Northstar Realty Finance (NRF) 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

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) 02-0732285 (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 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 x Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No 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, $0.01 par value per share, 223,110,746 shares outstanding as of November 6, 2014.

NORTHSTAR REALTY FINANCE CORP.

FORM 10-Q

TABLE OF CONTENTS

Index		Page
Part I.	Financial Information	5
Item 1.	Financial Statements	5
	Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	5
	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2014 and 2013	7
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2014 and 2013	8
	Consolidated Statements of Equity for the nine months ended September 30, 2014 (unaudited) and the year ended December 31, 2013	9
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2014 and 2013	10
	Notes to Consolidated Financial Statements (unaudited)	12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	65
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	104
Item 4.	Controls and Procedures	105
Part II.	Other Information	106
Item 1.	Legal Proceedings	106
Item 6.	Exhibits	107
Signatures		110

2

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 following the spin-off of our asset management business and the entry into a long-term management contract with an affiliate of NorthStar Asset Management Group Inc., or NSAM, 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:

• The proposed merger with Griffin-American Healthcare REIT II, Inc. may not have the full strategic and financial benefits that we expect or may not materialize at all;

• adverse economic conditions and the impact of the commercial real estate industry;

• access to debt and equity capital and our liquidity;

• our use of leverage and our ability to comply with the terms of our borrowing arrangements;

• 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 acquire attractive investment opportunities;

• the spin-off of our asset management business may not have the full or any strategic and financial benefits that we expect or such benefits may not materialize at all;

• our performance pursuant to a long-term management contract with an affiliate of NSAM, as our manager, and the effects of becoming an externally-managed company, including the payment of substantial base and potential incentive fees to our manager, the allocation of investments by our manager among us and the manager’s other managed companies and various conflicts of interest in our relationship with NSAM;

• our ability to grow and profit from our commercial real estate origination activities;

• the impact of adverse conditions effecting a specific asset class in which we have investments, such as healthcare, hotel, 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 tenants/operators/residents/guests of the real property that we own as well as 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;

• tenant/operator or borrower defaults or bankruptcy;

• illiquidity of properties in our portfolio;

• our ability to realize the value of the bonds and equity we purchased and/or retained in our collateralized debt obligations, or 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;

3

• credit rating downgrades;

• 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;

• our ability to close on the recent commitments to acquire real estate investments and engage in joint venture transactions on the terms contemplated or at all;

• the possibility that the net asset value of interests in certain real estate private equity funds we acquired do not necessarily reflect the fair value of such fund interests or that the actual amount of our future capital commitments underlying such fund interests varies materially from our expectations;

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

• 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 techniques and strategies;

• 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 the SEC, included in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and in our Quarterly Report on Form 10-Q, as filed with the SEC on August 11, 2014 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.

4

PART I. Financial Information

Item 1.  Financial Statements

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	September 30, 2014 (Unaudited)			December 31, 2013
Assets
Cash and cash equivalents	$	190,891		$	635,990
Restricted cash	312,234			166,487
Operating real estate, net	5,588,906			2,370,183
Real estate debt investments, net (refer to Note 5)	1,144,356			1,031,078
Real estate debt investments, held for sale	15,223			—
Investments in private equity funds, at fair value (refer to Note 6)	851,073			586,018
Investments in unconsolidated ventures (refer to Note 7)	213,139			142,340
Real estate securities, available for sale (refer to Note 8)	911,060			1,052,320
Receivables, net of allowance of $2,567 as of September 30, 2014	51,371			59,895
Receivables, related parties	1,524			25,262
Unbilled rent receivable, net of allowance of $7,523 as of September 30, 2014	11,077			15,006
Derivative assets, at fair value	2,540			3,469
Deferred costs and intangible assets, net	326,936			96,886
Assets of properties held for sale	51,648			30,063
Other assets	198,795			145,053
Total assets(1)	$	9,870,773		$	6,360,050
Liabilities
Mortgage and other notes payable	$	4,453,206		$	2,113,334
CDO bonds payable, at fair value	391,939			384,183
Securitization bonds payable	61,531			82,340
Credit facilities	822,588			70,038
Exchangeable senior notes	50,715			490,973
Junior subordinated notes, at fair value	219,253			201,203
Accounts payable and accrued expenses	138,740			74,547
Due to related party (refer to Note 11)	40,518			—
Escrow deposits payable	92,844			90,929
Derivative liabilities, at fair value	20,398			52,204
Liabilities of properties held for sale	28,962			28,962
Other liabilities	308,660			73,874
Total liabilities(2)	6,629,354			3,662,587
Commitments and contingencies
Equity
NorthStar Realty Finance Corp. Stockholders’ Equity
Preferred stock, $986,640 and $736,640 aggregate liquidation preference as of September 30, 2014 and December 31, 2013, respectively	939,118			697,352
Common stock, $0.01 par value, 500,000,000 shares authorized, 216,704,983 and 154,403,414 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively(3)	2,167			1,544
Additional paid-in capital	3,334,811			2,649,450
Retained earnings (accumulated deficit)	(1,216,223		)	(685,936		)
Accumulated other comprehensive income (loss)	60,025			(4,334		)
Total NorthStar Realty Finance Corp. stockholders’ equity	3,119,898			2,658,076
Non-controlling interests	121,521			39,387
Total equity	3,241,419			2,697,463
Total liabilities and equity	$	9,870,773		$	6,360,050

Refer to accompanying notes to consolidated financial statements.

5

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

(Dollars in Thousands)

		September 30, 2014 (Unaudited)		December 31, 2013
(1)	Assets of consolidated VIEs included in the total assets above:
	Restricted cash	$	23,512	$	24,411
	Operating real estate, net	4,869		4,945
	Real estate debt investments, net	25,635		44,298
	Real estate securities, available for sale	459,061		644,015
	Receivables	2,635		4,476
	Other assets	566		269
	Total assets of consolidated VIEs	$	516,278	$	722,414
(2)	Liabilities of consolidated VIEs included in the total liabilities above:
	CDO bonds payable, at fair value	$	391,939	$	384,183
	Accounts payable and accrued expenses	1,630		2,686
	Derivative liabilities, at fair value	20,217		52,204
	Other liabilities	2,100		2,993
	Total liabilities of consolidated VIEs	$	415,886	$	442,066

_______________________________

(3) Adjusted for the one-for-two reverse stock split completed on June 30, 2014. Refer to Note 13. “Stockholders’ Equity” for additional disclosure related to the reverse stock split.

Refer to accompanying notes to consolidated financial statements.

6

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014 (1)			2013 (1)			2014 (1)			2013 (1)
Property and other revenues
Rental and escalation income	$	86,915		$	71,949		$	234,116		$	174,138
Hotel related income	79,194			—			101,720			—
Resident fee income	25,027			—			40,087			—
Other revenue	3,189			1,346			8,668			2,652
Total property and other revenues	194,325			73,295			384,591			176,790
Net interest income
Interest income (refer to Note 11)	80,915			75,141			235,461			218,624
Interest expense on debt and securities	2,979			10,132			9,368			33,117
Net interest income on debt and securities	77,936			65,009			226,093			185,507
Expenses
Management fee, related party (refer to Note 11)	39,363			—			39,363			—
Other interest expense	59,923			41,270			143,836			101,394
Real estate properties—operating expenses	95,061			23,943			168,690			50,677
Other expenses	520			1,085			1,450			3,744
Transaction costs	44,410			298			84,170			10,801
Provision for (reversal of) loan losses, net	—			(11,122		)	2,719			(8,786		)
General and administrative expenses
Salaries and related expense	3,160			10,286			23,880			23,180
Equity-based compensation expense(2)	8,478			2,414			20,262			9,102
Other general and administrative expenses	2,821			3,881			10,923			11,744
Total general and administrative expenses	14,459			16,581			55,065			44,026
Depreciation and amortization	51,775			33,577			112,496			69,808
Total expenses	305,511			105,632			607,789			271,664
Income (loss) from operations	(33,250		)	32,672			2,895			90,633
Equity in earnings (losses) of unconsolidated ventures	38,234			31,013			101,406			54,445
Unrealized gain (loss) on investments and other	(15,377		)	18,791			(214,322		)	(27,187		)
Realized gain (loss) on investments and other	(15,938		)	28,341			(61,770		)	46,285
Gain (loss) from deconsolidation of N-Star CDOs (refer to Note 3)	—			(254,206		)	(31,423		)	(254,206		)
Income (loss) from continuing operations	(26,331		)	(143,389		)	(203,214		)	(90,030		)
Income (loss) from discontinued operations (refer to Note 10)(2)(3)	(278		)	1,640			(6,989		)	(2,569		)
Net income (loss)	(26,609		)	(141,749		)	(210,203		)	(92,599		)
Net (income) loss attributable to non-controlling interests	1,144			6,313			7,392			5,493
Preferred stock dividends	(21,060		)	(15,591		)	(52,241		)	(39,925		)
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(46,525	)	$	(151,027	)	$	(255,052	)	$	(127,031	)
Earnings (loss) per share:(4)
Income (loss) per share from continuing operations	$	(0.23	)	$	(1.37	)	$	(1.39	)	$	(1.24	)
Income (loss) per share from discontinued operations	—			0.01			(0.04		)	(0.03		)
Basic	$	(0.23	)	$	(1.36	)	$	(1.43	)	$	(1.27	)
Diluted	$	(0.23	)	$	(1.36	)	$	(1.43	)	$	(1.27	)
Weighted average number of shares:(4)
Basic	200,426,890			111,103,046			178,520,386			99,704,973
Diluted	200,426,890			115,734,622			181,269,381			104,275,175
Dividends per share of common stock(4)(5)	$	0.40		$	0.42		$	1.40		$	1.20

______________________

(1) The consolidated financial statements for the three months ended September 30, 2014 represent the Company's results of operations subsequent to the spin-off of the Company's historical asset management business. Periods prior to June 30, 2014 present a carve-out of the Company's historical financial information including revenues and expenses allocated to NSAM related to the Company's historical asset management business. As a result, results of operations for the three months ended September 30, 2014 may not be comparative to the Company's results of operations reported for the prior periods presented.

(2) Primarily relates to the operations of NSAM prior to the spin-off. Refer to Note 10. “Spin-off of Asset Management Business” for disclosure related to the spin-off of NSAM.

(3) The three months ended September 30, 2013 includes $1.0 million of equity-based compensation recorded in discontinued operations. There is no equity-based compensation recorded in discontinued operations for the three months ended September 30, 2014. The nine months ended September 30, 2014 and 2013 include $13.7 million and $4.5 million, respectively, of equity-based compensation recorded in discontinued operations.

(4) Adjusted for the one-for-two reverse stock split completed on June 30, 2014. Refer to Note 13. “Stockholders’ Equity” for disclosure related to the reverse stock split.

(5) The dividend per share for the third quarter 2014 represents the first dividend declared subsequent to the spin-off of NSAM.

 Refer to accompanying notes to consolidated financial statements.

7

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,
	2014			2013			2014			2013
Net income (loss)	$	(26,609	)	$	(141,749	)	$	(210,203	)	$	(92,599	)
Other comprehensive income (loss):
Unrealized gain (loss) on real estate securities, available for sale	15,887			(1,095		)	62,790			2,674
Reclassification of unrealized (gain) loss on real estate securities, available for sale to realized gain (loss) on investments and other	3,044			(926		)	2,077			(926		)
Reclassification of swap (gain) loss into interest expense on debt and securities (refer to Note 16)	228			1,172			685			4,656
Reclassification of swap gain (loss) from deconsolidation of N-Star CDOs (refer to Note 3)	—			15,246			—			15,246
Foreign currency translation adjustment	(119		)	—			(119		)	—
Total other comprehensive income (loss)	19,040			14,397			65,433			21,650
Comprehensive income (loss)	(7,569		)	(127,352		)	(144,770		)	(70,949		)
Comprehensive (income) loss attributable to non-controlling interests	1,144			5,737			5,696			4,583
Comprehensive income (loss) attributable to NorthStar Realty Finance Corp.	$	(6,425	)	$	(121,615	)	$	(139,074	)	$	(66,366	)

Refer to accompanying notes to consolidated financial statements.

8

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars and Shares in Thousands)

	Preferred Stock			Common Stock(1)			Additional Paid-in Capital(1)			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total NorthStar Stockholders’ Equity			Non-controlling Interests
																						Total Equity
	Shares	Amount		Shares	Amount
Balance as of December 31, 2012	21,466	$	504,018	81,804	$	818	$	1,195,949		$	(376,685	)	$	(22,179	)	$	1,301,921		$	28,943		$	1,330,864
Net proceeds from offering of common stock	—	—		66,125	661		1,304,958			—			—			1,305,619			—			1,305,619
Net proceeds from offering of preferred stock	8,000	193,334		—	—		—			—			—			193,334			—			193,334
Common stock related to transactions (refer to Note 13)	—	—		—	—		17,712			—			—			17,712			—			17,712
Non-controlling interests—contributions	—	—		—	—		—			—			—			—			19,774			19,774
Non-controlling interests—distributions	—	—		—	—		—			—			—			—			(1,403		)	(1,403		)
Dividend reinvestment plan	—	—		14	—		249			—			—			249			—			249
Amortization of equity-based compensation	—	—		—	—		—			—			—			—			16,961			16,961
Equity component of exchangeable senior notes	—	—		—	—		45,740			—			—			45,740			—			45,740
Conversion of exchangeable senior notes	—	—		5,791	58		74,719			—			—			74,777			—			74,777
Other comprehensive income (loss)	—	—		—	—		—			—			17,845			17,845			803			18,648
Conversion of Old LTIP Units	—	—		670	7		10,123			—			—			10,130			(10,130		)	—
Dividends on common stock, Old LTIP Units and RSUs	—	—		—	—		—			(171,798		)	—			(171,798		)	(9,588		)	(181,386		)
Dividends on preferred stock	—	—		—	—		—			(55,516		)	—			(55,516		)	—			(55,516		)
Net income (loss)	—	—		—	—		—			(81,937		)	—			(81,937		)	(5,973		)	(87,910		)
Balance as of December 31, 2013	29,466	$	697,352	154,404	$	1,544	$	2,649,450		$	(685,936	)	$	(4,334	)	$	2,658,076		$	39,387		$	2,697,463
Net proceeds from offering of common stock	—	—		32,250	323		787,448			—			—			787,771			—			787,771
Net proceeds from offering of preferred stock	10,000	241,766		—	—		—			—			—			241,766			—			241,766
Common stock related to transactions (refer to Note 13)	—	—		886	9		6,794			—			—			6,803			—			6,803
Issuance of common stock in connection with exercise of warrants (refer to Note 13)	—	—		799	8		8			—			—			16			—			16
Non-controlling interests—contributions	—	—		—	—		—			—			—			—			100,832			100,832
Non-controlling interests—distributions	—	—		—	—		—			—			—			—			(4,213		)	(4,213		)
Dividend reinvestment plan	—	—		8	—		205			—			—			205			—			205
Amortization of equity-based compensation	—	—		—	—		16,934			—			—			16,934			16,322			33,256
Exchangeable senior notes exchanged for Senior Notes (refer to Note 9)	—	—		—	—		(296,382		)	—			—			(296,382		)	—			(296,382		)
Conversion of exchangeable senior notes	—	—		23,751	237		310,226			—			—			310,463			—			310,463
Other comprehensive income (loss)	—	—		—	—		—			—			64,359			64,359			1,074			65,433
Conversion of Old LTIP Units (refer to Note 12)	—	—		4,607	46		18,565			—			—			18,611			(18,611		)	—
Spin-off of NSAM (refer to Note 10)	—	—		—	—		(158,437		)	—			—			(158,437		)	—			(158,437		)
Dividends on common stock, Old LTIP Units, Deferred LTIP Units and RSUs (refer to Note 12)	—	—		—	—		—			(275,235		)	—			(275,235		)	(5,878		)	(281,113		)
Dividends on preferred stock	—	—		—	—		—			(52,241		)	—			(52,241		)	—			(52,241		)
Net income (loss)	—	—		—	—		—			(202,811		)	—			(202,811		)	(7,392		)	(210,203		)
Balance as of September 30, 2014 (unaudited)	39,466	$	939,118	216,705	$	2,167	$	3,334,811		$	(1,216,223	)	$	60,025		$	3,119,898		$	121,521		$	3,241,419

_______________________

(1) Adjusted for the one-for-two reverse stock split completed on June 30, 2014. Refer to Note 13. “Stockholders’ Equity” for additional disclosure related to the reverse stock split.

Refer to accompanying notes to consolidated financial statements.

9

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net income (loss)	$	(210,203	)	$	(92,599	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) losses of PE Investments	(90,817		)	(52,304		)
Equity in (earnings) losses of unconsolidated ventures	(10,589		)	(2,141		)
Depreciation and amortization	112,496			70,828
Amortization of premium/accretion of discount on investments	(58,402		)	(34,629		)
Interest accretion on investments	(13,110		)	(1,443		)
Amortization of deferred financing costs	11,005			4,930
Amortization of equity-based compensation	33,256			13,615
Unrealized (gain) loss on investments and other	200,527			(16,866		)
Realized (gain) loss on investments and other	61,770			(46,285		)
(Gain) loss on deconsolidation of N-Star CDOs	31,423			254,206
Impairment from discontinued operations	543			—
Distributions from PE Investments (refer to Note 6)	90,817			52,304
Distributions from unconsolidated ventures	2,201			4,358
Distributions from equity investments	11,463			—
Amortization of capitalized above/below market leases	(255		)	(1,204		)
Straight-line rental income, net	(3,627		)	(2,226		)
Provision for (reversal of) loan losses, net	2,719			(8,786		)
Allowance for uncollectible accounts	10,090			898
Other	—			306
Discount received	3,416			7,318
Changes in assets and liabilities:
Restricted cash	(41,488		)	(5,064		)
Receivables	(20,914		)	(3,270		)
Receivables, related parties	7,086			(6,885		)
Other assets	(24,507		)	(1,370		)
Accounts payable and accrued expenses	59,554			41,091
Due to related party	40,518			—
Other liabilities	15,781			3,245
Net cash provided by (used in) operating activities	220,753			178,027
Cash flows from investing activities:
Acquisition of operating real estate, net	(2,482,416		)	(1,267,910		)
Improvements of operating real estate	(18,317		)	(9,049		)
Deferred costs and intangible assets	(1,840		)	(877		)
Origination of real estate debt investments, net	(276,630		)	(486,484		)
Acquisition of real estate debt investments	—			(56,301		)
Proceeds from sale of real estate debt investments (refer to Note 11)	13,952			90,345
Repayment on real estate debt investments	128,690			158,064
Investment in PE Investments (refer to Note 6)	(179,750		)	(617,692		)
Distributions from PE Investments (refer to Note 6)	133,367			37,061
Investment in unconsolidated ventures	(72,747		)	(22,546		)
Distributions from unconsolidated ventures	11,737			11,491
Acquisition of real estate securities, available for sale	(22,261		)	—
Proceeds from the sale of real estate securities, available for sale	68,537			206,380
Repayment on real estate securities, available for sale	53,577			170,531
Change in restricted cash	(117,125		)	(28,735		)
Other assets	(127,125		)	7,277
Net cash provided by (used in) investing activities	(2,888,351		)	(1,808,445		)

Refer to accompanying notes to consolidated financial statements.

