior loan participations secured by commercial real estate. We, and on behalf of NorthStar Income, utilize Securitization Financing Transactions, which provide permanent, non-recourse, non-mark-to-market financing for newly-originated CRE debt investments that were previously financed on credit facilities. As of September 30, 2013, we have $98 million issued as part of Securitization 2012-1 and $15 million outstanding under our loan credit facilities with $325 million of available borrowing under our loan credit facilities.

Our real estate portfolio is typically financed with non-recourse mortgages. We seek to match the term of the financing with the remaining lease term of the net lease and healthcare properties. Regarding our more recent acquisitions of real estate, including the manufactured housing communities and multifamily property investments, we seek long-term, non-recourse, non-mark to market financing that is also assignable and have been able to obtain such financing at very favorable terms.

Historically, we used CDOs to finance legacy CRE debt and securities investments. We have been winding down our legacy CDO business and investing in a broad and diverse range of CRE assets. As a result, such legacy business is a significantly smaller portion of our business today than in the past. Refer to "Liquidity and Capital Resources" for a further discussion of our legacy CDO business.

Borrowing levels for CRE debt and securities investments may change depending upon the nature of the assets and the related financing. Our financing strategy for our CRE debt and securities investments is dependent on our ability to obtain match-funded borrowings at rates that provide a positive net funding spread.

Portfolio 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 real estate investments, frequent re-underwriting and dialogue with borrowers/tenants/operators/partners and inspections of our collateral and owned properties have proven to be an effective process for identifying issues early. For our healthcare properties, 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. 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 or extending a maturity date, 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 portfolio 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 collateral when the borrower is not complying with the terms of a loan agreement 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.

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Securities generally have a more liquid market than debt and real estate, 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 two "B-piece" transactions, one in a $2.1 billion CMBS transaction acquired by us in 2011 and one in a $1.2 billion CMBS transaction acquired by NorthStar Income in 2013. We manage risk in our CRE securities investments 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.

We maintain a comprehensive portfolio management process that generally includes day-to-day oversight by the portfolio management team, weekly management meetings and an exhaustive 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 credit review, or more frequently as necessary, investments are put on highly-monitored status and identified for possible loan loss reserves 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.

We generally required 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 flow 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.

Each of our debt investments, while primarily backed by CRE collateral, is unique and requires customized portfolio 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.

Our portfolio management process may lead us to the determination that extending and working out a debt investment, rather than pursuing taking title to collateral, 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 portfolio management process related to CRE debt and securities underlying our deconsolidated CDOs is limited to monitoring the CDO bonds and equity interests in such CDO financing transactions. A more detailed discussion of our CDO financing transactions and our delegation of collateral management rights for the deconsolidated N-Star CRE debt CDOs is provided in "Liquidity and Capital Resources." Many of those debt investments were made to borrowers who had a business plan to improve the collateral and who therefore needed a flexible balance sheet lender. Property cash flow is generally lower today than was projected by the borrower for many of those debt investments 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 flow. Despite more recent low interest rates and improving real estate fundamentals, we expect that in the future some of these borrowers related to such CRE debt investments underlying our CDO financing transactions may still have difficulty servicing such debt.

Critical Accounting Policies

Principles of Consolidation

Our consolidated financial statements include the accounts of NorthStar Realty Finance Corp., the Operating Partnership and their consolidated subsidiaries. We consolidate variable interest entities, or VIEs, where we are the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by us. All significant intercompany balances are eliminated in consolidation.

Variable Interest Entities

A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. 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

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the quantitative analysis on the forecasted cash flow 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 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. 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 pass through 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.

We evaluate our CRE debt and securities, investments in unconsolidated ventures and securitization financing transactions, such as our CDOs and its liabilities to subsidiary trusts issuing preferred securities, to determine whether they are a VIE. We analyze new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.

Voting Interest Entities

A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If we have a majority voting interest in a voting interest entity, the entity will generally be consolidated. We do not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party.

We perform on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.

Investments in and Advances to Unconsolidated Ventures

We have non-controlling, unconsolidated ownership interests in entities that may be accounted for using the equity method, at fair value or the cost method.

Under the equity method, the investment is adjusted each period for capital contributions and distributions and our share of the entity's net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. Allocations of net income (loss) may differ from the stated ownership percentage interest in such entities as a result of preferred returns and allocation formulas, if any, as described in such governing documents.

We may account for an investment in an unconsolidated entity at fair value by electing the fair value option. We elected the fair value option for PE Investments. PE Investments are recorded as investments in private equity funds, at fair value on the consolidated balance sheets. We record the change in fair value for our share of the projected future cash flow of PE Investments from one period to another in equity in earnings (losses) from unconsolidated ventures in the consolidated statements of operations. Any change in fair value attributed to market related assumptions are considered unrealized gain (loss).

We may account for investments that do not qualify for equity method accounting or for which the fair value option was not elected using the cost method if we determine the investment in the unconsolidated entity is insignificant. Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment.

Fair Value Option

The fair value option provides an election that allows a company to irrevocably elect fair value for certain financial assets and liabilities on an instrument-by-instrument basis at initial recognition. We will generally not elect the fair value option for our assets and liabilities. However, we may elect to apply the fair value option for certain investments. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.

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Fair Value Measurement

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.


(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.

We generally obtain at least one quote from a pricing service or broker for each security. Furthermore, in limited circumstances, we may use internal pricing models to establish arm's length prices. Generally, the quote from the pricing service is used to determine fair value for the securities. The quotes are not adjusted. The pricing service uses market-based measurements based on valuation techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including prices for similar assets, benchmark yield curves and market corroborated inputs such as contractual terms, discount rates for similar securities and credit (such as credit support and delinquency rates). We believe such broker quote is generally based on a market transaction of comparable securities.

To determine the fair value used in the financial statements, we maintain a comprehensive quarterly process that includes a valuation committee comprised of senior members of the investment and accounting teams that is designed to enable management to ensure the prices used are representative of fair value and the instruments are properly classified pursuant to the fair value hierarchy.

Initially, a member of the investment team on the valuation committee reviews the prices at quarter end to ensure current market conditions are fairly presented. The investment team is able to assess these values because they are actively engaged in the market, reviewing bid lists, recent sales and frequently have discussions with various banks and other financial institutions regarding the state of the market. We then perform a variety of analyses to ensure the quotes are in a range which it believes to be representative of fair value and to validate the quotes obtained and used in determining the ultimate value used in the financial statements. At the portfolio level, we evaluate the overall change in fair value versus the overall change in the market. We review significant changes in fair value for individual instruments, both positive and negative, from the prior period. We perform back testing on any securities sold to validate the quotes used for the prior quarter. Where multiple quotes are available, we evaluate any large variance between the high and low price. We obtain any available market data that provides insight into the price through recent or comparable security trades, multiple broker bids and other pertinent information. This data may be available through the pricing service or based on data directly available to us. If as part of any of these processes, we are aware of data which we believe better supports the fair value, we challenge the quote provided by either the pricing service or broker. Any discrepancy identified from our processes are reviewed and resolved. The valuation committee approves the final prices. We believe these procedures are designed to enable us to estimate fair value.

Once we determine fair value, we review to ensure the instrument is properly classified pursuant to the fair value hierarchy consistent with U.S. GAAP through our understanding of the valuation methodologies used by the pricing service via discussion with representatives of the pricing service and review of any documentation describing its valuation methodology.

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Generally, when fair value is based on the pricing service or multiple broker quotes, we believe, based on our analysis, such quotes are based on observable inputs and are therefore classified as Level 2. Where the price is based on either a single broker quote or an internal pricing model, we generally consider such price to be based on less observable data and therefore classify such instruments as Level 3.

Revenue Recognition

Real Estate Debt Investments

Interest income is recognized on an accrual basis and any related premium, discount, 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 our consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such loan is reclassified to held for sale.