10

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended September 30,
	2014			2013
Cash flows from financing activities:
Borrowings from mortgage notes	$	1,514,882		$	992,836
Repayment of mortgage notes	(47,391		)	(7,492		)
Proceeds from CDO bonds reissuance	—			23,725
Repayment of CDO bonds	(60,042		)	(525,757		)
Repurchases of CDO bonds	—			(32,719		)
Repayment of securitization bonds payable	(20,831		)	(194		)
Borrowings from credit facilities	772,540			92,560
Repayment of credit facilities	(19,990		)	(130,054		)
Repayment of secured term loan	—			(105		)
Repurchases and repayment of exchangeable senior notes	—			(36,710		)
Proceeds from exchangeable senior notes	—			345,000
Repayment of Senior Notes	(481,118		)	—
Payment of deferred financing costs	(38,820		)	(26,452		)
Purchase of derivative instruments	(741		)	(9,589		)
Change in restricted cash	2,351			135,697
Net proceeds from common stock offering	787,771			656,319
Net proceeds from preferred stock offering	241,766			193,334
Proceeds from dividend reinvestment plan	205			187
Spin-off of NSAM (refer to Note 10)	(118,728		)	—
Dividends (common and preferred)	(327,095		)	(161,377		)
Contributions from non-controlling interests	27,346			12,157
Distributions to non-controlling interests	(9,329		)	(6,472		)
Net cash provided by (used in) financing activities	2,222,776			1,514,894
Effect of foreign currency translation on cash and cash equivalents	(277		)	—
Net increase (decrease) in cash and cash equivalents	(445,099		)	(115,524		)
Cash and cash equivalents—beginning of period	635,990			444,927
Cash and cash equivalents—end of period	$	190,891		$	329,403

  Refer to accompanying notes to consolidated financial statements.

11

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 company (the “Company”). The Company invests in multiple asset classes across commercial real estate (“CRE”) that it expects will generate attractive risk-adjusted returns and may take the form of acquiring real estate, originating or acquiring senior or subordinate loans, as well as pursuing opportunistic CRE investments, both in the United States and internationally. Effective June 30, 2014, the Company is externally managed and advised by an affiliate of NorthStar Asset Management Group Inc. (NYSE: NSAM) (“NSAM”). The Company is a Maryland corporation and completed its initial public offering in October 2004. The Company conducts its operations so as to continue to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.

Spin-off of Asset Management Business

On June 30, 2014, the Company completed the previously announced spin-off of its asset management business into a separate publicly-traded company, NSAM, in the form of a tax-free distribution (the “Distribution”). In connection with the Distribution, each of the Company’s common stockholders received shares of NSAM’s common stock on a one-for-one basis, after giving effect to a one-for-two reverse stock split of the Company’s common stock (the “Reverse Split”). Upon completion of the spin-off, the asset management business of the Company is owned and operated by NSAM and the Company is externally managed by an affiliate of NSAM through a management contract with an initial term of 20 years. Subsequent to the spin-off, the Company continues to operate its commercial real estate debt origination business. Most of the employees of the Company at the time of the spin-off became employees of NSAM and executive officers, employees engaged in the Company’s loan origination business at the time of the spin-off and certain other employees became co-employees of both the Company and NSAM. Affiliates of NSAM also manage the Company’s previously sponsored non-traded REITs: NorthStar Real Estate Income Trust, Inc. (“NorthStar Income”), NorthStar Healthcare Income, Inc. (“NorthStar Healthcare”) and NorthStar Real Estate Income II, Inc. (“NorthStar Income II”) (herein collectively referred to as the “NSAM Sponsored Companies”). In addition, NSAM owns NorthStar Realty Securities, LLC (“NorthStar Securities”), the Company’s previously owned captive broker-dealer platform and performs other asset management-related services. Refer to Note 10. “Spin-off of Asset Management Business” for further disclosure.

Prior to the Distribution, the Company completed an internal corporate reorganization (the “Reorganization”) whereby the Company collapsed its three tier holding company structure into a single tier. The Company previously conducted substantially all of its operations and made its investments through NorthStar Realty Finance Limited Partnership (the “Operating Partnership”). Limited partnership units structured as profits interests previously issued by the Operating Partnership (“Old LTIP Units”) as equity-based compensation were recorded as non-controlling interests on the consolidated balance sheets and were exchanged for shares of the Company’s common stock in the Reorganization. Refer to Note 12. “Equity-Based Compensation” and Note 14. “Non-controlling Interests” for further disclosure. The accompanying notes to these consolidated financial statements are presented after giving effect to the Reorganization, the Reverse Split and the spin-off.

All references herein to the Company refer to NorthStar Realty Finance Corp. and its consolidated subsidiaries after giving effect to the Reorganization, the Reverse Split and the spin-off, 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, 2013, which was filed with the Securities and Exchange Commission (the “SEC”).

12

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The consolidated financial statements for the three months ended September 30, 2014 represent the Company subsequent to the spin-off of its historical asset management business of managing the NSAM Sponsored Companies, owning NorthStar Securities and operating its special servicing business. In connection with the spin-off, most of the Company’s employees became employees of NSAM except for executive officers, employees engaged in the Company’s loan origination business at the time of the spin-off and certain other employees that became co-employees of both the Company and NSAM. Therefore, subsequent to June 30, 2014, NSAM generally incurs substantially all employee-related cash costs.

Periods prior to June 30, 2014 present a carve-out of the Company’s historical financial information, including revenues and expenses allocated to NSAM, related to the Company’s historical asset management business being reported in discontinued operations. Expenses also included an allocation of indirect expenses of the Company to NSAM, including salaries, equity-based compensation and other general and administrative expenses (primarily occupancy and other cost) based on an estimate had the asset management business been run as an independent entity. This allocation method was principally based on relative headcount and management’s knowledge of the Company’s operations.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its 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 the 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.

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

13

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 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. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity 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 (directly or indirectly in joint ventures) that own limited partnership interests in real estate private equity funds (“PE Investments”) and certain investments in unconsolidated ventures (refer to Note 7). The Company records the change in fair value for its share of the projected future cash flow of such 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 is 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. A non-controlling interest is 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. An allocation to a non-controlling interest 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.

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; (ii) the reclassification of unrealized gain (loss) on real estate securities available for sale for which the fair value option was not elected to realized gain (loss) upon sale or realized event; (iii) the reclassification of unrealized gain (loss) to interest expense on derivative instruments that are or were deemed to be effective hedges; and (iv) foreign currency translation adjustment.

14

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 may elect to apply the fair value option for certain investments due to the nature of the instrument. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.

Operating Real Estate

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, such as goodwill. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life.  Ordinary repairs and maintenance are expensed as incurred.  Operating real estate is carried at historical cost less accumulated depreciation. Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets.  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 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.

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. CRE debt investments where the Company does not have the intent to hold the loan for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or estimated value.

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 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 gain (loss) 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.

Restricted Cash

Restricted cash primarily consists of amounts related to operating real estate and CRE debt investments. The following table presents a summary of restricted cash as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30, 2014 (Unaudited)		December 31, 2013
Capital expenditures reserves	$	164,648	$	46,115
Operating real estate escrow reserves	50,024		7,599
CRE debt escrow deposits	76,931		92,347
Cash in CDOs(1)	20,631		20,426
Total	$	312,234	$	166,487

__________________________________________________

(1) Represents proceeds from repayments and/or sales pending distribution.

15

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Other Assets and Other Liabilities

The following table presents a summary of other assets and other liabilities as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30, 2014 (Unaudited)			December 31, 2013
Other assets:
Manufactured homes	$	71,820		$	69,217
Notes receivable	47,061			38,418
Investment-related reserves and deposits	15,065			11,127
Furniture, fixtures and equipment, net	—		(1)	6,977
Prepaid expenses	21,052			5,361
Due from servicer	19,874			—
Other	23,923			13,953
Total	$	198,795		$	145,053
	September 30, 2014 (Unaudited)			December 31, 2013
Other liabilities:
PE Investment IX purchase price (refer to Note 6)	$	186,454	(2)	$	—
PE Investment III deferred purchase price (refer to Note 6)	39,760			39,760
Below-market leases	33,099			8,700
Unearned revenue	7,081			2,029
Tenant security deposits	25,671			9,294
Other	16,595			14,091
Total	$	308,660		$	73,874

__________________________________________________

(1)Distributed to NSAM in connection with the spin-off.

(2)Represents the purchase price for the acquisition of PE Investment IX paid by the Company on October 2, 2014.

Revenue Recognition

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.

The Company generates operating income from healthcare and hotel properties permitted by the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”). Revenue related to healthcare properties includes resident room and care charges and other resident charges. Revenue related to operating hotel properties primarily consists of room and food and beverage sales. Revenue is recognized when such services are provided, generally defined as the date upon which a resident or guest occupies a room or uses the healthcare property or hotel services and is recorded in resident fee income for healthcare properties and hotel related income for hotel properties in the consolidated statements of operations.

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 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.

16

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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.

Credit Losses and Impairment on Investments

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.

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

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.

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.

Investments in 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.

17

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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: (a) the amount related to expected credit losses; and (b) 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. As of September 30, 2014, the Company did not have any OTTI recorded on its CRE securities.

Troubled Debt Restructuring

CRE debt investments modified in a troubled debt restructuring (“TDR”) are modifications granting a concession to a borrower experiencing financial difficulties where a lender agrees to terms that are more favorable to the borrower than is otherwise available in the current market. Management judgment is necessary to determine whether a loan modification is considered a TDR. Troubled debt that is fully satisfied via taking title to 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.

Exchangeable Senior Notes

The proceeds from exchangeable senior notes that may be settled in cash at the option of the issuer, including partial cash settlements, must be bifurcated between a liability component and an equity component associated with the embedded conversion option. The liability component is calculated based on the present value of the contractual cash flow discounted at a comparable market conventional borrowing rate at the date of issuance. The difference between the principal amount and the fair value of the liability component is reported as a discount on the exchangeable senior notes and is accreted as additional interest expense to the contractual maturity using the effective interest method. The equity component is calculated based on the difference between the proceeds received and the fair value of the liability component at the issuance date. The equity component is recorded in additional paid-in-capital, net of issuance costs, on the consolidated balance sheets. Issuance costs related to exchangeable senior notes is allocated between the liability and the equity components based on their relative values.

Equity-Based Compensation

The Company accounts for equity-based compensation awards, including awards granted to co-employees, using the fair value method, which requires an estimate of fair value of the award at the time of grant. Awards may be based on a variety of measures such as time, performance, market or a combination thereof. For time-based awards, the Company recognizes compensation expense over the vesting period on a straight-line basis. For awards with performance or market measures, the Company recognizes compensation expense over the requisite service period, using the accelerated attribution expense method. For performance-based measures, the Company recognizes compensation expense, net of estimated forfeitures, based on an estimate of the probable achievement of such measures. For market-based measures, the Company recognizes compensation expense based on the initial estimate of the fair value of the award using a binomial model.

For awards with a combination of performance or market measures, the Company estimates the fair value as if it were two separate awards. First, the Company estimates the probability of achieving the performance measure. If it is not probable the performance condition will be met, the Company records the compensation expense based on the fair value of the market measure. This expense is recorded even if the market-based measure is never met. If the performance-based measure is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

subsequently estimated to be achieved, the Company records compensation expense based on the performance-based measure. The Company would then record a cumulative catch-up adjustment for any additional compensation expense.

Equity-based compensation issued to non-employees is accounted for using the fair value of the award at the earlier of the performance commitment date or performance completion date. The awards are remeasured every quarter based on the stock price as of the end of the reporting period until such awards vest.

Foreign Currency

Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are translated into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency translation adjustment is recorded as a component of accumulated OCI in the consolidated statements of equity.

Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are remeasured into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency remeasurement adjustment is recorded in unrealized gain (loss) on investments and other in the consolidated statements of operations.

Earnings Per Share

The Company’s basic earnings per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common stock outstanding, including restricted stock. Diluted EPS reflects the potential dilution that could occur if outstanding restricted stock units (“RSUs”) or other contracts to issue common stock, assuming performance hurdles have been met, were converted to common stock, including Deferred LTIP Units (refer to Note 12), where such exercise or conversion would result in a lower EPS. The dilutive effect of such RSUs and Deferred LTIP Units is calculated assuming all units are converted to common stock.

Other

Refer to Note 2 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for further disclosure of the Company’s significant accounting policies.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting update that changes the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity or a business. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The requirements of this accounting update will be effective for the Company for the annual period beginning after December 15, 2014, however, early adoption is permitted but only for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issue. The Company early adopted this accounting pronouncement effective January 1, 2014 and the update did not have a material impact on the consolidated financial statements.

In May 2014, the FASB issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers.  When it becomes effective on January 1, 2017, the accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP.  The Company is in the process of evaluating the impact, if any, of the update on its consolidated financial statements and related disclosures.

3. Variable Interest Entities

As of September 30, 2014, the Company has identified the following consolidated and unconsolidated VIEs.

CDO Financing Transactions

The Company 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 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 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, 2014, the Company serves as collateral manager and/or special servicer for N-Star CDOs I and IX which are primarily collateralized by CRE securities. 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 and/or special servicer, may in its sole discretion 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, 2014 and 2013.

Unconsolidated N-Star CDOs

The Company delegated the collateral management rights for N-Star CDOs IV, VI and VIII and the CapLease CDO on September 30, 2013 and the CSE CDO on December 31, 2013 to a third-party collateral manager/collateral manager delegate who is entitled to a percentage of the senior and subordinate collateral management fees. The Company continues to receive fees as named collateral manager or collateral manager delegate and retained administrative responsibilities. The Company evaluated the fees paid to the third-party collateral manager/collateral manager delegate and concluded that such fees represented a variable interest in the deconsolidated loan CDOs and that the third party was functioning as a principal. The Company determined that the delegation of the Company’s collateral management power in the CDOs was a VIE reconsideration event and concluded that these CDOs were still VIEs as the equity investors do not have the characteristics of a controlling financial interest. The Company then reconsidered if it was the primary beneficiary of such VIEs and determined that it 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, the Company deconsolidated the assets and liabilities for N-Star CDOs IV, VI and VIII and the CapLease CDO on September 30, 2013 and the CSE CDO on December 31, 2013.

In March 2014, the Company determined it no longer had the power to direct the activities that most significantly impact the economic performance of N-Star CDO V 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 was no longer the primary beneficiary of N-Star CDO V, and as a result, in the first quarter 2014, the Company deconsolidated the assets and liabilities of this CDO.

In May 2014, the Company determined it no longer had the power to direct the activities that most significantly impact the economic performance of N-Star CDO III 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 was no longer the primary beneficiary of N-Star CDO III, and as a result, in the second quarter 2014, 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.

For the nine months ended September 30, 2014, the deconsolidation of N-Star CDOs III and V resulted in an aggregate non-cash realized loss on deconsolidation of $31.4 million recorded in the consolidated statement of operations, which was the result of the deconsolidation of an aggregate $192.5 million of assets, $149.0 million of liabilities, net of $8.8 million of fair

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

value of N-Star CDO bonds recorded that no longer eliminated in consolidation and the reclassification of $3.3 million of unrealized gain to loss from deconsolidation.

For the nine months ended September 30, 2013, the deconsolidation of N-Star CDOs IV, VI, VIII and CapLease CDO resulted in an aggregate non-cash realized loss on deconsolidation of $254.2 million recorded in the consolidated statement of operations, which was the result of the deconsolidation of an aggregate $1.8 billion of assets, $1.4 billion of liabilities, net of $223.7 million of fair value of N-Star CDO bonds and equity recorded that no longer eliminated in consolidation and the reclassification of $3.3 million of unrealized gain and $15.2 million of OCI swap loss to loss from deconsolidation.

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, 2014. These unconsolidated VIEs are summarized as follows:

Real Estate Debt Investments

The Company identified three CRE debt investments with an aggregate carrying value of $60.0 million as variable interests in a VIE. The Company determined that it is not the primary beneficiary of such 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 two CRE securities with an aggregate fair value of $37.6 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 one of these securitizations, an affiliate of NSAM was appointed as special servicer. The special servicing business for certain securitizations was transferred to NSAM in connection with the spin-off. The Company determined each securitization was a VIE. However, the Company determined at that time and continues to believe that it does not currently or potentially hold a significant interest in any of these securitizations and, therefore, is not the primary beneficiary.

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. As of September 30, 2014, the Company’s carrying value and maximum exposure to loss related to its investment in the Trusts is $3.7 million and is recorded in investments in unconsolidated ventures on the consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Summary of Unconsolidated VIEs

The following table presents the classification, carrying value and maximum exposure of unconsolidated VIEs as of September 30, 2014 (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	$	—		$	60,027	$	—	$	60,027	$	60,027
Investments in unconsolidated ventures	3,742			—		—		3,742		3,742
Real estate securities, available for sale:
N-Star CDO bonds	—			—		267,273		267,273		267,273
N-Star CDO equity	—			—		134,775		134,775		134,775
CMBS	—			—		37,631		37,631		37,631
Subtotal real estate securities, available for sale	—			—		439,679		439,679		439,679
Total assets	3,742			60,027		439,679		503,448		503,448
Junior subordinated notes, at fair value	219,253			—		—		219,253		NA
Total liabilities	219,253			—		—		219,253		NA
Net	$	(215,511	)	$	60,027	$	439,679	$	284,195	$	503,448

____________________________________________________________

(1) The Company’s maximum exposure to loss as of September 30, 2014 would not exceed the carrying value of its investment.

The Company is not contractually required to provide financial support to any of its unconsolidated VIEs during the nine months ended September 30, 2014 and 2013 however, the Company, in its capacity as collateral manager/collateral manager delegate and/or special servicer of the deconsolidated CDOs, may in its sole discretion provide support such as protective and other advances it deems appropriate. As of September 30, 2014, 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

Real Estate Acquisitions

The following table summarizes the Company’s acquisitions for the nine months ended September 30, 2014 (dollars in millions):

Acquisition Date	Type	Description	Name	Purchase Price(1)		Properties	Units	Primary Location(s)	Financing			Equity		Ownership Interest			Transaction Costs
May 2014	Healthcare	Senior housing and skilled nursing facilities	Formation Portfolio	$	1,060.7	80	8,500 beds	FL, IL, OR, TX	$	646.8		$	357.6	86.0	%	(2)	$	6.0
May 2014	Manufactured Housing	Manufactured housing communities	Manufactured Housing Portfolio 3(3)	55.2		4	1,344 pad sites	AZ, CO, TX	16.5			34.5		93.0	%	(3)	3.1
June 2014	Hotel	Upscale extended stay and premium branded select service	Innkeepers Portfolio	1,057.6		47	6,100 rooms	CA, NJ, TX	840.0			193.1		90.0	%	(4)	19.7
August 2014	Hotel	Premium branded select service	K Partners Portfolio	265.9		20	1,900 rooms	CA, LA, OK	211.7			51.7		97.5	%		6.6
August 2014	Net Lease	Industrial properties(5)	Industrial Portfolio	403.6		39	6.3 million sq ft	CA, IL, FL, GA, MI	221.1			164.1		40.0	%	(6)	1.8
September 2014	Hotel	Premium branded select service	Courtyard Portfolio	682.7		40	5,800 rooms	CA, VA, TX, GA, FL	415.0			266.6		100.0	%		7.7
September 2014	International	Multi-tenant office complex	UK Property	106.1		1	224,000 sq ft	UK	—		(7)	97.9		100.0	%		4.3
September 2014	Office	Multi-tenant office	Legacy Property	40.4		4	366,000 sq ft	CO	—		(7)	38.5		95.0	%		0.4
Total				$	3,672.2	235			$	2,351.1		$	1,204.0				$	49.6

______________________________________

(1) Includes all transaction costs, escrows and reserves.

(2) The Company acquired the Formation Portfolio through a general partnership with a subsidiary of NorthStar Healthcare and a joint venture with an affiliate of Formation Capital, LLC. The Company together with NorthStar Healthcare owns an aggregate approximate 92% interest in the joint venture.

(3) Represents four of the 16 communities in Manufactured Housing Portfolio 3 acquired in May 2014. Previously, 12 communities were acquired in connection with this portfolio in December 2013. The Company structured the acquisition as a joint venture with the same third-party operating partner that currently manages the Company’s other manufactured housing portfolios.

(4) The Company acquired the Innkeepers Portfolio through a joint venture with Chatham Lodging Trust (NYSE: CLDT).

(5) The 39 industrial properties are comprised of 87 buildings and include four office properties.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) The Company has a 40% equity interest and is entitled to 50% of the cash flow. In addition, the Company’s investment includes $151.0 million structured as preferred equity, which is eliminated in consolidation.

(7) The property is currently unlevered, however the Company intends to obtain financing representing 75% loan-to-cost in the near term.

The following table presents the initial allocation of the purchase price of the assets acquired and the liabilities issued or assumed upon the closing of the Formation Portfolio, Manufactured Housing Portfolio 3, K Partners Portfolio, Industrial Portfolio, Courtyard Portfolio, UK Property and Legacy Property that continue to be subject to refinement upon receipt of all information (dollars in thousands):

	Formation Portfolio		Manufactured Housing Portfolio 3		K Partners Portfolio		Industrial Portfolio		Courtyard Portfolio		UK Property		Legacy Property
Assets:
Land and improvements	$	138,017	$	324,511	$	33,516	$	85,980	$	99,880	$	18,834	$	7,672
Buildings and improvements	826,303		8,456		167,581		243,247		507,600		75,335		30,686
Other assets acquired	90,347		65,016		58,254		84,149		67,515		7,617		1,642
Total assets acquired	$	1,054,667	$	397,983	$	259,351	$	413,376	$	674,995	$	101,786	$	40,000
Liabilities:
Mortgage notes payable	$	646,751	$	264,542	$	211,681	$	221,131	$	415,000	$	—	$	—
Other liabilities assumed	—		2,478		1,255		11,616		1,136		8,149		1,126
Total liabilities	646,751		267,020		212,936		232,747		416,136		8,149		1,126
Total NorthStar Realty Finance Corp. stockholders’ equity(1)	351,574		122,135		45,091		162,259		258,859		93,637		38,129
Non-controlling interests	56,342		8,828		1,324		18,370		—		—		745
Total equity	407,916		130,963		46,415		180,629		258,859		93,637		38,874
Total liabilities and equity	$	1,054,667	$	397,983	$	259,351	$	413,376	$	674,995	$	101,786	$	40,000

______________________________________

(1) Stockholders’ equity excludes transaction costs incurred in connection with the acquisitions.

(2) For the nine months ended September 30, 2014, the Company recorded aggregate revenue and net loss for all of the above noted real estate acquisitions of $79.6 million and $20.6 million, respectively. Net loss is primarily related to transaction costs.

The following table presents the final allocation of the purchase price of the assets acquired and liabilities issued upon the closing of the Innkeepers Portfolio (dollars in thousands):

	Innkeepers Portfolio (1)
Assets:
Land and improvements	$	167,106
Buildings and improvements	685,645
Other assets acquired	185,212
Total assets acquired	$	1,037,963
Liabilities:
Mortgage notes payable	$	840,000
Other liabilities assumed	2,405
Total liabilities	842,405
Total NorthStar Realty Finance Corp. stockholders’ equity	173,440
Non-controlling interests	22,118
Total equity	195,558
Total liabilities and equity	$	1,037,963

______________________________________

(1) For the nine months ended September 30, 2014, the Company recorded revenue and net loss of $89.7 million and $11.5 million, respectively. Net loss is primarily related to transaction costs.

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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 following acquisitions: Formation Portfolio, Innkeepers Portfolio, K Partners Portfolio, Courtyard Portfolio, Industrial Portfolio, UK Property and Legacy Property and related borrowings as if it occurred on January 1, 2013. 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,
	2014			2013			2014			2013
Pro forma total revenues	$	336,163		$	312,989		$	965,627		$	889,151
Pro forma net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(35,142	)	$	(147,076	)	$	(244,323	)	$	(115,064	)
Pro forma EPS—Basic	$	(0.18	)	$	(1.32	)	$	(1.37	)	$	(1.15	)
Pro forma EPS—Diluted	$	(0.18	)	$	(1.32	)	$	(1.37	)	$	(1.15	)

Discontinued Operations

Discontinued operations relates to five healthcare properties held for sale or sold as of September 30, 2014. The following table presents income (loss) from discontinued operations related to such properties for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
Revenue
Rental and escalation income	$	—		$	960	$	—		$	2,880
Other revenue	—			—		85			92
Total revenue	—			960		85			2,972
Expenses
Other interest expense	—			478		—			1,418
Real estate properties—operating expenses	8			7		385			18
Other expenses	13			125		72			225
Impairment of operating real estate	257			—		543			—
Depreciation and amortization	—			328		—			1,020
Total expenses	278			938		1,000			2,681
Income (loss) from operating real estate discontinued operations	$	(278	)	$	22	$	(915	)	$	291

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. Real Estate Debt Investments

The following table presents CRE debt investments as of September 30, 2014, excluding CRE debt underlying deconsolidated N-Star CDOs (dollars in thousands):

								Weighted Average(6)						Floating Rate as % of Principal Amount(6)
	Number	Principal Amount		Carrying Value(4)		Allocation by Investment Type(5)		Fixed Rate		Spread Over LIBOR(7)		Yield(8)
Asset Type:
First mortgage loans	15	$	460,175	$	430,072	39.0	%	13.21	%	7.25	%	10.77	%	78.9	%
Mezzanine loans	7	113,386		109,876		9.6	%	13.44	%	13.84	%	14.21	%	74.4	%
Subordinate interests	8	204,428		202,723		17.3	%	13.08	%	12.33	%	13.13	%	40.2	%
Corporate loans (1)(2)	8	360,343		376,050		30.6	%	12.37	%	—		12.97	%	—
Subtotal/Weighted average(3)	38	1,138,332		1,118,721		96.5	%	12.69	%	9.02	%	12.25	%	46.2	%
CRE debt in N-Star CDOs
First mortgage loans	2	26,957		11,484		2.3	%	—	%	1.27	%	3.05	%	100.0	%
Mezzanine loans	1	11,000		10,991		0.9	%	8.00	%	—		8.33	%	—
Corporate loans	6	3,160		3,160		0.3	%	6.74	%	—		6.74	%	—
Subtotal/Weighted average	9	41,117		25,635		3.5	%	7.72	%	1.27	%	5.77	%	65.6	%
Total	47	$	1,179,449	$	1,144,356	100.0	%	12.58	%	8.64	%	12.10	%	46.9	%

____________________________________________________________

(1) Includes $112.0 million of preferred equity investments for which the Company elected the fair value option. As of September 30, 2014, carrying value represents fair value with respect to these investments.

(2) Corporate loans include one revolver of $25.0 million, of which $19.4 million is outstanding as of September 30, 2014.

(3) Certain CRE debt investments serve as collateral for financing transactions including carrying value of $95.3 million for Securitization 2012-1 and $157.8 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 $20.2 million.

(4) There are no loans on non-accrual status except for one first mortgage loan acquired with deteriorated credit quality with a carrying value of $5.8 million as of September 30, 2014. Certain loans have an accrual of interest at a specified rate that may be in addition to a current rate. Such loans represent an aggregate $3.2 million carrying value where the Company does not recognize interest income on the accrual rate but does recognize interest income based on the current rate.

(5) Based on principal amount.

(6) Excludes three CRE debt investments with an aggregate principal amount of $13.1 million that were originated prior to 2008.

(7) $412.4 million principal amount (excluding CRE debt in N-Star CDOs) has a weighted average LIBOR floor of 0.83%. Includes one first mortgage loan with a principal amount of $6.7 million with a spread over prime rate.

(8) Based on initial maturity and for floating-rate debt, calculated using one-month LIBOR as of September 30, 2014, and for CRE debt with a LIBOR floor, using such floor.

Year to date through September 30, 2014, the Company originated nine loans with an aggregate principal amount of $260.6 million.

The following table presents CRE debt investments as of December 31, 2013, excluding CRE debt underlying deconsolidated N-Star CDOs (dollars in thousands):

								Weighted Average(6)						Floating Rate  as % of Principal Amount(6)
	Number	Principal Amount		Carrying Value(4)		Allocation by Investment Type(5)		Fixed Rate		Spread Over LIBOR(7)		Yield(8)
Asset Type:
First mortgage loans	15	$	441,750	$	407,202	40.7	%	10.98	%	6.59	%	9.90	%	90.2	%
Mezzanine loans	6	109,215		107,116		10.1	%	13.96	%	12.09	%	12.97	%	74.2	%
Subordinate interests	7	146,652		144,853		13.5	%	13.05	%	12.33	%	13.14	%	56.0	%
Corporate loans(1)(2)	5	330,343		327,609		30.3	%	12.31	%	—		12.72	%	—
Subtotal/Weighted average(3)	33	1,027,960		986,780		94.6	%	12.36	%	8.04	%	11.58	%	53.8	%
CRE debt in N-Star CDOs
First mortgage loans	2	34,418		21,431		3.2	%	—		2.22	%	3.68	%	100.0	%
Mezzanine loans	1	11,000		10,965		1.0	%	8.00	%	—		8.33	%	—
Subordinate interests	1	7,773		7,773		0.8	%	—		6.75	%	6.92	%	100.0	%
Corporate loans	7	4,129		4,129		0.4	%	6.95	%	—		6.95	%	—
Subtotal/Weighted average	11	57,320		44,298		5.4	%	7.71	%	3.05	%	5.70	%	73.6	%
Total	44	$	1,085,280	$	1,031,078	100.0	%	12.21	%	7.68	%	11.31	%	54.9	%

25

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

____________________________________________________________

(1) Includes a $100.0 million preferred equity investment for which the Company elected the fair value option. As of December 31, 2013, carrying value represents fair value with respect to this investment.

(2) Corporate loans include one revolver of $25.0 million, of which $3.5 million was outstanding as of December 31, 2013.

(3) Certain CRE debt investments serve as collateral for financing transactions including carrying value of $133.4 million for Securitization 2012-1 and $109.1 million for credit facilities. The remainder is unleveraged.

(4) There are no loans on non-accrual status except for one first mortgage loan acquired with deteriorated credit quality with a carrying value of $6.4 million as of December 31, 2013. Certain loans have an accrual of interest at a specified rate that may be in addition to a current rate. Such loans represent an aggregate $5.1 million carrying value where the Company does not recognize interest income on the accrual rate but does recognize interest income based on the current rate.

(5) Based on principal amount.

(6) Excludes three CRE debt investments with an aggregate principal amount of $37.0 million that were originated prior to 2008.

(7) $426.1 million principal amount has a weighted average LIBOR floor of 0.99%. Includes one first mortgage loan with a principal amount of $7.4 million with a spread over prime rate.

(8) Based on initial maturity and for floating-rate debt, calculated using one-month LIBOR as of December 31, 2013, and for CRE debt with a LIBOR floor, using such floor.

The following table presents maturities of CRE debt investments based on principal amount as of September 30, 2014 (dollars in thousands):

	Initial Maturity		Maturity Including Extensions(1)
October 1 to December 31, 2014	$	145,276	$	138,552
Years Ending December 31:
2015	228,808		86,085
2016	287,917		162,940
2017	62,699		190,374
2018	2,761		149,510
Thereafter	451,988		451,988
Total	$	1,179,449	$	1,179,449

____________________________________________________________

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

As of September 30, 2014, the weighted average maturity, including extensions, of CRE debt investments was 4.5 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 certain contractual maturities in connection with loan modifications.

The principal amount of CRE debt investments differs from the carrying value primarily due to unamortized origination fees and costs, unamortized premium and discount and loan loss reserves recorded as part of the carrying value of the investment. As of September 30, 2014, the Company had $23.9 million of net unamortized discount and $6.1 million of net unamortized origination fees and costs.

The Company did not have any non-performing loans (“NPLs”) as of September 30, 2014 and December 31, 2013.

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, 2014 and 2013 (dollars in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
Beginning balance	$	5,599	$	133,202		$	2,880	$	156,699
Provision for (reversal of) loan losses, net	—		(11,122		)	2,719		(8,786		)	(1)
Transfers to REO	—		—			—		(5,623		)
Write-offs / payoffs	—		—			—		(20,210		)	(2)
Deconsolidation of N-Star CDOs	—		(118,304		)	—		(118,304		)
Ending balance	$	5,599	$	3,776		$	5,599	$	3,776

____________________________________________________________

26

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(1) Includes $4.0 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.

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 an 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.

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, 2014		December 31, 2013
Loans with no loan loss reserve:
First mortgage loans	$	440,856	$	426,850
Mezzanine loans	120,867		116,195
Subordinate interests	202,723		152,626
Corporate loans	379,210		331,738
Subtotal	1,143,656		1,027,409
Other loans with a loan loss reserve/non-accrual status:
First mortgage loans(1)	700		1,783
Mezzanine loans	—		1,886
Subtotal	700		3,669
Non-performing loans:	—		—
Total	$	1,144,356	$	1,031,078

____________________________________________________________

(1) Excludes one first mortgage loan acquired with deteriorated credit quality with a carrying value of $5.8 million and $6.4 million as of September 30, 2014 and December 31, 2013, respectively.

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, 2014 and December 31, 2013 (dollars in thousands):

	September 30, 2014							December 31, 2013
	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	1	$	2,533	$	700	$	1,833	1	$	2,533	$	1,783	$	1,000
Mezzanine loans	1	3,766		—		3,766		1	3,766		1,886		1,880
Total	2	$	6,299	$	700	$	5,599	2	$	6,299	$	3,669	$	2,880

____________________________________________________________

(1) Principal amount differs from carrying value primarily due to unamortized origination fees and costs, unamortized premium or discount and loan loss reserves included in the carrying value of the investment. Excludes one first mortgage loan acquired with deteriorated credit quality with a carrying value of $5.8 million and $6.4 million as of September 30, 2014 and December 31, 2013, respectively.

27

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, 2014 and 2013 (dollars in thousands):

	September 30, 2014					September 30, 2013(1)
	Number	Average Carrying Value		Three Months Ended Income		Number	Average Carrying Value		Three Months Ended Income
Class of Debt:
First mortgage loans	1	$	700	$	—	5	$	77,077	$	346
Mezzanine loans	1	—		2		7	105,897		136
Subordinate interests	—	—		—		2	—		1
Corporate loans	—	—		—		1	27,068		914
Total/weighted average	2	$	700	$	2	15	$	210,042	$	1,397

______________________________________

(1) Includes impaired loans outstanding during the period which were deconsolidated on September 30, 2013 and December 31, 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, 2014 and 2013 (dollars in thousands):

	September 30, 2014					September 30, 2013(1)
	Number	Average Carrying Value		Nine Months Ended Income		Number	Average Carrying Value		Nine Months Ended Income
Class of Debt:
First mortgage loans	1	$	1,241	$	—	5	$	80,733	$	1,030
Mezzanine loans	1	471		4		7	124,665		414
Subordinate interests	—	—		—		2	—		3
Corporate loans	—	—		—		1	24,413		2,712
Total/weighted average	2	$	1,712	$	4	15	$	229,811	$	4,159

______________________________________

(1) Includes impaired loans outstanding during the period which were deconsolidated on September 30, 2013 and December 31, 2013. Refer to Note 3 for further disclosure.