Loans acquired at a discount with deteriorated credit quality are accreted to expected recovery, which takes into consideration the contractual cash flow of the loan, adjusted for the impact of any prepayments, and expected future cash flow we expect to receive. We continue to estimate the amount of recovery over the life of such loans. A subsequent change in expected future cash flow is recognized as an adjustment to the accretable yield prospectively over the remaining life of such loan.

Operating Real Estate

Rental and escalation income from operating real estate is derived from leasing of space to various types of 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. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in unbilled rent receivable on our consolidated balance sheets. Escalation income represents revenue from tenant/operator leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by us on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.

Real Estate Securities

Commission Income

Commission income represents income earned from selling equity in our Sponsored Companies through NorthStar Realty Securities while such companies are raising capital for their primary offering. Commission income is accrued on a trade date basis. We are currently raising capital for NorthStar Healthcare and NorthStar Income II. NorthStar Income, our first Sponsored Company, successfully completed its $1.1 billion primary offering on July 1, 2013.

Advisory and Other Fees

Advisory and other fees include fees earned from the management of our Sponsored Companies and are recognized in the period during which the related services are performed and the amounts have been contractually earned.

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 underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated 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

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to 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 a loan 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.

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 expected future undiscounted cash flow generated by the property is less than the carrying value. In conducting this review, management considers U.S. macroeconomic factors, real estate sector conditions and asset specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value and recorded in impairment on operating real estate in our consolidated statements of operations.

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

Investments in and Advances to Unconsolidated Ventures

We review our investments in unconsolidated ventures for which we did not elect the fair value option on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value may be impaired or that its carrying value may not be recoverable. An investment is considered impaired if the projected net recoverable amount over the expected holding period is less than the carrying value. In conducting this review, we consider 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 is measured as the excess of the carrying value of the investment over the estimated fair value and recorded in provision for loss on equity investment in our consolidated statements of operations.

Real Estate Securities

CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment, or OTTI, as any change in fair value is 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. Impairment of a security is considered to be other-than-temporary when: (i) the holder has the intent to sell the impaired security; (ii) it is more likely than not the holder will be required to sell the security; or (iii) the holder does not expect to recover the entire amortized cost of the security. When a CRE security has been deemed to be other-than-temporarily impaired due to (i) or (ii), the security is written down to its fair value and an OTTI is recognized in the consolidated statements of operations. In the case of (iii), the security is written down to its fair value and the amount of OTTI is then bifurcated into: (i) the amount related to expected credit losses; and (ii) the amount related to fair value adjustments in excess of expected credit losses. The portion of OTTI related to expected credit losses is recognized in our consolidated statements of operations. The remaining OTTI related to the valuation adjustment is recognized as a component of accumulated OCI in our consolidated statements of equity. The portion of OTTI recognized through earnings is accreted back to the amortized cost basis of the security through interest income, while amounts recognized through OCI are amortized over the life of the security with no impact on earnings. CRE securities which are not high-credit quality are considered to have an OTTI if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of OTTI is then bifurcated as discussed above.

Other

Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 for a complete discussion of our critical accounting policies.

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Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board, or FASB, issued an accounting update that concluded when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's non-recourse borrowing, the reporting entity must apply sales accounting to the real estate to determine whether it should derecognize the in substance real estate. The reporting entity is precluded from derecognizing the real estate until legal ownership has been transferred to the lender to satisfy the borrowing. The requirements of the accounting update were effective for us in the first quarter 2013 and are applied on a prospective basis. We adopted the provisions of the update and it did not have a material impact on our consolidated financial statements.

In February 2013, the FASB issued an accounting update to present the reclassification adjustments to OCI by component on the face of the statement of operations or in the notes to the consolidated financial statements. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety into earnings, an entity is required to cross-reference to other disclosures required under U.S. GAAP to provide additional detail about those amounts. We adopted the provisions of the update and it did not have a material impact on our consolidated financial statements.

Results of Operations

Comparison of the Three Months Ended September 30, 2013 to September 30, 2012 (Dollars in Thousands):



	Three Months Ended September 30,						Increase (Decrease)
	2013			2012			Amount			%
Net interest income
Interest income	$	75,141		$	82,558		$	(7,417	)	(9.0	)%
Interest expense on debt and securities	10,132			12,304			(2,172		)	(17.7	)%
Net interest income on debt and securities	65,009			70,254			(5,245		)	(7.5	)%
Other revenues
Rental and escalation income	72,909			29,095			43,814			150.6	%
Commission income, related party	1,639			12,213			(10,574		)	(86.6	)%
Advisory and other fees, related party	6,816			1,507			5,309			352.3	%
Other revenue	1,778			366			1,412			385.8	%
Total other revenues	83,142			43,181			39,961			92.5	%
Expenses
Other interest expense	41,747			23,618			18,129			76.8	%
Real estate properties—operating expenses	23,926			4,814			19,112			397.0	%
Commission expense	1,629			11,070			(9,441		)	(85.3	)%
Other expenses	1,207			1,120			87			7.8	%
Transaction costs	298			—			298			NA
Provision for (reversal of) loan losses, net	(11,122		)	6,360			(17,482		)	(274.9	)%
General and administrative
Salaries and equity-based compensation	17,130			13,691			3,439			25.1	%
Other general and administrative	5,094			5,801			(707		)	(12.2	)%
Total general and administrative	22,224			19,492			2,732			14.0	%
Depreciation and amortization	33,905			11,635			22,270			191.4	%
Total expenses	113,814			78,109			35,705			45.7	%
Income (loss) from operations	34,337			35,326			(989		)	(2.8	)%
Equity in earnings (losses) of unconsolidated ventures	31,013			421			30,592			7,266.5	%
Unrealized gain (loss) on investments and other	16,565			(202,019		)	218,584			(108.2	)%
Realized gain (loss) on investments and other	30,567			15,221			15,346			100.8	%
Gain (loss) from deconsolidation of N-Star CDOs	(254,206		)	—			(254,206		)	NA
Income (loss) from continuing operations	(141,724		)	(151,051		)	9,327			(6.2	)%
Income (loss) from discontinued operations	(25		)	411			(436		)	(106.1	)%
Gain on sale from discontinued operations	—			29			(29		)	NA
Net income (loss)	$	(141,749	)	$	(150,611	)	$	8,862		(5.9	)%

Net Interest Income

Net interest income is generated on our interest-earning assets and related interest-bearing liabilities and is recorded as part of our CRE debt and securities segments and our N-Star CDO segments. For assets financed in a CDO, also referred to as legacy investments, the N-Star CDO segments are based on the primary collateral of the CDO financing transaction and as such may include other types of investments.

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The following table presents the average balance of interest-earning assets and related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the three months ended September 30, 2013 and 2012. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):



	Three Months Ended September 30,
	2013							2012
	Average Carrying Value⁽²⁾		Interest Income/ Expense⁽³⁾		WA Yield/ Financing Cost⁽⁴⁾			Average Carrying Value⁽²⁾		Interest Income/ Expense⁽³⁾		WA Yield/ Financing Cost⁽⁴⁾
Interest-earning assets:⁽¹⁾
CRE debt investments	$	1,539,745	$	36,257	9.42	%		$	1,805,064	$	37,483	8.31	%
CRE securities investments	1,445,587		38,884		10.76	%		2,022,355		45,075		8.92	%
	$	2,985,332	75,141		10.07	%		$	3,827,419	82,558		8.63	%
Interest-bearing liabilities:⁽¹⁾
CDO bonds payable	$	2,122,562	7,947		3.65	%	⁽⁵⁾	$	3,300,964	11,183		3.61	%	⁽⁵⁾
Securitization bonds payable	97,943		763		3.12	%		NA		—		NA
Credit facilities	81,357		1,278		6.28	%		141,232		977		2.77	%
Secured term loan	7,298		144		7.89	%		14,682		144		3.92	%
	$	2,309,160	10,132		3.73	%		$	3,456,878	12,304		3.58	%
Net interest income			$	65,009						$	70,254

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(1)	Excludes $116.9 million and $180.8 million average carrying value of REO and investments in and advances to unconsolidated ventures, net of related financing as of September 30, 2013 and 2012, respectively.