As of September 30, 2014 and December 31, 2013, the Company did not have any loans past due greater than 90 days.

Troubled Debt Restructurings

The Company did not have any CRE debt investments modified that were considered TDRs for the three months ended September 30, 2014 and 2013 or for the nine months ended September 30, 2014. The following table presents CRE debt investments that were modified and considered a TDR for the nine months ended September 30, 2013 (dollars in thousands):

	September 30, 2013
Class of Debt:	Number	Carrying Value		Original WA Interest Rate		Modified WA Interest Rate
Mezzanine loan	1	$	50,905	10.85	%	0.00	%	(1)

______________________________________

(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 N-Star CDOs, and as a result, no longer records this loan on its consolidated balance sheets. Refer to Note 3 for further disclosure.

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.

28

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6.Investments in Private Equity Funds

The following is a description of investments in private equity funds that own PE Investments either through unconsolidated ventures (“PE Investment I” and “PE Investment II”), consolidated ventures (“PE Investment V” and “PE Investment VIII”) or direct investments (“PE Investment III,” “PE Investment IV,” “PE Investment VI,” “PE Investment VII and PE Investment IX”), (consolidated and direct investments, collectively “Direct PE Investments”) which are recorded as investments in private equity funds at fair value on the consolidated balance sheets. 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. All PE Investments are considered voting interest entities. PE Investment I and II 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 does not consolidate any of the underlying real estate private equity funds owned in Direct PE Investments as it does not own a majority voting interest in any such funds. Refer to Note 7 for the Company’s evaluation and disclosure of summarized financial information required for any individually significant PE Investments.

Summary

The following tables summarize the Company’s PE Investments (dollars in millions):

PE Investment	Initial Closing Date	NAV Reference Date (1)	Number of Funds		Purchase Price		Expected Future Contributions (2)
PE Investment I	February 15, 2013	June 30, 2012	49		$	282.1	$	9
PE Investment II	July 3, 2013	September 30, 2012	24		353.4		7
PE Investment III (3)	December 31, 2013	June 30, 2013	8		39.8		1
PE Investment IV	May 30, 2014	December 31, 2013	1		8.0		—
PE Investment V	July 1, 2014	September 30, 2013	3		12.0		—
PE Investment VI (4)	July 30, 2014	June 30, 2014	20		90.2		3
PE Investment VII (4)	August 15, 2014	December 31, 2013	18		60.0		2
PE Investment VIII (5)	August 19, 2014	N/A	N/A		N/A		N/A
PE Investment IX	October 2, 2014	March 31, 2014	11		217.7		4
Total			134	(6)	$	1,063.2	$	26

____________________________________________________________

(1) Represents the net asset value (“NAV”) date on which the Company agreed to acquire the respective PE Investment.

(2) Represents the estimated amount of expected future contributions to funds as of September 30, 2014.

(3) PE Investment III paid $39.8 million to the PE III Seller for all of the fund interests, or 50% of the June 30, 2013 NAV, and will pay the remaining $39.8 million, or 50% of the June 30, 2013 NAV, by December 31, 2015 to two third parties. Such amount is included in other liabilities on the consolidated balance sheets.

(4) For the three months ended September 30, 2014, the Company closed 13 of the 20 fund interests related to PE Investment VI and 10 of the 18 fund interests related to PE Investment VII. The Company closed the remaining seven fund interests for PE Investment VI in October 2014. The Company expects to close the remaining fund interests for PE Investment VII in the fourth quarter of 2014 once the Company receives general partner consent from the underlying funds.

(5) On August 19, 2014, the Company, through a subsidiary, entered into a joint venture with a third party to source and invest in real estate private equity funds. For the three months ended September 30, 2014, PE Investment VIII has not made any investments.

(6) The total number includes 12 funds held across multiple PE Investments.

	Carrying Value				Three Months Ended September 30, 2014 (1)						Nine Months Ended September 30, 2014
PE Investment	September 30, 2014		December 31, 2013		Equity in Earnings		Cash Distributions		Cash Contributions		Equity in Earnings		Cash Distributions		Cash Contributions
PE Investment I	$	204.3	$	226.3	$	13.9	$	18.0	$	0.9	$	41.6	$	64.7	$	1.0
PE Investment II	244.0		288.9		13.9		40.7		—		40.3		90.2		4.9
PE Investment III	59.9		70.8		1.4		5.4		—		4.4		15.4		0.2
PE Investment IV	7.5		—		0.4		0.9		—		0.5		0.9		—
PE Investment V	7.5		—		0.5		5.0		—		0.5		5.0		—
PE Investment VI	88.9		—		2.3		3.9		0.3		2.3		3.9		0.3
PE Investment VII	52.5		—		1.1		8.9		0.1		1.2		8.8		0.1
PE Investment VIII(2)	N/A		N/A		N/A		N/A		N/A		N/A		N/A		N/A
PE Investment IX	186.5		—		—		—		—		—		—		—
Total	$	851.1	$	586.0	$	33.5	$	82.8	$	1.3	$	90.8	$	188.9	$	6.5

____________________________________________________________

(1) The three months ended September 30, 2014 represents activity from July 30, 2014 for PE Investment VI and August 15, 2014 for PE Investment VII.

(2) On August 19, 2014, the Company, through a subsidiary, entered into a joint venture with a third party to source and invest in real estate private equity funds. For the three months ended September 30, 2014, PE Investment VIII has not made any investments.

29

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013 (1)
PE Investment	Equity in Earnings		Cash Distributions		Cash Contributions		Equity in Earnings		Cash Distributions		Cash Contributions
PE Investment I	$	15.3	$	18.1	$	0.8	$	37.3	$	74.6	$	18.7
PE Investment II	15.0		15.0		4.4		15.0		15.0		4.4
Total	$	30.3	$	33.1	$	5.2	$	52.3	$	89.6	$	23.1

____________________________________________________________

(1) The nine months ended September 30, 2013 represents activity from February 15, 2013 for PE Investment I and July 3, 2013 for PE Investment II.

Unconsolidated PE Investments

PE Investment I

In February 2013, the Company completed the initial closing (“PE I Initial Closing”) of 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 PE I 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 49 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 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 are based on each partner’s proportionate interest.

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 is solely caused by the Company or NorthStar Income, as the case may be.

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 and entered into an agreement with Common Pension Fund E, a common trust fund created under New Jersey law (“PE II Seller”), to acquire a portfolio of limited partnership interests in 24 real estate private equity funds managed by institutional-quality sponsors. The aggregate reported NAV acquired was $910.0 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 are based on each Partner’s proportionate interest.

PE Investment II paid $504.8 million to PE II Seller for all of the fund interests, or 55% of the September 30, 2012 NAV (the “Initial Amount”), and will pay the remaining $411.4 million, or 45% of the September 30, 2012 NAV (the “Deferred Amount”), by the last day of the fiscal quarter after the four year anniversary following the closing date of each fund interest. The Company funded $353.4 million, all of its proportionate share of the Initial Amount, at the initial closing on July 3, 2013. For the nine months ended September 30, 2014, PE Investment II paid $2.4 million of the Deferred Amount to PE II Seller of which the Company’s share was $1.7 million. As of September 30, 2014, the Company’s share of the Deferred Amount was $286.3 million. 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.

30

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

On March 31st of each year, commencing on March 31, 2015 and for a period of two years thereafter, PE Investment II will pay an amount necessary to reduce the Deferred Amount by the greater of 15% of the then outstanding Deferred Amount or 15% of the aggregate distributions received by PE Investment II during the preceding 12 month period.

On the last day of the fiscal quarter after the four-year anniversary of the applicable closing date of each fund interest, PE Investment II will be required to pay to PE II Seller the then outstanding unpaid Deferred Amount. PE Investment II will receive 100% of all distributions following the payment of the Deferred Amount.

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.

7. Investments in Unconsolidated Ventures

The following is a description of investments in unconsolidated ventures. All of the below are accounted for under the equity method, except for the investments in RXR Realty LLC (“RXR Realty”), Aerium Group (“Aerium”) and Legacy Partners Commercial, LLC (“Legacy Commercial”) for which the fair value option was elected. The Company records equity in earnings (losses) for such investments for which the fair value option was elected based on the change in fair value for the Company’s share of the projected future cash flow from one period to another.

RXR Realty

In December 2013, the Company entered into a strategic transaction with RXR Realty, a leading real estate owner, developer and investment management company focused on high-quality real estate in the New York Tri-State area. The investment in RXR Realty includes an approximate 30% equity interest (“RXR Equity Interest”). The carrying value of the RXR Equity Interest was $88.3 million and $84.1 million as of September 30, 2014 and December 31, 2013, respectively. For the three and nine months ended September 30, 2014, the Company recognized equity in earnings of $2.5 million and $5.5 million, respectively. The Company’s equity interest in RXR Realty is structured so that NSAM is entitled to certain fees in connection with RXR Realty’s investment management business.  Refer to Note 11. “Related Party Arrangements - NorthStar Asset Management Group - Management Agreement” for further disclosure.

Aerium

In June 2014, the Company acquired a 15% interest in Aerium, a pan-European real estate investment manager specializing in commercial real estate properties and is headquartered in Luxembourg with additional offices in London, Paris, Istanbul, Geneva, Düsseldorf and Bahrain. As of September 30, 2014, Aerium managed approximately €6.1 billion of real estate assets across 12 countries and employed over 200 professionals, some of whom provide services to NSAM following the spin-off. The investment in Aerium was acquired for €50 million ($68.8 million), excluding $3.6 million of transaction costs, funded with €45 million ($62.2 million) of cash and €5 million from the issuance of the Company’s common stock (refer to Note 13). The carrying value of the investment in Aerium was $70.6 million as of September 30, 2014. For the three months ended September 30, 2014, the Company recognized equity in earnings of $1.8 million associated with this investment. The Company’s equity interest in Aerium is structured so that NSAM is entitled to certain fees in connection with Aerium’s asset management business.  Refer to Note 11. “Related Party Arrangements - NorthStar Asset Management Group - Management Agreement” for further disclosure.

Legacy Commercial

In September 2014, the Company entered into an investment with Legacy Commercial, a real estate investment manager, owner and operator with a portfolio of commercial assets focused in key markets in the western United States. The investment included a 40% interest in the common equity of certain entities affiliated with Legacy Commercial (collectively referred to as the “Legacy Commercial Entities”). The carrying value of the Company’s investment as of September 30, 2014 was $4.6 million. For the three months ended September 30, 2014, the Company did not record any equity in earnings associated with this investment. Refer to Note 11. “Related Party Arrangements - Legacy Commercial” for further disclosure.

Multifamily Joint Venture

31

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 property was financed with a non-recourse mortgage note of $29.5 million and the remainder in cash. The mortgage note 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. The carrying value of the Company’s investment was $9.9 million and $10.0 million as of September 30, 2014 and December 31, 2013, respectively. For the three and nine months ended September 30, 2014, the Company recognized equity in losses of $0.1 million and $0.3 million, respectively. 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 the joint venture recording transaction costs of $0.8 million, as well as depreciation and amortization.

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”). 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. The carrying value of the 49% interest in LandCap was $11.0 million and $14.1 million as of September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014 and December 31, 2013, LandCap had investments totaling $22.5 million and $25.9 million, respectively. For the three and nine months ended September 30, 2014, the Company recognized equity in earnings of $0.3 million and $0.8 million, respectively. For the three and nine months ended September 30, 2013, the Company recognized equity in earnings of $0.1 million and $0.3 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. The carrying value of the investment in CS/Federal was $5.5 million as of September 30, 2014 and December 31, 2013. For the three and nine months ended September 30, 2014, the Company recognized equity in earnings of $0.1 million and an immaterial amount, respectively. For the three and nine months ended September 30, 2013, the Company recognized equity in earnings of $0.1 million and $0.2 million, respectively.

NSAM Sponsored Companies

The Company committed to purchase up to $10.0 million in shares of each of NSAM’s Sponsored Companies’ common stock during the two year period from when each offering was declared effective through the end of their respective offering period, in the event that NSAM Sponsored Companies’ distributions to its stockholders, on a quarterly basis, exceeds its modified funds from operations (as defined in accordance with the current practice guidelines issued by the Investment Program Association). In addition, pursuant to the management agreement with NSAM, the Company has committed up to $10.0 million to invest as distribution support consistent with past practice in each future public non-traded NSAM Sponsored Company, up to a total of five new companies per year. The Company has the following ownership interest in the NSAM Sponsored Companies:

• NorthStar Income - The Company purchased an aggregate 645,847 shares (including 507,980 shares related to the distribution support agreement) of NorthStar Income’s common stock for $5.8 million from inception of NorthStar Income, a CRE debt focused non-traded REIT, through the expiration of this commitment on July 19, 2013. The carrying value of the investment in NorthStar Income was $6.0 million and $6.1 million, representing an interest of 0.6%, as of September 30, 2014 and December 31, 2013, respectively. For the three and nine months ended September 30, 2014, the Company recognized $0.1 million and $0.3 million of equity in earnings, respectively. For the three and nine months ended September 30, 2013, the Company recognized equity in earnings of $0.2 million and $0.3 million, respectively.

• NorthStar Healthcare - The Company purchased an aggregate 325,471 shares of NorthStar Healthcare’s common stock (including 222,223 shares for the satisfaction of the minimum offering amount) for $2.9 million. The commitment to NorthStar Healthcare ends in August 2015, unless extended at the Company’s discretion. The carrying value of the investment in NorthStar Healthcare was $2.5 million and $2.1 million as of September 30, 2014 and December 31, 2013, respectively, representing an interest of 0.6% and 2.3%, respectively. For the three and nine months ended

32

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

September 30, 2014, the Company recognized an immaterial amount of equity in earnings and $0.1 million of equity in losses, respectively. For the three months ended September 30, 2013, the Company recognized an immaterial amount of equity in earnings.

• NorthStar Income II - The Company purchased an aggregate 307,734 shares of NorthStar Income II’s common stock (including 222,223 shares for the satisfaction of the minimum offering amount) for $2.6 million. The commitment to NorthStar Income II ends in May 2015, unless extended at the Company’s discretion. The carrying value of the investment in NorthStar Income II was $2.6 million and $2.2 million as of September 30, 2014 and December 31, 2013, respectively, representing an interest of 1.4% and 8.7%, respectively. For the three and nine months ended September 30, 2014, the Company recognized an immaterial amount of equity in earnings for both periods.

On March 31, 2014, NorthStar/RXR New York Metro Income, Inc. (“NorthStar/RXR New York Metro”) confidentially submitted its registration statement on Form S-11 to the SEC seeking to raise up to $2.0 billion in a public offering of common stock. NorthStar/RXR New York Metro will be structured as a public, non-traded corporation that intends to qualify as a REIT and is co-sponsored by NSAM and RXR Realty. NorthStar/RXR New York Metro intends to make commercial real estate investments in the New York City metropolitan area. The distribution support agreement related to NorthStar/RXR New York Metro is expected to be an obligation of both the Company and RXR Realty, where each is expected to agree to purchase up to an aggregate of $10.0 million in Class A common stock during the two-year period following commencement of the offering, with the Company and RXR Realty agreeing to purchase 75% and 25% of any shares purchased, respectively.

Other

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). For the three and nine months ended September 30, 2013, the Company recognized equity in losses of $0.1 million and $0.8 million, respectively.

In May 2012, the Company acquired a 9.8% interest in a joint venture that owns a pari passu participation in a first mortgage loan secured by a portfolio of luxury residences located in resort destinations. In April 2014, the loan was repaid at par. As of December 31, 2013, the carrying value of the Company’s investment was $5.7 million. For the nine months ended September 30, 2014, the Company recognized $1.5 million of equity in earnings. For the three and nine months ended September 30, 2013, the Company recognized $0.4 million and $1.1 million of equity in earnings, respectively.

In August 2012, the Company acquired a 33.3% interest in a joint venture that owns a pari passu participation in a first mortgage loan secured by an office building in New York. In July 2013, the loan was paid off at par. For the three and nine months ended September 30, 2013, the Company recognized $1.6 million and $2.8 million of equity in earnings, respectively.

In April 2013, in connection with a loan on a hotel property in New York, the Company and NorthStar Income acquired an aggregate 35.0% interest in the Row NYC (formerly the Milford) hotel and retail component, of which the Company owns 65% and NorthStar Income owns 35%. There was no carrying value as of September 30, 2014 and December 31, 2013. For the three and nine months ended September 30, 2013, the Company recognized $0.8 million and $1.1 million of equity in losses, respectively. In March 2014, the retail component of the hotel was sold and for the nine months ended September 30, 2014, the Company recognized a $1.2 million gain from this sale in equity in earnings.

In June 2013, in connection with the restructuring of an existing mezzanine loan, the Company acquired a 9.99% equity interest for $8.5 million in a joint venture that owns two office buildings in Chicago. As of September 30, 2014 and December 31, 2013, the carrying value of the investment was $8.5 million for each period. For the three and nine months ended September 30, 2014 and 2013, the Company did not recognize any equity in earnings.

Summarized Financial Information

The Company evaluates whether disclosure of summarized financial information is required for any individually significant investment in unconsolidated ventures. As of September 30, 2014, the Company determined there were 14 significant unconsolidated joint ventures, including certain PE Investments, the Company’s investment in RXR Realty and Aerium. For these unconsolidated ventures, the Company records equity in earnings (losses) based on the change in fair value for its share of the projected cash flow from one period to another and not based on such summarized financial information.

33

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Summarized financial information for such unconsolidated ventures for the nine months ended September 30, 2014 and 2013 are as follows (dollars in thousands):

	Nine Months Ended September 30,
	2014 (1)		2013
Revenues	$	310,282	$	160,154
Operating expenses	166,289		31,110
Interest expense	31,329		15,309
Depreciation and amortization	13,519		4,603
Total expenses	211,137		51,022
Income (loss) from continuing operations	$	99,145	$	109,132
Net income (loss)	$	147,419	$	109,132
Net income attributable to joint venture	$	125,846	$	109,132
Equity in earnings of unconsolidated ventures	$	99,686	$	52,565

____________________________________________________________

(1)Includes summarized financial information for PE Investments for the six months ended June 30, 2014, which is the most recent financial information available from the underlying funds.

8. Real Estate Securities, Available for Sale

The following table presents CRE securities as of September 30, 2014 (dollars in thousands):

						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)	34	$	469,981	$	204,462	$	64,178	$	(1,367	)	$	267,273	30.3	%	1.81	%	21.45	%
N-Star CDO equity(5)	5	146,754		146,754		8,398		(20,377		)	134,775		9.5	%	NA		18.27	%
CMBS and other securities(6)	14	108,995		64,854		11,559		(25,021		)	51,392		7.0	%	2.71	%	5.53	%
Subtotal(2)	53	725,730		416,070		84,135		(46,765		)	453,440		46.8	%	1.98	%	17.85	%
CRE securities in N-Star CDOs(5)(7)
CMBS	146	640,875		455,978		50,990		(127,888		)	379,080		41.3	%	3.77	%	10.10	%
Third-party CDO notes	11	83,057		75,385		68		(48,333		)	27,120		5.5	%	0.24	%	1.19	%
Agency debentures	8	87,172		30,029		6,870		(820		)	36,079		5.6	%	NA		4.56	%
Unsecured REIT debt	1	8,000		8,423		994		—			9,417		0.5	%	7.50	%	5.88	%
Trust preferred securities	2	7,225		7,225		—		(1,301		)	5,924		0.3	%	2.25	%	2.25	%
Subtotal	168	826,329		577,040		58,922		(178,342		)	457,620		53.2	%	3.04	%	8.48	%
Total	221	$	1,552,059	$	993,110	$	143,057	$	(225,107	)	$	911,060	100.0	%	2.60	%	12.42	%

____________________________________________________________

(1) Excludes $85.0 million principal amount of N-Star CDO bonds payable that are eliminated in consolidation.

(2) All securities are unleveraged.

(3) Based on amortized cost for N-Star CDO equity and principal amount for remaining securities.

(4) Based on expected maturity and for floating-rate securities, calculated using the applicable LIBOR as of September 30, 2014.

(5) The fair value option was elected for these securities (refer to Note 15).

(6) The fair value option was elected for $41.9 million carrying value of these securities (refer to Note 15).

(7) Investments in the same securitization tranche held in separate CDO financing transactions are reported as separate investments.

As of September 30, 2014, the Company’s CRE securities portfolio is comprised of N-Star CDO bonds and N-Star CDO equity and other securities which are predominantly conduit CMBS, meaning each asset is a pool backed by a large number of commercial real estate loans. As a result, this portfolio is typically well-diversified by collateral type and geography. As of September 30, 2014, contractual maturities of CRE securities investments ranged from seven months to 38 years, with a weighted average expected maturity of 3.9 years.

34

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents CRE securities as of December 31, 2013 (dollars in thousands):

						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)	31	$	481,386	$	207,547	$	1,878	$	(4,138	)	$	205,287	23.0	%	1.82	%	20.00	%
N-Star CDO equity(5)	5	158,274		158,274		—		—			158,274		7.6	%	NA		18.42	%
CMBS and other securities(6)	17	98,650		58,482		6,457		(18,264		)	46,675		4.7	%	3.06	%	4.98	%
Subtotal(2)	53	738,310		424,303		8,335		(22,402		)	410,236		35.3	%	2.03	%	17.34	%
CRE securities in N-Star CDOs(5)(7)
CMBS	264	1,140,368		799,126		67,770		(294,595		)	572,301		54.5	%	3.15	%	9.65	%
Third-party CDO notes	20	109,651		99,603		—		(74,672		)	24,931		5.2	%	0.29	%	1.17	%
Agency debentures	8	87,172		29,031		2,644		(2,135		)	29,540		4.2	%	NA		4.64	%
Unsecured REIT debt	1	8,000		8,502		1,019		—			9,521		0.4	%	7.50	%	6.00	%
Trust preferred securities	2	7,225		7,225		—		(1,434		)	5,791		0.4	%	2.26	%	2.32	%
Subtotal	295	1,352,416		943,487		71,433		(372,836		)	642,084		64.7	%	2.73	%	8.51	%
Total	348	$	2,090,726	$	1,367,790	$	79,768	$	(395,238	)	$	1,052,320	100.0	%	2.52	%	11.25	%

_________________________________________________________

(1) Excludes $126.6 million principal amount of N-Star CDO bonds payable that are eliminated in consolidation.

(2) All securities are unleveraged.

(3) Based on amortized cost for N-Star CDO equity and principal amount for remaining securities.

(4) Based on expected maturity and for floating-rate securities, calculated using the applicable LIBOR as of December 31, 2013.

(5) The fair value option was elected for these securities (refer to Note 15).

(6) The fair value option was elected for $30.6 million carrying value of these securities (refer to Note 15).

(7) Investments in the same securitization tranche held in separate CDO financing transactions are reported as separate investments.

For the three and nine months ended September 30, 2014, proceeds from the sale of CRE securities was $42.6 million and $68.5 million, respectively, resulting in a net realized gain of $5.6 million and $17.4 million, respectively. For the three and nine months ended September 30, 2013, proceeds from the sale of CRE securities was $36.2 million and $206.4 million, respectively, resulting in a net realized gain of $2.5 million and $31.0 million, respectively.

CRE securities investments, not held in N-Star CDOs, include 36 securities for which the fair value option was not elected. As of September 30, 2014, the aggregate carrying value of these securities was $276.7 million, representing $62.8 million of accumulated net unrealized gains included in OCI. The Company held seven securities with an aggregate carrying value of $10.2 million with an unrealized loss of $1.4 million as of September 30, 2014 and all were in an unrealized loss position for a period of less than 12 months. Based on management’s quarterly evaluation, no OTTI was identified related to these securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of its amortized cost basis, which may be at maturity.

35

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9.Borrowings

The following table presents borrowings as of September 30, 2014 and December 31, 2013 (dollars in thousands):

				September 30, 2014				December 31, 2013
	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)
Healthcare
Minnesota Portfolio(5)	—	—	—	$	—	$	—	$	38,175	$	38,175
Wakefield Portfolio	Non-recourse	Mar-15	LIBOR + 5.95%	55,004		55,004		55,768		55,768
Ohio Portfolio	Non-recourse	Mar-16	6.00%	20,296		20,296		20,496		20,496
Lancaster, OH	Non-recourse	Mar-16	LIBOR + 5.00%	4,355		4,355		4,399		4,399
Wilkinson Portfolio	Non-recourse	Jan-17	6.99%	150,707		150,707		152,772		152,772
Tuscola/Harrisburg, IL	Non-recourse	Jan-17	7.09%	7,445		7,445		7,545		7,545
East Arlington, TX	Non-recourse	May-17	5.89%	3,171		3,171		3,209		3,209
Formation Portfolio(6) (26)	Non-recourse	Jul-18/May-19	LIBOR + 3.91%(7)	646,477		638,675		—		—
Healthcare Preferred	Non-recourse	Jul-21	LIBOR + 7.75%	75,000		75,000		75,000		75,000
Indiana Portfolio	Non-recourse	Sept-21	LIBOR + 4.50%	121,130		121,130		121,130		121,130
Subtotal Healthcare				1,083,585		1,075,783		478,494		478,494
Hotel
Innkeepers Portfolio(8)	Non-recourse	Jun-19	LIBOR + 3.39%(7)	840,000		840,000		—		—
K Partners Portfolio(9)	Non-recourse	Aug-19	LIBOR + 3.25%(7)	211,681		211,681		—		—
Courtyard Portfolio(10)	Non-recourse	Oct-19	LIBOR + 2.12%(7)	415,000		415,000		—		—
Subtotal Hotel				1,466,681		1,466,681		—		—
Manufactured housing communities
Manufactured Housing Portfolio 1(11)	Non-recourse	Jan-23	4.387%(7)	236,900		236,900		236,900		236,900
Manufactured Housing Portfolio 2(12)	Non-recourse	May-23	4.016%(7)	639,999		639,999		639,999		639,999
Manufactured Housing Portfolio 3(13) (26)	Non-recourse	Dec-21/ Jan-24/ Sept-24	4.923%(7)	297,478		299,848		248,000		248,000
Subtotal Manufactured housing communities				1,174,377		1,176,747		1,124,899		1,124,899
Net lease
Fort Wayne, IN	Non-recourse	Jan-15	6.41%	2,937		2,937		3,019		3,019
Reading, PA(14)	Non-recourse	Jan-15	5.58%	12,520		12,520		12,765		12,765
Reading, PA(14)	Non-recourse	Jan-15	6.00%	5,000		5,000		5,000		5,000
EDS Portfolio	Non-recourse	Oct-15	5.37%	42,980		42,980		43,682		43,682
Keene, NH	Non-recourse	Feb-16	5.85%	6,139		6,139		6,237		6,237
Green Pond, NJ	Non-recourse	Apr-16	5.68%	15,875		15,875		16,095		16,095
Aurora, CO	Non-recourse	Jul-16	6.22%	30,852		30,852		31,232		31,232
DSG Portfolio	Non-recourse	Oct-16	6.17%	31,282		31,282		31,729		31,729
Indianapolis, IN	Non-recourse	Feb-17	6.06%	26,267		26,267		26,600		26,600
Milpitas, CA	Non-recourse	Mar-17	5.95%	19,612		19,612		20,055		20,055
Fort Mill, SC	Non-recourse	Apr-17	5.63%	27,700		27,700		27,700		27,700
Fort Mill, SC - Mezzanine	Non-recourse	Apr-17	6.21%	1,178		1,178		1,464		1,464
Salt Lake City, UT	Non-recourse	Sept-17	5.16%	13,311		13,311		13,689		13,689
Industrial Portfolio(15)(26)	Non-recourse	Jul-17/Dec-17	4.21%(7)	221,131		228,075		—		—
Columbus, OH	Non-recourse	Dec-17	6.48%	22,029		22,029		22,300		22,300
South Portland, ME	Non-recourse	Jul-23	LIBOR + 2.15%	3,683		3,683		3,819		3,819
Subtotal Net lease				482,496		489,440		265,386		265,386
Multifamily
Memphis, TN	Non-recourse	Apr-23	3.996%	39,600		39,600		39,600		39,600
Southeast Portfolio(16)	Non-recourse	May-23/July-23	4.03%(7)	158,417		158,417		158,417		158,417
Scottsdale, AZ(17)	Non-recourse	Jul-23	4.28%(7)	46,538		46,538		46,538		46,538
Subtotal Multifamily				244,555		244,555		244,555		244,555
Subtotal Mortgage and other notes payable				4,451,694		4,453,206		2,113,334		2,113,334

36

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

				September 30, 2014				December 31, 2013
	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 + 5.48%(7)	$	31,389	$	29,999	$	37,754	$	34,886
N-Star III(18)	—	—	—	—		—		100,022		46,090
N-Star V(18)	—	—	—	—		—		202,899		80,897
N-Star IX	Non-recourse	Aug-52	LIBOR + 0.42%(7)	580,368		361,940		629,544		222,310
Subtotal CDO bonds payable—VIE				611,757		391,939		970,219		384,183
Securitization bonds payable:
Securitization 2012-1	Non-recourse	Aug-29	LIBOR+1.86%(7)	61,505		61,531		82,337		82,340
Subtotal Securitization financing transaction				61,505		61,531		82,337		82,340
Credit facilities:
Corporate Revolving Credit Facility(19)	Recourse	Aug-17	LIBOR + 3.50%(7)	450,000		450,000		—		—
Corporate Term Facility(20)	Recourse	Sept-17	4.60%	275,000		275,000		—		—
Loan Facility 1	Non-recourse	Jul-18(21)	5.16%(22)	14,850		14,850		14,850		14,850
Loan Facility 2	Partial Recourse(23)	Mar-18(24)	3.09%(25)	82,738		82,738		55,188		55,188
Subtotal Credit facilities				822,588		822,588		70,038		70,038
Exchangeable senior notes:(26)
7.25% Notes	Recourse	Jun-27(27)	7.25%	12,955		12,955		12,955		12,955
7.50% Notes(28)	—	—	—	—		—		172,500		165,366
8.875% Notes	Recourse	Jun-32(29)	8.875%	1,000		984		13,360		13,068
5.375% Notes	Recourse	Jun-33(30)	5.375%	41,785		36,776		345,000		299,584
Subtotal Exchangeable senior notes				55,740		50,715		543,815		490,973
Junior subordinated notes:(31)
Trust I	Recourse	Mar-35	8.15%	41,240		33,817		41,240		31,342
Trust II	Recourse	Jun-35	7.74%	25,780		21,269		25,780		19,722
Trust III	Recourse	Jan-36	7.81%	41,238		34,021		41,238		31,547
Trust IV	Recourse	Jun-36	7.95%	50,100		41,333		50,100		38,327
Trust V	Recourse	Sept-36	LIBOR + 2.70%(7)	30,100		21,823		30,100		19,866
Trust VI	Recourse	Dec-36	LIBOR + 2.90%(7)	25,100		18,700		25,100		16,943
Trust VII	Recourse	Apr-37	LIBOR + 2.50%(7)	31,459		22,492		31,459		20,290
Trust VIII	Recourse	Jul-37	LIBOR + 2.70%(7)	35,100		25,798		35,100		23,166
Subtotal Junior subordinated notes				280,117		219,253		280,117		201,203
Grand Total				$	6,283,401	$	5,999,232	$	4,059,860	$	3,342,071

____________________________________________________________

(1) Refer to Note 16 for further disclosure regarding derivative instruments which are used to manage interest rate exposure.

(2) For borrowings with a contractual interest rate based on LIBOR, represents three-month LIBOR for N-Star CDO I and the Wakefield Portfolio and one-month LIBOR for the other borrowings.

(3) Carrying value represents fair value with respect to CDO bonds payable and junior subordinated notes due to the election of the fair value option (refer to Note 15) and amortized cost with regards to the other borrowings.

(4) Mortgage and other notes payable are subject to customary non-recourse carveouts.

(5) In July 2014, the Company repaid the entire principal balance.

(6) Represents seven separate senior mortgage notes, five with a total principal amount of $357.0 million maturing in May 2019 and two with a total principal balance of $289.5 million maturing in July 2018.

(7) Contractual interest rate represents a weighted average.

(8) Represents one senior mortgage note, with a principal amount of $635.0 million, and two separate mezzanine notes, with a total principal amount of $205.0 million, all maturing in June 2016, with three one-year extension options.

(9) Represents one senior mortgage note, with a principal amount of $167.6 million, and three separate mezzanine notes, with a total principal amount of $44.1 million, all maturing in August 2016, with three one-year extension options.

(10) Represents one senior mortgage note, with a principal amount of $415.0 million, maturing in October 2016, with three one-year extension options. In October 2014, the Company obtained mezzanine financing with a principal amount of $97.0 million, with an interest rate of LIBOR plus 6.25%, also maturing in October 2016, with three one-year extension options.

(11) Represents two separate senior mortgage notes, one with a total principal amount of $120.8 million and another with a total principal amount of $116.1 million, both maturing in January 2023.

(12) Represents eight separate senior mortgage notes, all maturing in May 2023.

(13) Represents seven separate senior mortgage notes, three with a total principal amount of $16.5 million maturing in December 2021, three with a total principal amount of $248.0 million maturing in January 2024 and one with a total principal amount of $33.0 million maturing in September 2024.

(14) In October 2014, such borrowings were repaid upon sale of the property.

37

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(15) Represents two senior mortgage notes, one with a principal amount of $102.7 million maturing in July 2017 and one with a principal amount of $118.4 million, maturing in December 2017.

(16) Represents seven separate senior mortgage notes, five with a total principal amount of $116.2 million, maturing in May 2023 and two with a total principal amount of $42.2 million, maturing in July 2023.

(17) Represents two separate senior mortgage notes, one with a principal amount of $28.7 million and another with a principal amount of $17.8 million, both maturing in July 2023.

(18) In March 2014 and May 2014, the Company deconsolidated N-Star CDOs V and III, respectively, which resulted in the deconsolidation of its CDO bonds payable. Refer to Note 3 for further disclosure.

(19) Secured by collateral relating to a borrowing base comprised primarily of unlevered CRE debt and securities investments with a carrying value of $696.1 million as of September 30, 2014.

(20) Represents the fixed rate of 4.60% associated with the initial borrowing under the Corporate Term Facility.

(21) The initial maturity date is July 30, 2015, with three one-year extensions at the Company’s option, which may be exercised upon the satisfaction of certain customary conditions set forth in the governing documents.

(22) Represents the weighted average contractual interest rate as of September 30, 2014, which varies based on the asset type and characteristics and ranges from one-month LIBOR plus 3.95% to 5.95%.

(23) Recourse solely with respect to certain types of loans as defined in the governing documents.

(24) The maturity is March 11, 2015, with three one-year extensions.

(25) Contractual interest rate varies based on collateral type and ranges from one-month LIBOR plus 2.50% to 5.00%.

(26) Principal amount differs from carrying value due to the unamortized premium or discount associated with assumed mortgage notes or the equity component of the exchangeable senior notes.

(27) The holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2017.

(28) In March 2014, $172.5 million principal amount of the 7.50% Notes were exchanged for $481.1 million principal amount of Senior Notes, which were paid off in cash at maturity on September 30, 2014.

(29) The holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2019.

(30) The holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2023 and June 15, 2028.

(31) Junior subordinated notes Trusts I, II, III and IV have a fixed interest rate for periods ranging from June 2015 to September 2016, when the interest rate will change to floating and reset quarterly at rates ranging from three-month LIBOR plus 2.80% to 3.25%.