(2)	Based on amortized cost for CRE debt and securities investments, principal amount for N-Star CDOs, securitization bonds payable, credit facilities and secured term loan and carrying value for the CSE and CapLease CDOs. All amounts are calculated based on quarterly averages.


(3)	Includes the effect of amortization of premium or accretion of discount and deferred fees.


(4)	Calculated based on annualized interest income or expense divided by average carrying value.


(5)	We use interest rate swaps in CDO financing transactions to manage interest rate risk. Weighted average financing cost includes $11.4 million and $18.6 million of net cash payments on interest rate swaps recorded in unrealized gain (loss) in our consolidated statements of operations for the three months ended September 30, 2013 and 2012, respectively.

Interest income decreased $7.4 million, primarily attributable to decreased interest income on CRE debt and securities investments in the CSE CDO ($7.6 million) and other N-Star CDOs ($12.7 million), offset by increased income associated with an investment in our CDO bonds ($7.3 million) and related to CRE debt and securities investments ($5.6 million).

Interest expense decreased $2.2 million, primarily attributable to lower interest expense related to repurchases and paydowns of CDO bonds payable ($3.7 million), offset by new borrowings on investments through credit facilities and Securitization 2012-1 ($1.5 million).

Other Revenues

Rental and Escalation Income

Rental and escalation income increased $43.8 million, primarily attributable to new investments ($38.9 million) and higher income on our net lease and healthcare properties ($0.7 million) in our real estate segment and higher income related to new REO in our N-Star CDO CRE debt segment ($4.2 million).

Commission Income—Related Party

Commission income is generated in our asset management business and currently represents income earned for selling equity in our Sponsored Companies through NorthStar Realty Securities. The decrease of $10.6 million in commission income is attributable to completing our offering of NorthStar Income on July 1, 2013 and commencing selling in NorthStar Healthcare and NorthStar Income II at the end of the third quarter 2013.

Advisory and Other Fees—Related Party

Advisory and other fees are generated in our asset management business and increased $5.3 million primarily due to increased fees from managing our Sponsored Companies.

Other Revenue

Other revenue increased $1.4 million due to increases in various fees such as special servicing fees, draw fees and late fees.

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Expenses

Other Interest Expense

Other interest expense increased $18.1 million, primarily attributable to increased interest expense related to new mortgage notes payable associated with new investments in our real estate segment ($12.9 million), new exchangeable senior notes at the corporate level ($4.9 million) and new mortgage notes payable associated with new REO in our N-Star CDO CRE debt segment ($0.8 million), offset by decreased interest expense from principal paydowns on mortgage notes payable in our real estate segment ($0.1 million) and junior subordinated notes at the corporate level ($0.3 million).

Real Estate Properties—Operating Expenses

Real estate properties operating expenses increased $19.1 million, primarily attributable to new investments in our real estate segment ($17.1 million) and new REO in our N-Star CDO CRE debt segment ($1.9 million).

Commission Expense

Commission expense is incurred in our asset management business and represents fees to broker-dealers with whom we have distribution agreements to raise capital in the non-traded REIT market and commissions related to NorthStar Realty Securities. The decrease of $9.4 million in commission expense corresponds with the decreased commission income.

Other Expenses

Other expenses increased $0.1 million and consisted of costs primarily related to managing the N-Star CDO CRE debt investments and are recorded as part of the N-Star CDO segments. These amounts include legal and consulting fees for loan modifications and restructurings and other expenses associated with managing the N-Star CDOs.

Transaction Costs

Transaction costs represent costs such as professional fees associated with new investments. For the three months ended September 30, 2013, transaction costs of $0.3 million related to our acquisition of real estate properties in our real estate segment. We did not incur any transaction costs for the three months ended September 30, 2012.

Provision for (Reversal of) Loan Losses, Net

Provision for (reversal of) loan losses, net on our CRE debt investments decreased $17.5 million. For the three months ended September 30, 2013, reversal of provision for loan loss of $11.1 million primarily related to a loan that is expected to pay off at par during the fourth quarter. For the three months ended September 30, 2012, provision for loan losses, net of $6.4 million related to two debt investments, including $5.6 million for a mezzanine loan and $0.7 million for a subordinated mortgage interest.

General and Administrative

General and administrative expenses are principally incurred at the corporate level except as it relates to compensation expense and other costs incurred at our broker-dealer which is part of our asset management segment.

General and administrative expenses increased $2.7 million primarily attributable to the following:

Salaries and equity-based compensation expense increased $3.4 million primarily due to compensation from higher staffing levels to accommodate our new business activities ($5.1 million), equity compensation in the form of limited partnership interests in the Operating Partnership which are structured as profits interests ($1.2 million) and equity compensation for the 2012 long-term incentive plan ($0.8 million), offset by decreased equity compensation for the 2010 and 2009 long-term incentive plans ($1.4 million and $0.1 million, respectively) and the allocation of costs to our Sponsored Companies.

Other general and administrative expenses decreased $0.7 million at the corporate level primarily due to increased legal fees related to general corporate work, offset by the allocation of costs to our Sponsored Companies.

Depreciation and Amortization

Depreciation and amortization expense increased $22.3 million, primarily related to new acquisitions in our real estate segment.

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) of unconsolidated ventures increased $30.6 million, primarily attributable to PE Investment I ($15.3 million) and PE Investment II ($15.0 million) both in our real estate segment and decreased losses from equity investments in our N-Star CDO CRE debt segment ($0.3 million).

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Unrealized Gain (Loss) on Investments and Other

Unrealized gain (loss) on investments and other is primarily related to the non-cash change in fair value adjustments and the remaining amount is related to net cash payments on interest rate swaps. Any change in fair value related to securities, CDO bonds payable and related derivatives and the associated net cash payments on interest rate swaps is primarily part of our N-Star CDO segments while any change in fair value and net cash payments on interest rate swaps related to junior subordinated notes are at the corporate level.

For the three months ended September 30, 2013, the $16.6 million net unrealized gain primarily related to unrealized gains on our junior subordinated notes ($28.3 million) at the corporate level and net unrealized gains on CRE securities investments ($7.3 million) and derivative instruments ($6.1 million), offset by unrealized losses on CDO bonds payable ($10.6 million) and net cash payments on interest rate swaps ($11.4 million) in our N-Star CDO segments. The remaining change related to the reversal of unrealized gains related to the deconsolidation of N-Star CDOs IV, VI, VII and VIII and the CapLease CDO ($3.3 million).

For the three months ended September 30, 2012, the $202.0 million net unrealized loss primarily related to our N-Star CDO segments and included net unrealized losses on CDO bonds payable ($193.7 million) and net cash payments on interest rate swaps ($18.6 million), offset by unrealized gains on CRE securities investments ($24.6 million) and unrealized gains on derivative instruments ($6.9 million). The remaining change related to unrealized losses on our junior subordinated notes ($20.7 million) at the corporate level and unrealized losses on CRE securities investments ($0.5 million) in our CRE securities segment.

Realized Gain (Loss) on Investments and Other

Realized gains of $30.6 million for the three months ended September 30, 2013 consisted primarily foreign currency remeasurement gain ($2.2 million) in the CRE debt segment, gains from an investment in the CRE securities segment ($33.1 million) and gain from the sale of timeshare units ($0.3 million) in the real estate segment. The remaining change related to the N-Star CDO segments and primarily included gains from the sale of CRE debt and securities investments ($0.9 million), offset by losses related to certain CRE securities investments ($3.1 million) and repurchases of CDO bonds ($2.7 million).

Realized gains of $15.2 million for the three months ended September 30, 2012 consisted primarily of net realized gains from the sale of timeshare units ($4.9 million) in our real estate segment and foreign currency remeasurement gain ($1.2 million) in the CRE debt segment, offset by losses related to certain CRE securities investments ($0.8 million) in the CRE securities segment. The remaining change related to the N-Star CDO segments and primarily included net realized gains from the sale of CRE debt and securities investments ($10.2 million) and net realized gains on termination of interest rate swaps ($7.6 million), offset by losses on the repurchases of CDO bonds ($5.8 million) and losses related to certain CRE securities investments ($2.1 million).

Gain (Loss) from Deconsolidation of N-Star CDOs

The loss of $254.2 million is related to the deconsolidation of N-Star CDOs IV, VI, VII and VIII and the CapLease CDO, which was predominately due to the reversal of the unrealized gains on the CDO liabilities that were recorded in prior periods due to the election of the fair value option.

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 and are included as part of our N-Star CDO segments. For the three months ended September 30, 2013 and 2012, income (loss) from discontinued operations of an immaterial amount for both periods, related to one healthcare property located in Kentucky classified as held for sale and one multifamily property located in Texas that was sold in 2012.

Gain on Sale from Discontinued Operations

For the three months ended September 30, 2013, there was no gain on sale from discontinued operations. Gain on sale from discontinued operations for the three months ended September 30, 2012 related to the sale of an office property in Indiana.

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Comparison of the Nine Months Ended September 30, 2013 to September 30, 2012 (Dollars in Thousands):



	Nine Months Ended September 30,						Increase (Decrease)
	2013			2012			Amount			%
Net interest income
Interest income	$	218,624		$	243,367		$	(24,743	)	(10.2	)%
Interest expense on debt and securities	33,117			38,569			(5,452		)	(14.1	)%
Net interest income on debt and securities	185,507			204,798			(19,291		)	(9.4	)%
Other revenues
Rental and escalation income	177,018			85,076			91,942			108.1	%
Commission income, related party	51,214			28,291			22,923			81.0	%
Advisory and other fees, related party	17,111			4,766			12,345			259.0	%
Other revenue	3,452			1,996			1,456			72.9	%
Total other revenues	248,795			120,129			128,666			107.1	%
Expenses
Other interest expense	102,811			67,316			35,495			52.7	%
Real estate properties—operating expenses	50,616			13,184			37,432			283.9	%
Commission expense	46,504			25,538			20,966			82.1	%
Other expenses	4,020			4,191			(171		)	(4.1	)%
Transaction costs	10,801			2,433			8,368			343.9	%
Provision for (reversal of) loan losses, net	(8,786		)	19,737			(28,523		)	(144.5	)%
General and administrative
Salaries and equity-based compensation	52,589			41,764			10,825			25.9	%
Other general and administrative	16,774			14,991			1,783			11.9	%
Total general and administrative	69,363			56,755			12,608			22.2	%
Depreciation and amortization	70,828			36,419			34,409			94.5	%
Total expenses	346,157			225,573			120,584			53.5	%
Income (loss) from operations	88,145			99,354			(11,209		)	(11.3	)%
Equity in earnings (losses) of unconsolidated ventures	54,445			(416		)	54,861			(13,187.7	)%
Other income (loss)	—			20,258			(20,258		)	NA
Unrealized gain (loss) on investments and other	(28,513		)	(413,073		)	384,560			(93.1	)%
Realized gain (loss) on investments and other	47,611			35,768			11,843			33.1	%
Gain (loss) from deconsolidation of N-Star CDOs	(254,206		)	—			(254,206		)	NA
Income (loss) from continuing operations	(92,518		)	(258,109		)	165,591			(64.2	)%
Income (loss) from discontinued operations	(81		)	506			(587		)	(116.0	)%
Gain on sale from discontinued operations	—			314			(314		)	NA
Net income (loss)	$	(92,599	)	$	(257,289	)	$	164,690		(64.0	)%

Net Interest Income

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The following table presents the average balance of interest-earning assets and related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the nine months ended September 30, 2013 and 2012. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):



	Nine Months Ended September 30,
	2013							2012
	Average Carrying Value⁽²⁾		Interest Income/ Expense⁽³⁾		WA Yield/ Financing Cost⁽⁴⁾			Average Carrying Value⁽²⁾		Interest Income/ Expense⁽³⁾		WA Yield/ Financing Cost⁽⁴⁾
Interest-earning assets:⁽¹⁾
CRE debt investments	$	1,676,094	$	102,411	8.15	%		$	1,751,735	$	103,445	7.87	%
CRE securities investments	1,601,705		116,213		9.67	%		2,147,906		139,922		8.69	%
	$	3,277,799	218,624		8.89	%		$	3,899,641	243,367		8.32	%
Interest-bearing liabilities:⁽¹⁾
CDO bonds payable	$	2,602,427	26,976		3.64	%	⁽⁵⁾	$	3,509,858	$	36,132	3.68	%	⁽⁵⁾
Securitization bonds payable	97,986		2,345		3.19	%		NA		—		NA
Credit facilities	69,827		3,368		6.43	%		104,137		2,007		2.57	%
Secured term loan	10,971		428		5.20	%		14,682		430		3.91	%
	$	2,781,211	33,117		3.70	%		$	3,628,677	38,569		3.65	%
Net interest income			$	185,507						$	204,798

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(1)	Excludes $154.5 million and $172.2 million average carrying value of REO and investments in and advances to unconsolidated ventures, net of related financing as of September 30, 2013 and 2012, respectively.


(2)	Based on amortized cost for CRE debt and securities investments, principal amount for N-Star CDOs, securitization bonds payable, credit facilities and secured term loan and carrying value for the CSE and CapLease CDOs. All amounts are calculated based on quarterly averages.


(3)	Includes the effect of amortization of premium or accretion of discount and deferred fees.


(4)	Calculated based on annualized interest income or expense divided by average carrying value.


(5)	We use interest rate swaps in CDO financing transactions to manage interest rate risk. Weighted average financing cost includes $44.1 million and $60.8 million of net cash payments on interest rate swaps recorded in unrealized gain (loss) in our consolidated statements of operations for the nine months ended September 30, 2013 and 2012, respectively.

Interest income decreased $24.7 million, primarily attributable to decreased interest income on CRE debt and securities investments in the CSE CDO ($19.8 million) and other N-Star CDOs ($35.3 million), offset by increased income associated with an investment in our CDO bonds ($11.4 million) and related to CRE debt and securities investments ($19.0 million).

Interest expense decreased $5.5 million, primarily attributable to lower interest expense related to repurchases and paydowns of CDO bonds payable ($9.2 million), offset by new borrowings on investments through credit facilities and Securitization 2012-1 ($3.7 million).

Other Revenues

Rental and Escalation Income

Rental and escalation income increased $91.9 million, primarily attributable to new investments in our real estate segment ($81.4 million) and higher income related to new REO in our N-Star CDO CRE debt segment ($10.5 million).

Commission Income—Related Party

Commission income is generated in our asset management business and currently represents income earned for selling equity in our Sponsored Companies through NorthStar Realty Securities. The increase of $22.9 million in commission income is attributable to our increased capital raising velocity in 2013.

Advisory and Other Fees—Related Party

Advisory and other fees are generated in our asset management business and increased $12.3 million primarily due to increased fees from managing our Sponsored Companies.

Other Revenue

Other revenue increased $1.5 million due to increases in various fees such as special servicing fees, draw fees and late fees.

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Expenses

Other Interest Expense

Other interest expense increased $35.5 million, primarily attributable to increased interest expense related to new mortgage notes payable associated with new investments in our real estate segment ($25.7 million), new exchangeable senior notes at the corporate level ($9.1 million) and new mortgage notes payable associated with new REO in our N-Star CDO CRE debt segment ($1.9 million), offset by decreased interest expense from principal paydowns on mortgage notes payable in our real estate segment ($0.3 million) and junior subordinated notes at the corporate level ($0.9 million).

Real Estate Properties—Operating Expenses

Real estate properties operating expenses increased $37.4 million, primarily attributable to new investments in our real estate segment ($31.9 million) and new REO in our N-Star CDO CRE debt segment ($5.2 million).