The following table presents scheduled principal on borrowings, based on final maturity as of September 30, 2014 (dollars in thousands):

	Total		Mortgage and Other Notes Payable		CDO Bonds Payable		Securitization Bonds Payable		Credit Facilities		Exchangeable Senior Notes(1)		Junior Subordinated Notes
October 1 to December 31, 2014	$	4,488	$	4,488	$	—	$	—	$	—	$	—	$	—
Years ending December 31:
2015	137,035		137,035		—		—		—		—		—
2016	134,140		134,140		—		—		—		—		—
2017	1,244,999		507,044		—		—		725,000		12,955		—
2018	403,874		306,286		—		—		97,588		—		—
Thereafter	4,358,865		3,362,701		611,757		61,505		—		42,785		280,117
Total	$	6,283,401	$	4,451,694	$	611,757	$	61,505	$	822,588	$	55,740	$	280,117

____________________________________________________________

(1) The 7.25% Notes, 8.875% Notes and 5.375% Notes have a final maturity date of June 15, 2027, June 15, 2032 and June 15, 2033, respectively. The above table reflects the holders’ repurchase rights which may require the Company to repurchase the 7.25% Notes, 8.875% Notes and 5.375% Notes on June 15, 2017, June 15, 2019 and June 15, 2023, respectively.

Corporate Credit Facilities

In August 2014, the Company and certain of its subsidiaries entered into a corporate revolving credit facility (“Corporate Revolving Credit Facility”) with certain commercial bank lenders, with a total commitment amount of $500.0 million for a three-year term. Corporate Revolving Credit Facility is secured by collateral relating to a borrowing base and also includes guarantees by certain subsidiaries of the Company. As of September 30, 2014, the Company had $50.0 million of available borrowing under Corporate Revolving Credit Facility. Corporate Revolving Credit Facility and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, the Company must maintain at least $25.0 million based on the sum of unrestricted cash or cash equivalents and undrawn availability at all times during the term of the Corporate Revolving Credit Facility.

In September 2014, the Company entered into a corporate facility agreement (“Corporate Term Facility”) with a commercial bank lender with respect to the establishment of term borrowings to be made to the Company with an aggregate principal amount of up to $500.0 million. The Corporate Term Facility provides that the Company may enter into one or more credit agreements for term borrowings with varying amounts, borrowing dates, maturities and interest rates, from time to time until

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

September 2015. Borrowings may be prepaid at any time subject to customary breakage costs. In September 2014, the Company entered into a credit agreement providing for an initial term borrowing under Corporate Term Facility in a principal amount of $275.0 million, maturing on September 19, 2017 and with a fixed interest rate of 4.60%. Corporate Term Facility and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types.

Loan Facilities

In July 2012, a subsidiary of the Company entered into a credit and security agreement (“Loan Facility 1”) of $40.0 million on a non-recourse basis, subject to certain exceptions, to finance first mortgage loans and senior loan participations secured by commercial real estate. In connection with Loan Facility 1, the Company agreed to guarantee interest payments and the customary obligations under Loan Facility 1 if either the Company or its affiliates engage in certain customary bad acts. In addition, the Company pledged its interests in its borrowing subsidiary as collateral. Loan Facility 1 and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, the Company must maintain at least $3.75 million and as much as $7.5 million in unrestricted cash, or other eligible investments, at all times during the term of Loan Facility 1.

In March 2013, a subsidiary of the Company entered into a master repurchase agreement (“Loan Facility 2”) of $200.0 million to finance first mortgage loans and senior interests secured by commercial real estate. In connection with Loan Facility 2, the Company entered into a guaranty agreement under which the Company guaranteed certain of the obligations under Loan Facility 2. Loan Facility 2 and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, the Company must maintain at least $20.0 million in unrestricted cash or cash equivalents at all times during the term of Loan Facility 2. In addition, the Company has agreed to guarantee certain customary obligations under Loan Facility 2 if the Company or an affiliate of the Company engage in certain customary bad acts.

As of September 30, 2014, the Company had $157.8 million carrying value of loans financed with $97.6 million on the loan facilities, with $142.4 million of available borrowing under its loan facilities.

During the initial term, the credit facilities act as revolving credit facilities that can be paid down as assets repay or are sold and re-drawn upon for new investments. As of September 30, 2014, the Company was in compliance with all of its financial covenants.

Senior Notes and Exchangeable Senior Notes

In March 2014, $172.5 million principal amount of the 7.50% Notes were exchanged for $481.1 million principal amount of senior notes that came due on September 30, 2014 (the “Senior Notes”). In connection with this exchange, the Company recorded a loss of $22.4 million in realized gain (loss) on investments and other in the consolidated statements of operations. On September 30, 2014, the Company repaid the Senior Notes in cash, including interest, in the amount of $488.3 million.

The following table presents the Company’s exchangeable senior notes exchanged for common stock during the nine months ended September 30, 2014 (dollars in thousands):

Date	Exchangeable Senior Notes	Principal Amount Exchanged		Common Shares(1)	Realized Gain (Loss)
January 2014	8.875%	$	9,550	814,626	$	(2,132	)
January 2014	5.375%	137,026		7,059,715	(13,307		)
April 2014	5.375%	53,590		2,771,843	(6,830		)
July 2014	5.375%	78,255		8,742,983	(14,935		)
July 2014	8.875%	2,810		522,474	(696		)
August 2014	5.375%	32,994		3,686,234	(5,244		)
September 2014	5.375%	1,350		153,691	(207		)
Total		$	315,575	23,751,566	$	(43,351	)

___________________________

(1)Adjusted for the Reverse Split effected on June 30, 2014.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. Spin-off of Asset Management Business

In connection with the spin-off of the Company’s asset management business, $179.5 million of assets were transferred and $21.1 million of liabilities were assumed by NSAM. Included in the assets transferred was $118.7 million of cash representing the initial capitalization amount of NSAM upon completion of the spin-off, including an amount related to transaction costs to be paid by NSAM. Such transaction costs were expensed by NSAM upon completion of the spin-off and included legal, accounting, tax and other professional services and relocation and start-up costs.

The following table presents a carve-out of revenues and expenses associated with NSAM and included in discontinued operations in the Company’s consolidated statements of operations. Such amounts exclude the effect of any fees that NSAM began earning in connection with the management agreement with the Company upon completion of the spin-off (dollars in thousands):

	Nine Months Ended September 30,
	2014(1)			2013
Total revenues	$	56,013		$	69,033
Total expenses	62,087			71,893
NSAM income (loss) in discontinued operations	$	(6,074	)	$	(2,860	)

__________________

(1) Represents six months of total revenues and expenses of NSAM included in discontinued operations prior to the spin-off on June 30, 2014.

Total revenues include asset management and other fee income from NSAM Sponsored Companies earned prior to the spin-off. In connection with the spin-off, the advisory agreements between the Company and each of the NSAM Sponsored Companies were terminated and affiliates of NSAM entered into new advisory agreements with each of the NSAM Sponsored Companies on substantially the same terms as those in effect at the time of the spin-off. 

Total revenues also include selling commissions and dealer manager fees earned by selling equity in the NSAM Sponsored Companies through NorthStar Securities. As part of the Distribution to NSAM, NorthStar Securities became a subsidiary of NSAM. Pursuant to dealer manager agreements between NorthStar Securities and the NSAM Sponsored Companies, the Company generally received selling commissions of up to 7% of gross offering proceeds raised. The Company reallowed all selling commissions earned to participating broker-dealers. In addition, the Company also generally received a dealer manager fee of up to 3% of gross offering proceeds raised, a portion of which is typically reallowed to participating broker-dealers. Total expenses include commission expense representing fees to participating broker-dealers with whom NorthStar Securities has selling agreements and commissions to employees of NorthStar Securities.

In addition, total expenses primarily included an allocation of indirect expenses of the Company to NSAM related to managing the NSAM Sponsored Companies and owning NorthStar Securities, including salaries, equity-based compensation and other general and administrative expenses (primarily occupancy and other costs) based on an estimate had the asset management business been run as an independent entity.

11.Related Party Arrangements

NorthStar Asset Management Group

Management Agreement

Upon completion of the spin-off of the Company’s asset management business, the Company entered into a management agreement with an affiliate of NSAM for an initial term of 20 years, which will be automatically renewed for additional 20-year terms each anniversary thereafter unless earlier terminated. As asset manager, NSAM is responsible for the Company’s day-to-day operations, subject to the supervision of the Company’s board of directors. Through its global network of subsidiaries and branch offices, NSAM performs services and activities relating to, among other things, investments and financing, portfolio management and other administrative services, such as accounting and investor relations, to the Company and its subsidiaries other than the Company’s CRE loan origination business. The management agreement with NSAM is for an initial term of 20 years and provides for a base management fee and incentive fee.

For the three months ended September 30, 2014, the Company incurred $38.0 million related to the base management fee, which is recorded in due to related party on the consolidated balance sheets. The management contract with NSAM commenced on July 1, 2014, and as such, there were no management fees incurred for the six months ended June 30, 2014. The base management fee to NSAM will increase subsequent to September 30, 2014 by 1.5% per annum of the sum of:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

• cumulative net proceeds of all future common equity and preferred equity issued by the Company;

• equity issued by the Company in exchange or conversion of exchangeable senior notes based on the stock price at the date of issuance;

• any other issuances by the Company of common equity, preferred equity or other forms of equity, including but not limited to units in an operating partnership (“LTIP units”) (excluding equity-based compensation, but including issuances related to an acquisition, investment, joint venture or partnership); and

• cumulative cash available for distribution (“CAD”) of the Company in excess of cumulative distributions paid on common stock, LTIP units or other equity awards beginning the first full calendar quarter after completion of the spin-off.

Additionally, the Company’s equity interest in RXR Realty and Aerium is structured so that NSAM is entitled to the portion of distributable cash flow from each investment in excess of the $10 million minimum annual base amount.

For the three months ended September 30, 2014, the Company incurred $1.3 million related to the incentive management fee, which is recorded in due to related party on the consolidated balance sheets. The incentive management fee is calculated and payable quarterly in arrears in cash, equal to:

• the product of: (a) 15% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, when such amount is in excess of $0.39 per share but less than $0.45 per share; plus

• the product of: (a) 25% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, when such amount is equal to or in excess of $0.45 per share;

• multiplied by the Company’s weighted average shares outstanding for the calendar quarter.

In addition, NSAM may also earn an incentive fee from the Company’s healthcare investments in connection with NSAM’s Healthcare Strategic Partnership (refer to below).

Weighted average shares represents the number of shares of the Company’s common stock, LTIP units or other equity-based awards (with some exclusions), outstanding on a daily weighted average basis. With respect to the base management fee, all issuances shall be allocated on a daily weighted average basis during the fiscal quarter of issuances.

Furthermore, if the Company were to spin-off any asset or business in the future, such entity would be managed by NSAM on terms substantially similar to those set forth in the management agreement between the Company and NSAM. The management agreement further provides that the aggregate base management fee in place immediately after the spin-off will not be less than the aggregate base management fee in place at the Company immediately prior to the spin-off.

Payment of Costs and Expenses and Expense Allocation

The Company is responsible for all of its direct costs and expenses and will reimburse NSAM for costs and expenses incurred by NSAM on its behalf. In addition to the Company’s costs and expenses, following the Distribution, the Company is obligated to reimburse NSAM for additional costs and expenses incurred by NSAM for an amount not to exceed the following: (i) 20% of the combined total of: (a) the Company’s general and administrative expenses as reported in its consolidated financial statements excluding: (1) equity-based compensation expense, (2) non-recurring items, (3) fees payable to NSAM under the terms of the management agreement and (4) any allocation of expenses from the Company (“NorthStar Realty G&A”); and (b) NSAM’s general and administrative expenses as reported in its consolidated financial statements, excluding equity-based compensation expense and adding back any costs or expenses allocated to any managed company of NSAM, less (ii) the NorthStar Realty G&A. For the three months ended September 30, 2014, NSAM allocated $1.2 million to the Company, which is recorded in due to related party on the consolidated balance sheets.

Investment Opportunities

Under the management agreement, the Company agreed to make available to NSAM for the benefit of NSAM and its managed companies, including the Company, all investment opportunities sourced by the Company. NSAM agreed to fairly allocate such opportunities among NSAM’s managed companies, including the Company and NSAM in accordance with an investment allocation policy. Pursuant to the management agreement, the Company is entitled to fair and reasonable compensation for its services in connection with any loan origination opportunities sourced by the Company, which may include first mortgage

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

loans, subordinate mortgage interests, mezzanine loans and preferred equity interests, in each case relating to commercial real estate.  

NSAM provides services with regard to such areas as payroll, human resources and employee benefits, financial systems management, treasury and cash management, accounts payable services, telecommunications services, information technology services, property management services, legal and accounting services and various other corporate services to the Company as it relates to its loan origination business for CRE debt.

Credit Agreement

In connection with the Distribution, the Company entered into a revolving credit agreement with NSAM pursuant to which the Company will make available to NSAM, on an “as available basis,” up to $250 million of financing for a five year term at LIBOR plus 3.50%. The revolving credit facility is unsecured. NSAM expects to use the proceeds for general corporate purposes, including potential future acquisitions.  In addition, NSAM may use the proceeds to acquire assets on behalf of its managed companies, including the Company, that it intends to allocate to such managed company but for which such managed company may not then have immediately available funds. The terms of the revolving credit facility contain various representations, warranties, covenants and conditions, including the condition that the Company’s obligation to advance proceeds to NSAM is dependent upon the Company and its affiliates having at least $100 million of either unrestricted cash and cash equivalents or amounts available under committed lines of credit, after taking into account the amount NSAM seeks to draw under the facility. As of September 30, 2014, the Company has not funded any amounts to NSAM in connection with this agreement.

Healthcare Strategic Joint Venture

In January 2014, NSAM entered into a long-term strategic partnership with James F. Flaherty III, former Chief Executive Officer of HCP, Inc., focused on expanding the Company’s healthcare business into a preeminent healthcare platform (“Healthcare Strategic Partnership”). In connection with the partnership, Mr. Flaherty oversees and seeks to grow both the Company’s healthcare real estate portfolio and the portfolio of NorthStar Healthcare. In connection with entering into the partnership, the Company granted Mr. Flaherty certain RSUs (refer to Note 12). The Healthcare Strategic Partnership is entitled to incentive fees ranging from 20% to 25% above certain hurdles for new and existing healthcare real estate investments held by the Company. For the three and nine months ended September 30, 2014, the Company did not incur any incentive fees related to Healthcare Strategic Partnership.

N-Star CDOs

The Company earns certain collateral management fees from the N-Star CDOs primarily for administrative services. Such fees are recorded in other revenue in the consolidated statements of operations. For the three months ended September 30, 2014 and 2013, the Company earned $1.3 million and $3.0 million in fee income, respectively, of which $0.6 million and $3.0 million, respectively, were eliminated in consolidation. For the nine months ended September 30, 2014 and 2013, the Company earned $4.5 million and $9.2 million in fee income, respectively, of which $2.0 million and $9.2 million, respectively, were eliminated in consolidation. Prior to the third quarter 2013, all amounts were eliminated in consolidation as all of the N-Star CDOs were consolidated by the Company.

Additionally, the Company earns interest income from the N-Star CDO bonds and N-Star CDO equity in deconsolidated N-Star CDOs. For the three and nine months ended September 30, 2014, the Company earned $20.0 million and $53.9 million of interest income from such investments in deconsolidated N-Star CDOs.

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, a securitization transaction entered into by the Company and NorthStar Income. In both cases, the respective retained equity interest of the Company and NorthStar Income is subordinate to interests of the investment-grade bondholders of Securitization 2012-1 and the investment-grade 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 the 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 investment-grade bondholders.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Legacy Commercial

In September 2014, the Company entered into a debt and equity investment with Legacy Commercial, comprised of a 40% interest in entities affiliated with Legacy Commercial (refer to Note 7) and loans to certain Legacy Commercial entities totaling $30.0 million (collectively the “Legacy Investment”). C. Preston Butcher, a former director of the Company, held certain preferred and other significant interests in Legacy Commercial and was the chairman of the board of directors and chief executive officer of Legacy Commercial. $14.8 million of the proceeds from the Legacy Investment will be used by the Legacy Commercial Entities for future investments, subject to certain approval rights held by the Company and $15.2 million of the proceeds of the Legacy Investment was used by the Legacy Commercial Entities to redeem the majority of the interests held by Mr. Butcher and a family limited partnership controlled by Mr. Butcher in the Legacy Commercial Entities. The Legacy Investment was made on a pari passu basis with the investment held by the two remaining partners in Legacy Commercial, Mr. Butcher and certain employees of Legacy Commercial. The Company owns 75% of the senior debt and preferred equity and 40% of the common equity issued by the applicable Legacy Commercial Entities. Mr. Butcher and a family limited partnership controlled by Mr. Butcher received total consideration of $30.0 million, of which $14.8 million was in the form of a cash distribution from the Legacy Commercial Entities and $15.2 million was funded from the Legacy Investment. At closing, Mr. Butcher retained a 15.3% indirect interest in the senior debt and 15.3% indirect interest in the preferred equity issued by the applicable Legacy Commercial Entities. In addition, a family limited partnership controlled by Mr. Butcher indirectly owns 10% of the common equity issued by the applicable Legacy Commercial Entities. The transaction also includes up to an additional $10.0 million in future preferred loans from the Company for additional real estate investments, subject to the Company’s approval. In connection with this transaction, Mr. Butcher stepped down as chairman and chief executive officer of Legacy Commercial and retains no ongoing voting or decision making rights.  Subject to certain approval rights held by the Company, Mr. Butcher has been hired as an employee of a Legacy Commercial Entity and Legacy Commercial is now controlled by the two remaining principals. Mr. Butcher retained his ownership interests in Legacy Partners Residential, Inc. and certain other related entities and companies that are not owned by Legacy Commercial or any Legacy Commercial Entity in which the Company is making investments.

In addition, the Company has an interest in four CRE debt investments, two of which are in deconsolidated N-Star CDOs, with a subsidiary of Legacy Partners Realty Fund I, LLC (the “Legacy Fund”) as borrower. Legacy Commercial indirectly owns an equity interest in, and owns the manager of, the Legacy Fund.

Two loans with an aggregate principal amount of $39.6 million were deconsolidated in September 2013 (refer to Note 3), and as a result, the Company no longer records these loans on the consolidated balance sheets. For the three and nine months ended September 30, 2013, the Company recorded an aggregate $0.5 million and $1.6 million, respectively, of interest income in the consolidated statements of operations related to these loans.

The third loan with a principal amount of $38.8 million matures in October 2016 and has two one-year extension options, at the borrower’s option. In March 2014, the Company originated the fourth loan, a senior mortgage loan with a principal amount of $17.3 million and a mezzanine loan with a principal amount of $8.1 million, both of which mature in April 2021. For the three and nine months ended September 30, 2014, the Company recorded an aggregate $1.1 million and $3.2 million, respectively, of interest income in the consolidated statements of operations related to these loans.

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 former advisor to NorthStar Income, received a customary 1.0% origination fee and further earned an annual asset management fee of 1.25% through June 30, 2014, the time of the spin-off. In addition, prior to the spin-off, the Company leased 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. NSAM assumed the lease in connection with the spin-off.

NorthStar Income II

In January 2014, the Company sold a $9.0 million pari passu participation in a first mortgage loan at cost originated by the Company to NorthStar Income II. Additionally, in April 2014, the Company sold a $5.0 million pari passu participation in a first mortgage loan at cost to NorthStar Income II. Such sales were approved by the independent board of directors of NorthStar Income II.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

West Point Partners

In June 2014, the Company paid $0.8 million to West Point Partners LLC (“West Point Partners”) in connection with its services facilitating the acquisition of the Innkeepers Portfolio for an aggregate purchase price of approximately $1.1 billion, including all costs, reserves and escrows (refer to Note 4). West Point Partners is a real estate investment and advisory firm based in New York. Sridhar Sambamurthy, who was a member of the board of directors of the Company at the time of such payment, is managing principal and co-founder of West Point Partners and owns a 50% interest in that company and consequently ceased to be independent at that time. Mr. Sambamurthy is no longer a member of the Company’s board of directors.

12. Equity-Based Compensation

Impact of the Reorganization and Spin-off

The Company has issued equity-based awards to directors, officers, employees, consultants and advisors pursuant to the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (the “Stock Plan”) and the NorthStar Realty Executive Incentive Bonus Plan, as amended (the “Plan” and collectively the “NorthStar Realty Equity Plans”). All of the vested and unvested equity-based awards granted by the Company prior to the spin-off remain outstanding following the Reorganization and the spin-off. Appropriate adjustments were made to all awards to reflect the Reorganization, the Reverse Split and the spin-off. Pursuant to the Reorganization, Old LTIP Units were converted into an equal number of shares of common stock of NRFC Sub-REIT Corp. (refer to Note 14) and holders of such shares received an equal number of shares of NSAM’s common stock in connection with the spin-off, all of which generally remain subject to the same vesting and other terms that applied prior to the spin-off. Old LTIP Units that remain subject to vesting are herein referred to as restricted stock. Deferred LTIP Units are equity awards representing the right to receive either LTIP units in the Company’s successor operating partnership or, if such LTIP units are not available upon settlement of the award, shares of common stock of the Company. Other equity and equity-based awards relating to the Company’s common stock, such as RSUs and Deferred LTIP Units, were adjusted to also relate to an equal number of shares of NSAM’s common stock, but otherwise generally remain subject to the same vesting and other terms that applied prior to the spin-off. Vesting conditions for outstanding awards have been adjusted to reflect the impact of NSAM in terms of employment for service based on awards and total stockholder return in terms of performance-based awards with respect to periods after the spin-off.

Following the spin-off, the Company and the compensation committee of its board of directors (the “Committee”) continue to administer all awards issued under the NorthStar Realty Equity Plans but NSAM is obligated to issue shares of NSAM’s common stock or other equity awards of its subsidiaries or make cash payments in lieu thereof or with respect to dividend or distribution equivalent obligations to the extent required by these awards under the NorthStar Realty Equity Plans. These awards will continue to be governed by the NorthStar Realty Equity Plans, as applicable, and shares of NSAM’s common stock issued pursuant to these awards will not be issued pursuant to, or reduce availability under the NorthStar Realty Equity Plans.

All of the adjustments made in connection with the Reorganization, Reverse Split and the spin-off were deemed to be equitable adjustments pursuant to anti-dilution provisions in accordance with the terms of the NorthStar Realty Equity Plans. As a result, there was no incremental value attributed to these adjustments and these adjustments do not impact the amount recorded for equity-based compensation expense for the three and nine months ended September 30, 2014 and 2013.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following summarizes the equity-based compensation plans and related aggregate expenses for the Company.

All share amounts disclosed below have been retrospectively adjusted to reflect the Reverse Split.

Omnibus Stock Incentive Plan

In September 2004, the board of directors of the Company adopted the Stock 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 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 LTIP units or any combination of the foregoing. The eligible participants in the Stock Plan include directors, officers, employees, consultants and advisors of the Company.

As of September 30, 2014, 3,835,743 shares of common stock remain available for issuance pursuant to the Stock Plan, which includes shares reserved for issuance upon settlement of outstanding Deferred LTIP Units and RSUs and 734,568 shares of restricted stock, after giving effect to the Reverse Split. As noted above, in connection with the spin-off, each outstanding Old LTIP Unit received an equal number of shares of NSAM’s common stock and each Deferred LTIP Unit award was adjusted to also relate to an equal number of Deferred LTIP Units in NSAM. Holders of shares of restricted stock or Deferred LTIP Units are entitled to receive dividends or dividend equivalents with respect to both the Company and NSAM on shares of restricted stock and vested and unvested Deferred LTIP Units for as long as such shares and Deferred LTIP Units remain outstanding.

The following table presents the status as of September 30, 2014 and December 31, 2013 of all grants of Old LTIP Units and Deferred LTIP Units. The balance as of September 30, 2014 represents unvested Old LTIP Units (representing shares of restricted stock) and Deferred LTIP Units that are outstanding, whether vested or not (grants in thousands):

	Nine Months Ended				Year Ended
	September 30, 2014				December 31, 2013
	Grants		Weighted Average Grant Price(6)		Grants		Weighted Average Grant Price(6)
Beginning balance(1)(2)	4,609		$	14.31	3,114		$	13.32
Granted(3)	1,183		30.61		2,166		16.20
Converted to common stock	(647	)	17.31		(670	)	15.80
Forfeited	(4	)	20.48		(1	)	10.76
Vested Old LTIP Units converted to common stock in the Reorganization(4)	(3,178	)	14.52		—		—
Vesting of restricted stock post-spin	(47	)	13.39		—		—
Ending balance/weighted average(5)	1,916		$	23.02	4,609		$	14.31

____________________________________________________________

(1) Reflects the balance as of January 1, 2014 and 2013 for the periods ended September 30, 2014 and December 31, 2013, respectively.

(2) Includes 349,071 Old LTIP Units issued in connection with the NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan of which 333,755 Old LTIP Units have been converted. The remaining 15,316 Old LTIP Units were converted to common stock in the spin-off.

(3) Awards were grants in the form of Old LTIP Units for the year ended December 31, 2013 and Deferred LTIP Units for the nine months ended September 30, 2014.

(4) Represents vested Old LTIP Units that were converted to the Company’s common stock in connection with the Reorganization.

(5) Includes 734,568 shares of restricted stock, 201,792 vested Deferred LTIP Units and 978,873 unvested Deferred LTIP Units as of September 30, 2014.

(6) Amounts have been retrospectively adjusted to reflect the Reverse Split.

Incentive Compensation Plan

In July 2009, the Committee approved the material terms of the Plan for the Company’s executive officers and other employees. Pursuant to the Plan, an incentive pool was established each calendar year through 2013. The size of the incentive pool was 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 or was subject to achievement of additional performance and/or time-based goals summarized below.

The portion of the incentive pool for the executive officers was 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 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,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

subject to the participant’s continued employment through each payment date (“Deferred Bonus”); and (c) a long-term incentive in the form of RSUs, LTIP units and/or Deferred LTIP Units. RSUs are subject to the Company achieving cumulative performance hurdles and/or total stockholder return hurdles 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 in the Company’s successor operating partnership to the extent available under the NorthStar Realty Equity Plans and, pursuant to adjustments made in connection with the spin-off, an equal number of shares of NSAM’s common stock or, if all or a portion of such shares or LTIP units are not available, in cash (the “Long Term Amount Payout”). These performance based RSUs were adjusted to refer to combined total stockholder return of the Company and NSAM with respect to periods after the spin-off. Old LTIP Units (converted into common stock of the Company in the Reorganization) or Deferred LTIP Units granted as a portion of the long-term incentive are subject to vesting based on continued employment during the performance period, but are not subject to performance-based vesting hurdles. Deferred LTIPS that vest cannot be converted until March 31, 2015.

In connection with the 2010 incentive pool under the Plan, the Company issued 1,104,999 RSUs to executive officers, after giving effect to the Reverse Split, which vested 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 2012 the performance hurdle was reached entitling the recipients to 100% of the RSUs granted. In achievement of the performance hurdles, the Company issued 1,104,999 Old LTIP Units to executive officers in February 2013.

In connection with the incentive pool under the 2011 Plan, the Company issued 762,898 RSUs to executive officers, after giving effect to the Reverse Split, which vest subject to continued employment and achieving total stockholder return hurdles for the four-year period ending December 31, 2014. The fair value of the grant is being amortized into equity-based compensation expense over the performance period. 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 762,898 Old LTIP Units to executive officers, after giving effect to the Reverse Split, which were subject to vesting in four annual installments ending on January 29, 2015, subject to the executive officer’s continued employment through the applicable vesting date, and may not be sold prior to December 31, 2014. The Company also granted 302,692 Old LTIP Units (net of forfeitures), after giving effect to the Reverse Split, to certain non-executive employees, which vest quarterly over three years beginning April 2012, subject to continued employment through the applicable vesting date.

In connection with the incentive pool under the 2012 Plan, the Company issued 704,839 RSUs to executive officers, after giving effect to the Reverse Split, subject to continued employment and achieving total stockholder return hurdles 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. 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 704,839 Old LTIP Units to executive officers, after giving effect to the Reverse Split, which were subject to vesting in four annual installments beginning on January 29, 2013, subject to the executive officer’s continued employment through the applicable vesting date, and which may not be sold prior to December 31, 2015. The Company also granted 289,975 Old LTIP Units (net of forfeitures) to certain non-executive employees, after giving effect to the Reverse Split, which vest quarterly over three years beginning April 2013, subject to continued employment through the applicable vesting date.

In connection with the incentive pool under the 2013 Plan, the Company issued 500,371 RSUs to executive officers, after giving effect to the Reverse Split, subject to continued employment and achieving total stockholder return hurdles for the four-year period ending December 31, 2016. 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. 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 500,371 Deferred LTIP Units to executive officers, after giving effect to the Reverse Split, which vest in four annual installments beginning on January 29, 2014, subject to the executive officer’s continued employment through the applicable vesting date, and may not be sold prior to December 31, 2016, and 261,577 Deferred LTIP Units, after giving effect to the Reverse Split, which are subject to vesting based on continued employment through December 31, 2015. The Company also granted 276,105 of Deferred LTIP Units (net

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

of forfeitures) to certain non-executive employees, after giving effect to the Reverse Split, which vest quarterly over three years beginning April 2014, subject to continued employment through the applicable vesting date.

Healthcare Strategic Joint Venture

In connection with entering into the Healthcare Strategic Partnership, the Company granted Mr. Flaherty 500,000 RSUs, after giving effect to the Reverse Split, which vest on January 22, 2019, unless certain conditions are met. In connection with the spin-off, the RSUs granted to Mr. Flaherty were adjusted to also relate to an equal number of shares of NSAM’s common stock. The RSUs are entitled to dividend equivalents prior to vesting and may be settled either in shares of common stock of the Company or in cash at the option of the Company. Mr. Flaherty is also entitled to incremental grants of NSAM’s common stock subject to certain conditions being met pursuant to a separate contractual arrangement entered into in connection with the Healthcare Strategic Partnership.

Summary

The nine months ended September 30, 2014 includes: (i) the Company’s equity-based compensation for the three months ended September 30, 2014 following the spin-off of the Company’s historical asset management business on June 30, 2014; and (ii) the Company’s equity-based compensation for the six months ended June 30, 2014, including an allocation to NSAM recorded to discontinued operations. The Company’s historical equity-based compensation for the nine months ended September 30, 2013 is prepared on the same basis as the six months ended June 30, 2014.

The following table presents equity-based compensation expense for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014			2013
NorthStar Realty	$	8,478	$	2,414	$	20,262		$	9,102
Allocation to NSAM (1)	—		1,006		13,745			4,513
Total	$	8,478	$	3,420	$	34,007	(2)	$	13,615

___________________________________________________________

(1)Recorded in discontinued operations.

(2)Represents $23.4 million related to the NorthStar Realty Equity Plans and $10.6 million related to the NSAM Stock Plan.

13. Stockholders’ Equity

Reverse Split

On June 30, 2014, the Company effected a Reverse Split of its common stock with any fractional shares settled in cash. As a result of the Reverse Split, the common stock was reduced by dividing the par value prior to the Reverse Split by two (including retrospective adjustment of prior periods) with a corresponding increase to additional paid-in capital. The par value per share of common stock remained unchanged.

All share and per share amounts disclosed in the Company’s consolidated financial statements and the accompanying notes have been retrospectively adjusted to reflect the Reverse Split, including common stock outstanding, earnings per share and shares or units outstanding related to equity-based compensation (refer to Note 12).

Common Stock

In January 2014, as part of the consideration for the investment in RXR Realty, the Company issued 677,570 shares of its common stock, after giving effect to the Reverse Split, in a private offering to an RXR Realty affiliate. Such amount was granted in December 2013 resulting in an increase to additional paid-in capital in 2013 of $17.7 million. This amount is recorded as a premium on the related CRE debt investments and is amortized to interest income over the life of the debt, using the effective interest method, in the consolidated statements of operations.

In May 2014, the Company issued 17.25 million shares of its common stock at a public offering price of $30.90 per share, after giving effect to the Reverse Split, which includes the full over-allotment option exercised by the underwriters of the offering. The net proceeds to the Company were $519.2 million.

In June 2014, as part of the consideration for the investment in Aerium, the Company issued 208,819 shares of its common stock in a private offering to an Aerium affiliate at an agreed upon price of $32.52 per share, after giving effect to the Reverse Split, resulting in an increase to additional paid-in capital of $6.8 million or €5 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In June 2014, the Company settled all outstanding warrants in a cashless exercise issuing 799,500 shares of its common stock, after giving effect to the Reverse Split.

In September 2014, the Company issued 15.0 million shares of its common stock at a public offering price of $18.40 per share and received net proceeds of $268.6 million. In connection with this offering, the Company entered into a forward sale agreement with a financial institution to issue an aggregate of 30.0 million shares of its common stock, subject to certain conditions. The forward sale agreement generally provides for settlement on one or more dates specified by the Company on or prior to March 4, 2015, subject to acceleration upon the occurrence of certain events. On a settlement date, if the Company decides to physically settle all or a portion of the forward sale agreement, it will issue common stock to such financial institution at the then-applicable forward sale price multiplied by 0.995. The initial forward sale price is equal to $17.95 per share. The forward sale agreement provides that the forward sale price will be adjusted based on the federal funds rate less the stock loan rate specified in the forward sale agreement and will be decreased by amounts related to expected dividends on the Company’s common stock during the term of the forward sale agreement. Subsequent to September 30, 2014, the Company issued 5.3 million shares of common stock under this forward sale agreement for net proceeds of $93.8 million, with 24.7 million shares of common stock remaining under this forward sale agreement.

Preferred Stock

In May 2014, the Company issued 10.0 million shares of its new 8.75% Series E Cumulative Redeemable Preferred Stock (“Series E Preferred Stock”), including the over-allotment option, for net proceeds of $241.8 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 7,139,923 shares of its common stock, after giving effect to the Reverse Split. 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, 2014, the Company issued 7,469 shares of its common stock pursuant to the DRP, after giving effect to the Reverse Split, for gross proceeds of $0.2 million.

Dividends

The following table presents dividends declared (on a per share basis) for the nine months ended September 30, 2014:

Common Stock				Preferred Stock
					Dividend Per Share
Declaration Date	Dividend Per Share(1)			Declaration Date	Series A		Series B		Series C		Series D		Series E
February 26	$	0.50		January 29	$	0.54688	$	0.51563	$	0.55469	$	0.53125	$	—
May 7	$	0.50		April 30	$	0.54688	$	0.51563	$	0.55469	$	0.53125	$	—
August 6	$	0.50		July 31	$	0.54688	$	0.51563	$	0.55469	$	0.53125	$	0.5469
October 29	$	0.40	(2)	October 29	$	0.54688	$	0.51563	$	0.55469	$	0.53125	$	0.5469

______________________

(1) Adjusted for the Reverse Split effected on June 30, 2014.

(2) Represents the first dividend declared subsequent to the spin-off of NSAM.

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(Unaudited)

Earnings Per Share

The following table presents EPS for the three and nine months ended September 30, 2014 and 2013 (dollars and shares in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Numerator:
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(46,525	)	$	(151,027	)	$	(255,052	)	$	(127,031	)
Net income (loss) attributable to Old LTIP Units non-controlling interest	—			(6,296		)	(5,296		)	(5,184		)
Net income (loss) attributable to common stockholders and Old LTIP Units(1)	$	(46,525	)	$	(157,323	)	$	(260,348	)	$	(132,215	)
Denominator:(2)
Weighted average shares of common stock	200,427			111,103			178,520			99,705
Weighted average Old LTIP Units(1)	—			4,632			2,749			4,570
Weighted average shares of common stock and Old LTIP Units(3)	200,427			115,735			181,269			104,275
Earnings (loss) per share:(2)
Basic	$	(0.23	)	$	(1.36	)	$	(1.43	)	$	(1.27	)
Diluted	$	(0.23	)	$	(1.36	)	$	(1.43	)	$	(1.27	)

____________________________________________________________

(1) The EPS calculation takes into account Old LTIP Units, which received non-forfeitable dividends from the date of grant, shared equally in the Company’s net income (loss) and converted on a one-for-one basis into common stock. Such Old LTIP Units were converted to common stock, the unvested portion of which remain restricted, in connection with the Reorganization (refer to Note 12).

(2) Adjusted for the Reverse Split effected on June 30, 2014.

(3) Excludes the effect of exchangeable senior notes, Deferred LTIP Units, shares under the forward sale agreement and RSUs outstanding that were not dilutive as of September 30, 2014. These instruments could potentially impact diluted EPS in future periods, depending on changes in the Company’s stock price and other factors.