Commission Expense

Commission expense is incurred in our asset management business and represents fees to broker-dealers with whom we have distribution agreements to raise capital in the non-traded REIT market and commissions related to NorthStar Realty Securities. The increase of $21.0 million in commission expense corresponds with the increased commission income.

Other Expenses

Other expenses decreased $0.2 million and consisted of costs primarily related to managing the N-Star CDO CRE debt investments and CDO financing transactions and are recorded as part of the N-Star CDO segments. These amounts include legal and consulting fees for loan modifications and restructurings and other expenses associated with managing the N-Star CDOs.

Transaction Costs

Transaction costs represent costs such as professional fees associated with new investments. For the nine months ended September 30, 2013, transaction costs of $10.8 million related to PE Investments and our acquisition of real estate properties, all in our real estate segment. For the nine months ended September 30, 2012, transaction costs of $2.4 million related to costs for transactions that were not completed.

Provision for (Reversal of) Loan Losses, Net

Provision for (reversal of) loan losses, net on our CRE debt investments decreased $28.5 million. For the nine months ended September 30, 2013, reversal of provision for loan losses, net of $8.8 million related to a loan loss on a mezzanine loan ($6.3 million), offset by a reversal of provision for loan loss for a mezzanine loan for which we contemporaneously took title to the collateral ($4.0 million) and a reversal of a provision for loan loss in September 2013 primarily related to a loan that is expected to pay off at par during the fourth quarter. Provision for loan losses, net of $19.7 million for the nine months ended September 30, 2012 related to six debt investments, including $17.1 million for mezzanine loans, $2.0 million for subordinated mortgage interests and $0.6 million for first mortgage loans.

General and Administrative

General and administrative expenses increased $12.6 million primarily attributable to the following:

Salaries and equity-based compensation expense increased $10.8 million primarily due to compensation from higher staffing levels to accommodate our new business activities ($10.9 million), equity compensation in the form of limited partnership interests in the Operating Partnership which are structured as profits interests ($5.8 million) and equity compensation for the 2012 and 2011 long-term incentive plans ($1.9 million and $0.2 million, respectively), offset by decreased equity compensation for the 2010 and 2009 long-term incentive plans ($4.3 million and $0.9 million, respectively) and the allocation of costs to our Sponsored Companies.

Other general and administrative expenses increased $1.8 million at the corporate level primarily due to increased legal fees related to general corporate work, offset by the allocation of costs to our Sponsored Companies.

Depreciation and Amortization

Depreciation and amortization expense increased $34.4 million, primarily related to new acquisitions in our real estate segment.

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Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) of unconsolidated ventures increased $54.9 million primarily attributable to PE Investment I ($37.3 million) and PE Investment II ($15.0 million) both in our real estate segment, income from investments in our N-Star CDO CRE debt and securities segments ($2.2 million) and decreased losses from equity investments in our N-Star CDO CRE debt segment ($0.4 million).

Other Income (Loss)

Other income (loss) of $20.3 million for the nine months ended September 30, 2012 was primarily comprised of a reversal of a loss accrual previously recorded related to certain litigation in our real estate segment.

Unrealized Gain (Loss) on Investments and Other

For the nine months ended September 30, 2013, the $28.5 million net unrealized loss primarily related to our N-Star CDO segments and included unrealized losses on CDO bonds payable ($105.4 million) and net cash payments on interest rate swaps ($44.1 million), offset by net unrealized gains on CRE securities investments ($88.2 million) and derivative instruments ($29.7 million). The remaining change related to unrealized gains on our junior subordinated notes ($4.9 million) at the corporate level, offset by unrealized losses on CRE securities investments ($1.8 million) in our CRE securities segment.

For the nine months ended September 30, 2012, the $413.1 million net unrealized loss primarily related to our N-Star CDO segments and included net unrealized losses on CDO bonds payable ($403.2 million) and net cash payments on interest rate swaps ($60.8 million), offset by unrealized gains on CRE securities investments in our N-Star CDO segments ($39.5 million) and unrealized gains on derivative instruments ($27.2 million). The remaining change related to unrealized losses on our junior subordinated notes ($24.9 million) and net cash payments on interest rate swaps ($0.3 million) at the corporate level and unrealized gains on CRE securities investments ($9.6 million) in our CRE securities segment.

Realized Gain (Loss) on Investments and Other

Realized gains of $47.6 million for the nine months ended September 30, 2013 consisted primarily foreign currency remeasurement gain ($1.3 million) in the CRE debt segment, gains from an investment in the CRE securities segment ($33.1 million) and gain from the sale of timeshare units ($12.0 million) in the real estate segment. The remaining change related to the N-Star CDO segments and primarily included gains from the sale of CRE debt and securities investments ($6.2 million) and gain from the liquidation of N-Star CDO II ($7.0 million), offset by net losses on repurchases of CDO bonds ($5.1 million) and losses related to certain CRE securities investments ($7.1 million).

Realized gains of $35.8 million for the nine months ended September 30, 2012 consisted primarily of net realized gains from the sale of timeshare units ($16.1 million) in our real estate segment, offset by foreign currency remeasurement loss ($0.4 million) in the CRE debt segment and losses related to certain CRE securities investments ($0.8 million) in the CRE securities segment. The remaining change related to the N-Star CDO segments and primarily included net realized gains from the sale of CRE debt and securities investments ($26.4 million), gain on a termination of an interest rate swap ($7.6 million) and gains from the sale of land in Arizona and Florida ($3.0 million), offset by losses on the repurchases of CDO bonds ($13.9 million) and losses related to certain CRE securities investments ($2.1 million).

Gain (Loss) from Deconsolidation of N-Star CDOs

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 and are included as part of our N-Star CDO segments. For the nine months ended September 30, 2013 and 2012, income (loss) from discontinued operations of an immaterial amount for both periods, related to one healthcare property located in Kentucky classified as held for sale and one multifamily property located in Texas that was sold in 2012.

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Gain on Sale from Discontinued Operations

For the nine months ended September 30, 2013, there was no gain on sale from discontinued operations. Gain on sale from discontinued operations for the nine months ended September 30, 2012 related to the sale of an office property in Indiana.

Liquidity and Capital Resources

We require capital to fund our investment activities and operating expenses. Our capital sources may include cash flow provided by operations, net proceeds from asset repayments and sales, borrowings under credit facilities, financings secured by our assets such as mortgage notes, securitization financing transactions, long-term senior and subordinate corporate capital such as senior term loans, senior exchangeable notes, trust preferred securities, perpetual preferred stock 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, issuance of debt or equity capital 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 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 CAD, AFFO, REIT qualification requirements, 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 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. Unrestricted cash as of November 1, 2013 was approximately $345 million.

Securitization Financing Transactions

We, and on behalf of NorthStar Income, entered into two Securitization Financing Transactions that provide permanent, non-recourse, non-mark-to-market financing for a portion of our CRE debt investments. We expect to execute similar transactions to finance our newly-originated debt investments that might initially be financed on our credit facilities.

Securitization 2012-1

In November 2012, we closed Securitization 2012-1, a $351 million securitization financing transaction which provides permanent, non-recourse, non-mark-to-market financing and is collateralized by CRE debt investments originated by us and on behalf of NorthStar Income. A total of $228 million of investment grade bonds were issued, $98 million of which was used to finance the assets we contributed, representing an advance rate of 65% and a weighted average coupon of LIBOR plus 1.63%. We used the proceeds to repay $95 million of borrowings on our loan facilities.

Securitization 2013-1

In August 2013, we bifurcated three first mortgage loans with an aggregate principal amount of $142 million into a senior loans of $79 million and subordinate mortgage interests of $63 million to facilitate the financing of the senior loans in Securitization 2013-1, a securitization financing transaction entered into by NorthStar Income. We transferred three senior loans at cost to Securitization 2013-1. We did not retain any interest in the senior loans and retained the subordinate mortgage interests on an unleveraged basis.

Credit Facilities

In November 2011, July 2012 and March 2013, we entered into three separate credit facilities that provide up to an aggregate of $340 million to finance the origination of first mortgage loans and senior loan participations secured by commercial real estate.

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The interest rate and advance rate depend on asset type and characteristic. Initial maturity dates for these facilities range from November 2013 to July 2015 and all have extensions available at our option, subject to the satisfaction of certain customary conditions, with maturity dates extending through July 2018.

As of September 30, 2013, we have $27 million principal amount of CRE debt investments financed with $15 million from the loan facilities resulting in an expected return on invested equity of approximately 12% with $325 million of available borrowing under these loan facilities. There is no assurance we will realize this expected return on invested equity over the term of these investments. Our actual return on invested equity could vary significantly from our expectations.

Our loan facilities contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. We are currently in compliance with all of our financial covenants under our credit facilities.

CDO Financing Transactions

Our legacy CRE debt and securities investments are predominantly financed in CDOs. We sponsored nine CDOs, three of which were primarily collateralized by CRE debt and six of which were primarily collateralized by CRE securities. We acquired equity interests of two CRE debt focused CDOs, the CSE CDO and the CapLease CDO, which we 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. We collectively refer to all CDOs as the N-Star CDOs and their assets as legacy investments. At the time of issuance of the sponsored CDO, we retained the below investment grade bonds, which are referred to as subordinate bonds, and preferred shares and equity notes are collectively referred to as equity interests. The repurchased CDO bonds and retained subordinate bonds are herein collectively referred to as N-Star CDO bonds.

We own the equity interests in all of our N-Star CDO financing transactions whether or not we consolidate these transactions on our balance sheet. We do not, however, own undivided interests in any of the assets within our N-Star CDOs and all senior and junior bondholders of the CDOs have economic interests that are senior to our equity interests.

These CDO financing transactions require that the underlying assets meet a collateral value coverage test, or OC test, and an interest coverage test, or IC test (as defined by each applicable indenture) in order for us, as the holder of the retained interests, to receive regular cash flow distributions. Primarily rating downgrades and/or defaults of CMBS and other securities can reduce the deemed value of the security in measuring the OC test. Also, defaults in 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. In such cases, this could decrease cash available to pay our dividend and affect compliance with REIT requirements.

N-Star CDO Equity

Substantially all of our N-Star CDO equity invested is in our CRE debt CDOs which currently have large OC cushions compared to our CRE securities CDOs. In fact, our CRE debt CDOs have distributed regular cash flow since their inception. Currently, all of our CRE debt CDOs, the CSE CDO and the CapLease CDO are in compliance with their OC and IC tests. Currently, two CRE securities CDOs (N-Star CDOs II and VII) have been liquidated. Three of the remaining CRE securities CDOs (N-Star CDOs I, III and V) are out of compliance with their respective OC test. We historically consolidated these CDO financing transactions under U.S. GAAP. More recently, we have been winding down our legacy CDO business resulting in liquidation and deconsolidation of certain of our N-Star CDOs.

In May 2013, we completed the redemption of N-Star CDO II. We owned $71 million principal amount of CDO bonds that we repurchased in the open market at an aggregate purchase price of $36 million. On the redemption date, the issuer of N-Star CDO II sold its collateral and repaid the respective CDO bonds. We received $70 million in connection with the N-Star CDO II bonds repurchased in prior periods. We deconsolidated N-Star CDO II in the second quarter 2013 and recorded a realized gain of $7 million.

In July 2013, we determined that we no longer had the power to direct the activities that most significantly impact the economic performance of N-Star CDO VII due to the ability of a single party to remove us as collateral manager as a result of an existing event of default. As a result, N-Star CDO VII was deconsolidated in July 2013.

In September 2013, we delegated the collateral management rights of N-Star CDOs IV, VI and VIII and the CapLease CDO to a third-party collateral manager but retained administrative responsibilities. As a result, we longer have the power to direct the activities that most significantly impact the economic performance of these CDOs. As a result, these CDOs were deconsolidated effective September 30, 2013.

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N-Star CDOs I, III, V and IX and the CSE CDO continue to be consolidated. The following table presents our N-Star CRE debt CDOs as of September 30, 2013 (dollars in thousands):



	Deconsolidated									Consolidated
Issue/Acquisition Date	N-Star IV Jun-05		N-Star VI Mar-06		N-Star VIII Dec-06		CapLease Aug-11			CSE Jul-10				Total
Balance sheet as of September 30, 2013⁽¹⁾
Assets, principal amount	$	336,156	$	398,661	$	922,457	$	156,385		$	835,867			$	2,649,526
CDO bonds, principal amount⁽²⁾	224,170		313,218		699,705		138,612			764,387				2,140,092
Net assets	$	111,986	$	85,443	$	222,752	$	17,773		$	71,480			$	509,434

CDO quarterly cash distributions and coverage tests⁽³⁾
Equity notes and subordinate bonds	$	1,266	$	2,127	$	2,995	$	653		$	5,638			$	12,679
Collateral management and other fees	272		469		977		88			408				$	2,214
Interest coverage cushion⁽¹⁾	1,353		2,412		3,490		407			5,750
Overcollateralization cushion⁽¹⁾	51,951		68,664		138,118		9,137			80,883
At offering	19,808		17,412		42,193		5,987		⁽⁴⁾	(151,595		)	⁽⁵⁾

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(1)	Based on remittance report issued on date nearest to September 30, 2013.


(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.


(4)	Based on trustee report as of August 31, 2011, closest to the date of acquisition.


(5)	Based on trustee report as of June 24, 2010, closest to the date of acquisition.

The following presents the diversity across property type and geographic location of all CRE debt in N-Star CDOs based on principal amount:



CRE Debt in N-Star CDOs by Property Type		CRE Debt in N-Star CDOs by Geographic Location

The following table presents our CRE securities CDO financing transactions as of September 30, 2013 (dollars in thousands):



Issue/Acquisition Date	N-Star I Aug-03		N-Star III Mar-05		N-Star V Sept-05		N-Star IX Feb-07		Total
Balance sheet as of September 30, 2013⁽¹⁾
Assets, principal amount	$	72,492	$	189,459	$	286,980	$	1,003,722	$	1,552,653
CDO bonds, principal amount⁽²⁾	71,021		118,749		246,243		724,217		1,160,230
Net assets	$	1,471	$	70,710	$	40,737	$	279,505	$	392,423

CDO quarterly cash distributions and coverage tests⁽³⁾
Equity notes and subordinate bonds	$	—	$	—	$	—	$	2,208	$	2,208
Collateral management and other fees	35		54		50		757		$	896
Interest coverage cushion⁽¹⁾	NEG		NEG		NEG		1,802
Overcollateralization cushion⁽¹⁾	NEG		NEG		NEG		24,923
At offering	8,687		13,610		12,940		24,516

____________________________________________________________


(1)	Based on remittance report issued on date nearest to September 30, 2013.


(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.

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Repurchased N-Star CDO Bonds

The following table presents our N-Star CDO bonds owned as of September 30, 2013 (dollars in thousands):



Based on original credit rating:	Principal Amount⁽¹⁾
AAA	$	72,264
AA through BBB	358,531
Below investment grade	176,790
Total⁽²⁾⁽³⁾	$	607,585
Weighted average original credit rating of repurchased N-Star CDO bonds	A / A2
Weighted average purchase price of repurchased N-Star CDO bonds	32		%

____________________________________________________________


(1)	Represents the maximum amount of principal proceeds that could be received. There is no assurance we will receive the maximum amount of principal proceeds.


(2)	Unencumbered N-Star CDO bonds are owned by us, of which $457 million were repurchased at a discount to par.


(3)	$282 million are eliminated in our consolidated financial statements.

Repurchased N-Star CDO bonds that are consolidated are not presented as an investment but rather are eliminated in our consolidated financial statements and, as a result, the interest and realization of any discount will generally not be recorded as income on our consolidated statements of operations under U.S. GAAP. These amounts are recorded as inter-segment revenues and expense as disclosed in Note 16. Segment Reporting in Item 1. "Financial Statements." We generate cash flow in future periods through the interest payable on these bonds, as well as realize (in cash) the discount if and when the bonds repay.

Cash Flows

Nine Months Ended September 30, 2013 Compared to September 30, 2012

Net cash provided by operating activities was $178 million for the nine months ended September 30, 2013 compared to $62 million for the nine months ended September 30, 2012. The increase was primarily due to new investment activity.

Net cash used in investing activities was $1.8 billion for the nine months ended September 30, 2013 compared to net cash provided by investing activities of $172 million for the nine months ended September 30, 2012. The decrease in net cash provided was primarily due to new investment activity.

Net cash provided by financing activities was $1.5 billion for the nine months ended September 30, 2013 compared to net cash used of $126 million for the nine months ended September 30, 2012. The primary cash inflows for the nine months ended September 30, 2013 was $1.2 billion of net new capital and $0.9 billion of net new borrowings, offset by $399 million for net repurchase/repayment of CDO bonds (utilizing restricted cash), $10 million for net swap activities and $161 million for the payment of dividends (common and preferred). The primary cash outflows for the nine months ended September 30, 2012 was $524 million for net repurchase/repayment of CDO bonds (utilizing restricted cash), $20 million for net swap activities and $74 million for the payment of dividends (common and preferred), offset by $422 million from net new capital and $84 million of net new borrowings.

Off-Balance Sheet Arrangements

As of September 30, 2013, we had off-balance sheet arrangements with respect to retained interests in certain deconsolidated N-Star CDOs. Refer to Note 3. "Variable Interest Entities" in Item 1. "Financial Statements" for a discussion of such retained interests in such N-Star CDOs in our consolidated financial statements. In each case, our exposure to loss is limited to the carrying value of our investment.

Additionally, we have certain 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 unconsolidated ventures. Refer to Note 6. "Investments in and Advances to Unconsolidated Ventures" in Item 1. "Financial Statements" 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 and Sponsored Company Arrangements

Commission Income and Expense

Commission income represents income earned by selling equity in Sponsored Companies through NorthStar Realty Securities. Pursuant to dealer manager agreements between NorthStar Realty Securities and the Sponsored Companies, we receive selling commissions of up to 7% of gross offering proceeds raised. We reallow all selling commissions earned to participating broker-

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dealers. In addition, we also receive a dealer manager fee of up to 3% of gross offering proceeds raised, a portion of which may be reallowed to participating broker-dealers. Commission expense represents fees to participating broker-dealers with whom we have selling agreements and commissions to employees of NorthStar Realty Securities. For the nine months ended September 30, 2013, commission expense was $47 million of which $6 million related to employees of NorthStar Realty Securities.

Advisory and Other Fees

We have agreements with each of our Sponsored Companies to manage their day-to-day affairs, including identifying, originating and acquiring investments on their behalf and earning fees for our services. For the nine months ended September 30, 2013 and 2012, we earned $17 million and $5 million of fees related to these agreements, respectively. In general, we may determine to defer fees or seek reimbursement, subject to compliance with applicable policies. From inception through September 30, 2013, we deferred $0.5 million of acquisition fees and $0.3 million of disposition fees related to NorthStar Income.

Additionally, we incur direct and indirect costs on behalf of our Sponsored Companies which are expected to be reimbursed subsequently to us. As of September 30, 2013, we had aggregate unreimbursed costs of $17 million from our Sponsored Companies. This amount is recorded as receivables, related parties on our consolidated balance sheets. For the nine months ended September 30, 2013, we received $10 million of reimbursements from our Sponsored Companies.

We earn collateral management fees from our CDOs. For the nine months ended September 30, 2013, fee income related to all of our CDO financing transactions of $13 million was eliminated as a result of the consolidation of the respective CDO financing transactions.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg



						Cumulative Unrealized							Allocation by		Weighted		Weighted
	Number	Principal Amount⁽³⁾		Amortized Cost		Gains		(Losses)			Fair Value		Investment Type⁽³⁾		Average Coupon		Average Yield⁽⁴⁾
Asset Type:
N-Star CDO bonds⁽¹⁾	27	$	325,723	$	152,919	$	1,407	$	(427	)	$	153,899	16.0	%	1.50	%	20.82	%
N-Star CDO equity⁽⁵⁾	4	129,670		129,670		—		—			129,670		6.4	%	NA		18.00	%
CMBS and other securities⁽⁶⁾	17	98,651		58,604		6,488		(18,613		)	46,479		4.8	%	3.07	%	5.07	%
Subtotal⁽²⁾	48	554,044		341,193		7,895		(19,040		)	330,048		27.2	%	1.86	%	17.05	%
CRE securities in N-Star CDOs⁽⁵⁾⁽⁷⁾
CMBS	288	1,267,362		904,253		66,489		(361,591		)	609,151		62.2	%	3.21	%	8.83	%
Third-party CDO notes	21	112,208		101,989		—		(76,939		)	25,050		5.5	%	0.34	%	1.18	%
Agency debentures	8	87,172		28,704		3,728		(1,662		)	30,770		4.3	%	NA		4.63	%
Unsecured REIT debt	1	8,000		8,527		999		—			9,526		0.4	%	7.50	%	6.00	%
Trust preferred securities	2	7,225		7,225		—		(1,434		)	5,791		0.4	%	2.25	%	2.25	%
Subtotal	320	1,481,967		1,050,698		71,216		(441,626		)	680,288		72.8	%	2.82	%	7.90	%
Total	368	$	2,036,011	$	1,391,891	$	79,111	$	(460,666	)	$	1,010,336	100.0	%	2.61	%	10.14	%



						Cumulative Unrealized⁽²⁾							Allocation by		Weighted		Weighted
	Number⁽¹⁾	Principal Amount		Amortized Cost		Gains		Losses			Fair Value⁽³⁾		Investment Type⁽⁴⁾		Average Coupon		Average Yield⁽⁵⁾
Asset Type:
CMBS	485	$	2,207,067	$	1,551,389	$	84,752	$	(652,123	)	$	984,018	86.9	%	3.75	%	10.43	%
Third-party CDO notes	35	197,103		159,657		—		(111,421		)	48,236		7.8	%	0.62	%	7.54	%
Unsecured REIT debt	11	57,180		53,585		2,898		(102		)	56,381		2.2	%	5.50	%	1.29	%
Trust preferred securities	3	14,725		10,916		1,184		(2,529		)	9,571		0.6	%	2.26	%	6.80	%
Agency debentures	4	63,000		17,538		8,924		—			26,462		2.5	%	NA		3.51	%
Total	538	$	2,539,075	$	1,793,085	$	97,758	$	(766,175	)	$	1,124,668	100.0	%	3.45	%	9.81	%



				September 30, 2013				December 31, 2012
	Recourse vs. Non-Recourse	Final Maturity	Contractual Interest Rate⁽¹⁾⁽²⁾	Principal Amount		Carrying Value⁽³⁾		Principal Amount			Carrying Value⁽³⁾
Mortgage and other notes payable:⁽⁴⁾
Manufactured housing communities
MH 1 Senior Mortgages⁽⁵⁾	Non-recourse	Jan-23	4.387%	$	236,900	$	236,900	$	236,900		$	236,900
MH 2 Senior Mortgages⁽⁶⁾	Non-recourse	May-23	4.016%	639,999		639,999		—			—
Subtotal Manufactured housing communities				876,899		876,899		236,900			236,900
Healthcare
Hillsboro, OR	Non-recourse	Jan-14	5.94%	31,288		31,288		31,650			31,650
Wakefield Portfolio	Non-recourse	Mar-15	LIBOR + 5.95%	56,003		56,003		56,717			56,717
Ohio Portfolio	Non-recourse	Mar-16	6.00%	20,558		20,558		20,747			20,747
Lancaster, OH	Non-recourse	Mar-16	LIBOR + 5.00%	4,412		4,412		4,453			4,453
Wilkinson Portfolio	Non-recourse	Jan-17	6.99%	153,407		153,407		155,332			155,332
Tuscola/Harrisburg, IL	Non-recourse	Jan-17	7.09%	7,576		7,576		7,667			7,667
East Arlington, TX	Non-recourse	May-17	5.89%	3,222		3,222		3,259			3,259
Minnesota Portfolio	Non-recourse	May-18⁽⁷⁾	LIBOR + 3.00%	38,249		38,249		—			—
Clinton, CT	Non-recourse	Jun-18	LIBOR + 2.75%	7,829		7,829		—			—
Healthcare Preferred⁽⁸⁾	Non-recourse	Jul-21	LIBOR + 7.75%	75,000		75,000		—			—
Subtotal Healthcare				397,544		397,544		279,825			279,825
Net lease
South Portland, ME	Non-recourse	Jun-14	7.34%	3,879		3,879		4,051			4,051
Fort Wayne, IN	Non-recourse	Jan-15	6.41%	3,046		3,046		3,123			3,123
Reading, PA	Non-recourse	Jan-15	5.58%	12,843		12,843		13,073			13,073
Reading, PA	Non-recourse	Jan-15	6.00%	5,000		5,000		5,000			5,000
EDS Portfolio	Non-recourse	Oct-15	5.37%	43,912		43,912		44,575			44,575
Keene, NH	Non-recourse	Feb-16	5.85%	6,269		6,269		6,353			6,353
Green Pond, NJ	Non-recourse	Apr-16	5.68%	16,167		16,167		16,374			16,374
Aurora, CO	Non-recourse	Jul-16	6.22%	31,356		31,356		31,713			31,713
DSG Portfolio	Non-recourse	Oct-16	6.17%	31,875		31,875		32,296			32,296
Indianapolis, IN	Non-recourse	Feb-17	6.06%	26,708		26,708		27,022			27,022
Milpitas, CA	Non-recourse	Mar-17	5.95%	20,199		20,199		20,616		��	20,616
Fort Mill, SC	Non-recourse	Apr-17	5.63%	27,700		27,700		27,700			27,700
Fort Mill, SC⁽⁹⁾	Non-recourse	Apr-17	6.21%	1,558		1,558		1,827			1,827
Salt Lake City, UT	Non-recourse	Sept-17	5.16%	13,812		13,812		14,133			14,133
Columbus, OH	Non-recourse	Dec-17	6.48%	22,389		22,389		22,643			22,643
Subtotal Net lease				266,713		266,713		270,499			270,499
Multifamily
MF 1 Senior Mortgage	Non-recourse	Apr-23	3.996%	39,600		39,600		—			—
MF 2 Senior Mortgages⁽¹⁰⁾	Non-recourse	May-23/July-23	4.03%	158,417		158,417		—			—
MF 3 Senior Mortgages⁽¹¹⁾	Non-recourse	Jul-23	4.28%	46,538		46,538		—			—
Subtotal Multifamily				244,555		244,555		—			—
Subtotal Non-VIE financing				1,785,711		1,785,711		787,224			787,224
REO
Phoenix, AZ	—	—	—	—		—		211,921			211,921
Austin, TX	—	—	—	—		—		16,525			16,525
Subtotal REO—VIE				—		—		228,446			228,446
Subtotal Mortgage and other notes payable				1,785,711		1,785,711		1,015,670			1,015,670



				September 30, 2013				December 31, 2012
	Recourse vs. Non-Recourse	Final Maturity	Contractual Interest Rate⁽¹⁾⁽²⁾	Principal Amount		Carrying Value⁽³⁾		Principal Amount		Carrying Value⁽³⁾
CDO bonds payable:
N-Star I	Non-recourse	Aug-38	LIBOR + 4.26%	46,409		42,338		106,648		100,429
N-Star II	—	—	—	—		—		82,694		69,089
N-Star III	Non-recourse	Jun-40	LIBOR + 1.66%	105,653		49,211		148,232		60,806
N-Star IV	—	—	—	—		—		181,353		149,112
N-Star V	Non-recourse	Sept-45	LIBOR + 0.92%	210,653		82,089		263,738		107,823
N-Star VI	—	—	—	—		—		284,623		221,306
N-Star VII	—	—	—	—		—		240,586		93,689
N-Star VIII	—	—	—	—		—		562,367		413,281
N-Star IX	Non-recourse	Aug-52	LIBOR + 0.40%	660,119		236,069		674,723		244,248
CSE CDO	Non-recourse	Jan-37	LIBOR + 0.42%	608,361		456,454		694,863		539,687
CapLease CDO	—	—	—	—		—		131,926		112,971
Subtotal CDO bonds payable—VIE				1,631,195		866,161		3,371,753		2,112,441
Securitization bonds payable:
Securitization 2012-1	Non-recourse	Aug-29	LIBOR+1.62%⁽¹²⁾	97,937		97,919		98,131		98,005
Subtotal Securitization financing transaction				97,937		97,919		98,131		98,005
Secured term loan:
Term Asset-Backed Securities Loan Facility	—	—	—	—		—		14,664		14,664
Subtotal Secured term loan—VIE				—		—		14,664		14,664
Credit facilities:
CMBS Facility	Recourse	Oct-14⁽¹³⁾	1.65%⁽¹⁴⁾	8,744		8,744		31,238		31,238
Loan Facility 1	Partial Recourse⁽¹⁵⁾	Nov-15⁽¹⁶⁾	— ⁽¹⁷⁾	—		—		15,000		15,000
Loan Facility 2	Non-recourse	Jul-18⁽¹⁸⁾	5.19%⁽¹⁹⁾	14,850		14,850		14,850		14,850
Loan Facility 3	Partial Recourse⁽²⁰⁾	Mar-18⁽²¹⁾	— ⁽²²⁾	—		—		—		—
Subtotal Credit facilities				23,594		23,594		61,088		61,088
Exchangeable senior notes:⁽²³⁾
11.50% Notes⁽²⁴⁾	—	—	—	—		—		35,710		35,611
7.25% Notes	Recourse	Jun-27⁽²⁵⁾	7.25%	12,955		12,955		12,955		12,955
7.50% Notes	Recourse	Mar-31⁽²⁶⁾	7.50%	172,500		164,644		172,500		162,596
8.875% Notes	Recourse	Jun-32⁽²⁷⁾	8.875%	81,000		79,081		82,000		79,869
5.375% Notes	Recourse	Jun-33⁽²⁸⁾	5.375%	345,000		298,752		—		—
Subtotal Exchangeable senior notes				611,455		555,432		303,165		291,031
Junior subordinated notes:⁽²⁹⁾
Trust I	Recourse	Mar-35	8.15%	41,240		30,311		41,240		31,549
Trust II	Recourse	Jun-35	7.74%	25,780		18,948		25,780		19,722
Trust III	Recourse	Jan-36	7.81%	41,238		30,310		41,238		31,547
Trust IV	Recourse	Jun-36	7.95%	50,100		36,824		50,100		38,326
Trust V	Recourse	Sept-36	LIBOR + 2.70%	30,100		18,722		30,100		18,662
Trust VI	Recourse	Dec-36	LIBOR + 2.90%	25,100		16,064		25,100		16,064
Trust VII	Recourse	Apr-37	LIBOR + 2.50%	31,459		19,127		31,459		19,190
Trust VIII	Recourse	Jul-37	LIBOR + 2.70%	35,100		21,973		35,100		22,113
Subtotal Junior subordinated notes				280,117		192,279		280,117		197,173
Grand Total⁽³⁰⁾				$	4,430,009	$	3,521,096	$	5,144,588	$	3,790,072

Northstar Realty Finance (NRF) Inactive 10-Q2013 Q3 Quarterly report

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