14. Non-controlling Interests

Reorganization

Prior to the Distribution, the Company’s predecessor, NorthStar Realty Finance Corp. (“NRF Predecessor”), conducted substantially all of its operations and made its investments through the Operating Partnership and the Company (formerly known as “NRFC Sub-REIT Corp.”), NRF Predecessor’s then-majority-owned subsidiary. In connection with the Reorganization, the Operating Partnership merged with and into NRF Predecessor with NRF Predecessor as the surviving entity (“OP Merger”). Second, NRF Predecessor merged with and into the Company (known at the time as NRFC Sub-REIT Corp.) with the Company as the surviving entity (“Sub-REIT Merger”) and then NRFC Sub-REIT Corp. renamed itself as “NorthStar Realty Finance Corp.” In the OP Merger, Old LTIP Units were converted into an equal number of shares of common stock of NRFC Sub-REIT Corp. In the Sub-REIT Merger, each share of common stock and each series of the preferred stock of NRF Predecessor were exchanged for one share of common stock and the corresponding series of preferred stock with substantially similar terms, respectively, of the Company. Immediately after the Reorganization, the Company had the same number of shares of common stock and preferred stock outstanding as NRF Predecessor, except for the Old LTIP Units. On June 30, 2014 prior to the OP Merger, the Old LTIP Units represented 2.2% of the Operating Partnership with the remaining 97.8% held by NRF Predecessor. As a result of the OP Merger, the Old LTIP Units were converted to common stock of the Company.

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(Unaudited)

Prior to the spin-off, net income (loss) attributable to the non-controlling interest was based on the weighted average Old LTIP Unit holders’ ownership percentage of the Operating Partnership for the respective period. The issuance of additional common stock or Old LTIP Units changed the percentage ownership of both the Old LTIP Unit holders and the Company. Since a unit was generally redeemable for cash or common stock at the option of the Company, it was deemed to be equivalent to common stock. Therefore, such transactions were treated as capital transactions and resulted in an allocation between stockholders’ equity and non-controlling interests on 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, 2014, there were no Old LTIP Units outstanding as all were converted to common stock in connection with the Reorganization and the unvested portion remains restricted (refer to Note 12). As of December 31, 2013, Old LTIP Units of 4,608,759 were outstanding, after giving effect to the Reverse Split, representing a 2.9% ownership and non-controlling interest in the Operating Partnership. Net income (loss) attributable to the Operating Partnership non-controlling interest for the six months ended June 30, 2014 and the nine months ended September 30, 2013 was a loss of $5.3 million and $5.2 million, respectively. Net income (loss) attributable to the Operating Partnership non-controlling interest for the three months ended September 30, 2013 was a loss of $6.3 million. Since the Operating Partnership does not exist subsequent to the spin-off, there was no allocation of net income (loss) attributable to the Operating Partnership non-controlling interest for the three months ended September 30, 2014. Such amounts exclude 1,135,599 Deferred LTIP Units, after giving effect to the Reverse Split, issued in connection with the Stock Plan.

In connection with the Reorganization, all obligations of the Operating Partnership and NRF Predecessor were assumed by the Company. Immediately following the Reorganization, the Company had, on a consolidated basis, the same assets, business and operations as NRF Predecessor had on a consolidated basis, immediately prior to the Reorganization. The Company accounted for the Reorganization as a reverse merger between entities under common control. The Company did not record any gain or loss related to the Reorganization.

Other

Other non-controlling interests represent third-party equity interests in ventures that are consolidated with the Company’s financial statements. Net income (loss) attributable to the other non-controlling interests for the three months ended September 30, 2014 and 2013 was a loss of $1.1 million and an immaterial amount, respectively. Net income (loss) attributable to the other non-controlling interests for the nine months ended September 30, 2014 and 2013 was a loss of $2.1 million and $0.3 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, 2014 and 2013 (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Income (loss) from continuing operations	$	(46,247	)	$	(152,667	)	$	(253,841	)	$	(126,689	)
Income (loss) from discontinued operations	(278		)	1,640			(1,211		)	(342		)
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders	$	(46,525	)	$	(151,027	)	$	(255,052	)	$	(127,031	)

15. 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.

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(Unaudited)

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 of assets and liabilities accounted for at fair value on a recurring basis 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.

Investments in Unconsolidated Ventures

The Company accounts for certain investments in unconsolidated ventures at fair value 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 and discount rate. Additionally, the Company accounts for certain CRE debt investments made in connection with certain investments in unconsolidated ventures at fair value (refer to Note 7), which is determined based on comparing the current yield to the estimated yield for newly originated loans with similar credit risk. These fair value measurements are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy.

Real Estate Securities

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.

Other CRE Securities

Other 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.

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(Unaudited)

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.

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, 2014 and December 31, 2013 by level within the fair value hierarchy (dollars in thousands):

	September 30, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Investments in private equity funds	$	—	$	—	$	851,073	$	851,073
Investments in unconsolidated ventures(1)	—		—		281,684		281,684
Real estate securities, available for sale:
N-Star CDO bonds	—		—		267,273		267,273
N-Star CDO equity	—		—		134,775		134,775
CMBS and other securities	—		17,330		34,062		51,392
CRE securities in N-Star CDOs
CMBS	—		329,135		49,945		379,080
Third-party CDO notes	—		—		27,121		27,121
Agency debentures	—		36,077		—		36,077
Unsecured REIT debt	—		9,417		—		9,417
Trust preferred securities	—		—		5,925		5,925
Subtotal CRE securities in N-Star CDOs	—		374,629		82,991		457,620
Subtotal real estate securities, available for sale	—		391,959		519,101		911,060
Derivative assets	—		2,540		—		2,540
Total assets	$	—	$	394,499	$	1,651,858	$	2,046,357
Liabilities:
CDO bonds payable	$	—	$	—	$	391,939	$	391,939
Junior subordinated notes	—		—		219,253		219,253
Derivative liabilities	—		20,398		—		20,398
Total liabilities	$	—	$	20,398	$	611,192	$	631,590

_____________________________________________________________________

(1) Includes certain CRE debt investments made in connection with certain investments in unconsolidated ventures, for which the fair value option was elected.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Investments in private equity funds	$	—	$	—	$	586,018	$	586,018
Investments in unconsolidated ventures(1)	—		—		192,419		192,419
Real estate securities, available for sale:
N-Star CDO bonds	—		—		205,287		205,287
N-Star CDO equity	—		—		158,274		158,274
CMBS and other securities	—		20,694		25,981		46,675
CRE securities in N-Star CDOs
CMBS	—		507,725		64,576		572,301
Third-party CDO notes	—				24,931		24,931
Agency debentures	—		29,540		—		29,540
Unsecured REIT debt	—		9,521		—		9,521
Trust preferred securities	—		—		5,791		5,791
Subtotal CRE securities in N-Star CDOs	—		546,786		95,298		642,084
Subtotal real estate securities, available for sale	—		567,480		484,840		1,052,320
Derivative assets	—		3,469		—		3,469
Total assets	$	—	$	570,949	$	1,263,277	$	1,834,226
Liabilities:
CDO bonds payable	$	—	$	—	$	384,183	$	384,183
Junior subordinated notes	—		—		201,203		201,203
Derivative liabilities	—		52,204		—		52,204
Total liabilities	$	—	$	52,204	$	585,386	$	637,590

_____________________________________________________________________

(1) Includes certain CRE debt investments made in connection with certain investments in unconsolidated ventures, for which the fair value option was elected.

53

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the changes in fair value of financial assets and liabilities which are measured at fair value on a recurring basis using Level 3 inputs to determine fair value for the nine months ended September 30, 2014 (dollars in thousands):

	Nine Months Ended September 30, 2014
	Investments in Private Equity Funds			Investments in Unconsolidated Ventures(1)			Real Estate Securities			CDO Bonds Payable			Junior Subordinated Notes
January 1, 2014	$	586,018		$	192,419		$	484,840		$	384,183		$	201,203
Transfers into Level 3(2)	—			—			16,368			—			—
Purchases / borrowings / amortization / contributions	363,177			83,341			45,920			—			—
Sales	—			—			(54,131		)	—			—
Paydowns / distributions	(188,939		)	(1,374		)	(50,016		)	(60,042		)	—
Repurchases	—			—			—			—			—
Gains:
Equity in earnings of unconsolidated ventures	90,817			7,298			—			—			—
Unrealized gains included in earnings	—			—			56,522			—			—
Realized gains included in earnings	—			—			17,946			—			—
Unrealized gain on real estate securities, available for sale included in OCI	—			—			67,974			—			—
Deconsolidation of N-Star CDOs(3)	—			—			8,805			(122,486		)	—
Losses:
Unrealized losses included in earnings	—			—			(48,252		)	190,176			18,050
Realized losses included in earnings	—			—			(2,902		)	108			—
Unrealized losses on real estate securities, available for sale included in OCI	—			—			(2,904		)	—			—
Deconsolidation of N-Star CDOs(3)	—			—			(21,069		)	—			—
September 30, 2014	$	851,073		$	281,684		$	519,101		$	391,939		$	219,253
Gains (losses) included in earnings attributable to the change in unrealized gains (losses) relating to assets or liabilities still held.	$	—		$	—		$	8,330		$	(190,176	)	$	(18,050	)

____________________________________________________________

(1) Includes certain CRE debt investments made in connection with certain investments in unconsolidated ventures, for which the fair value option was elected.

(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.

54

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the changes in fair value of financial assets and liabilities which are measured at fair value on a recurring basis using Level 3 inputs to determine fair value for the year ended December 31, 2013 (dollars in thousands):

	Year Ended December 31, 2013
	Investments in Private Equity Funds			Investments in Unconsolidated Ventures(1)		Real Estate Securities			CDO Bonds Payable			Junior Subordinated Notes
January 1, 2013	$	—		$	—	$	338,213		$	1,999,470		$	197,173
Transfers into Level 3(2)	—			—		7,788			—			—
Transfers out of Level 3(2)	—			—		(108,143		)	—			—
Purchases / borrowings / amortization / contributions	747,564			192,209		23,594			43,983			—
Sales	—			—		(40,328		)	—			—
Paydowns / distributions	(244,138		)	—		(54,971		)	(647,947		)	—
Repurchases	—			—		—			(44,221		)	—
Gains:
Equity in earnings of unconsolidated ventures	82,592			210		—			—			—
Unrealized gains included in earnings	—			—		68,794			—			—
Realized gains included in earnings	—			—		15,179			—			—
Unrealized gain on real estate securities, available for sale included in OCI	—			—		3,098			—			—
Deconsolidation of N-Star CDOs(3)	—			—		350,886			(1,656,857		)	—
Losses:
Unrealized losses included in earnings	—			—		(19,523		)	106,622			4,030
Realized losses included in earnings	—			—		(5,601		)	26,697			—
Unrealized losses on real estate securities, available for sale included in OCI	—			—		(4,138		)	—			—
Deconsolidation of N-Star CDOs(3)	—			—		(90,008		)	556,436			—
December 31, 2013	$	586,018		$	192,419	$	484,840		$	384,183		$	201,203
Gains (losses) included in earnings attributable to the change in unrealized gains (losses) relating to assets or liabilities still held.	$	—		$	—	$	20,746		$	(106,622	)	$	(4,030	)

____________________________________________________________

(1) Includes certain CRE debt investments made in connection with certain investments in unconsolidated ventures, for which the fair value option was elected.

(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, 2014 and December 31, 2013.

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).

For the nine months ended September 30, 2014, quantitative information about the Company’s remaining Level 3 fair value measurements on a recurring basis are as follows (dollars in thousands):

	Fair Value		Valuation Technique	Key Unobservable Inputs(2)	Range
Investments in private equity funds	$	851,073	Discounted Cash Flow Model	Discount Rate	15% - 27%
Investments in unconsolidated ventures(1)	$	281,684	Discounted Cash Flow Model/Credit Spread	Discount Rate/Credit Spread	10% - 30%
N-Star CDO equity	$	134,775	Discounted Cash Flow Model	Discount Rate	18% - 20%

55

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

_________________________________________

(1) Includes certain CRE debt investments made in connection with certain investments in unconsolidated ventures, for which the fair value option was elected.

(2) Includes timing and amount of expected future cash flows.

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 using 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 past market volatility the Company had 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, certain investments in unconsolidated ventures (refer to Note 7) 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 such investments 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.

The following table presents the fair value of financial instruments for which the fair value option was elected as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30, 2014		December 31, 2013
Assets:
Investments in private equity funds	$	851,073	$	586,018
Investments in unconsolidated ventures(1)	281,684		192,419
Real estate securities, available for sale:(2)
N-Star CDO equity	134,775		158,274
CMBS and other securities	41,917		30,642
CRE securities in N-Star CDOs
CMBS	379,080		572,301
Third-party CDO notes	27,120		24,931
Agency debentures	36,079		29,540
Unsecured REIT debt	9,417		9,521
Trust preferred securities	5,924		5,791
Subtotal CRE securities in N-Star CDOs	457,620		642,084
Subtotal real estate securities, available for sale	634,312		831,000
Total assets	$	1,767,069	$	1,609,437
Liabilities:
CDO bonds payable	$	391,939	$	384,183
Junior subordinated notes	219,253		201,203
Total liabilities	$	611,192	$	585,386

___________________________________________________________

(1) Includes certain CRE debt investments made in connection with certain investments in unconsolidated ventures, for which the fair value option was elected.

(2) September 30, 2014 excludes 36 CRE securities including $267.3 million of N-Star CDO bonds and $9.4 million of CRE securities, for which the fair value option was not elected. December 31, 2013 excludes 36 CRE securities including $205.3 million of N-Star CDO bonds and $16.0 million of CRE securities, for which the fair value option was not elected.

56

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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, 2014 (dollars in thousands):

	Fair Value		Amount Due Upon Maturity		Difference
CDO bonds payable	$	391,939	$	611,757	$	(219,818	)
Junior subordinated notes	219,253		280,117		(60,864		)
Total	$	611,192	$	891,874	$	(280,682	)

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, 2014 and 2013 (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Assets:
Real estate securities, available for sale	$	(6,667	)	$	(35,924	)	$	3,671		$	86,344
Foreign currency remeasurement(1)	(2,927		)	2,226			(3,727		)	1,326
Liabilities:
CDO bonds payable	(8,397		)	44,070			(190,176		)	(105,359		)
Junior subordinated notes	2,193			28,338			(18,050		)	4,894
Subtotal(2)	(15,798		)	38,710			(208,282		)	(12,795		)
Derivatives	3,523			(8,540		)	7,755			29,661
Total	$	(12,275	)	$	30,170		$	(200,527	)	$	16,866

____________________________________________________________

(1) Primarily represents foreign currency remeasurement on an investment denominated in Euros.

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

The remaining amount recorded to 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 16).

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.

57

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30, 2014						December 31, 2013
	Principal / Notional Amount		Carrying Value		Fair Value		Principal / Notional Amount		Carrying Value		Fair Value
Financial assets:(1)
Real estate debt investments, net	$	1,179,449	$	1,144,356	$	1,147,316	$	1,085,280	$	1,031,078	$	1,026,709
Real estate securities, available for sale(2)	1,552,059		911,060		911,060		2,090,726		1,052,320		1,052,320
Derivative assets(2)(3)	1,735,557		2,540		2,540		478,688		3,469		3,469
Financial liabilities:(1)
Mortgage and other notes payable	$	4,451,694	$	4,446,262	$	4,450,283	$	2,133,334	$	2,113,334	$	2,107,110
CDO bonds payable(2)	611,757		391,939		391,939		970,219		384,183		384,183
Securitization bonds payable	61,505		61,531		61,467		82,337		82,340		82,517
Credit facilities	822,588		822,588		822,588		70,038		70,038		70,038
Exchangeable senior notes	55,740		50,715		100,537		543,815		490,973		909,601
Junior subordinated notes(2)	280,117		219,253		219,253		280,117		201,203		201,203
Derivative liabilities(2)(3)	320,192		20,398		20,398		674,418		52,204		52,204

____________________________________________________________

(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 as of September 30, 2014 and December 31, 2013.

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.

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. 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

As of the reporting date, the Company believes the carrying value of its credit facilities 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.

58

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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.

16. 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 and cap 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.

The following tables present derivative instruments that were not designated as hedges under U.S. GAAP as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	Number	Notional Amount(1)		Fair Value Net Asset (Liability)				Range of Fixed LIBOR / Forward Rate		Range of Maturity
As of September 30, 2014:
Interest rate swaps	12	$	320,192	$	(20,398	)	(2)	0.62% - 5.25%		January 2015 - July 2018
Interest rate caps/floors	14	1,653,997		2,028				2.50% - 5.00%		January 2015 - December 2017
Foreign currency forward	1	81,560		512				1.63	(3)	October 2014
Total	27	$	2,055,749	$	(17,858	)
As of December 31, 2013:
Interest rate swaps	19	$	674,418	$	(52,204	)	(2)	4.27% - 5.25%		May 2014 - July 2018
Interest rate caps/floors	3	478,688		3,469				1.64% - 5.00%		July 2014 - January 2015
Total	22	$	1,153,106	$	(48,735	)

____________________________________________________________

(1) Excludes timing swaps with a notional amount of $28.0 million as of September 30, 2014 and December 31, 2013.

(2) Most of the interest rate swaps were liabilities of consolidated N-Star CDOs 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) Represents a forward settlement rate of U.S. Dollar to British Pound Sterling.

The change in number and notional amount of interest rate swaps from December 31, 2013 primarily relates to the decrease from deconsolidation of N-Star CDOs III and V (refer to Note 3) and contractual notional amortization, offset by an interest rate swap assumed in connection with the Formation Portfolio. The change in number and notional amount of interest rate caps/floors from December 31, 2013 primarily relates to the assumption of and new caps in connection with the Formation Portfolio, Innkeepers Portfolio and K Partners Portfolio. The Company had no derivative financial instruments that were designated as hedges in qualifying hedging relationships as of September 30, 2014 and December 31, 2013.

The following table presents the fair value of derivative instruments, as well as their classification on the consolidated balance sheets, as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	Balance Sheet Location	September 30, 2014		December 31, 2013
Interest rate caps/floors/foreign currency forward	Derivative assets	$	2,540	$	3,469
Interest rate swaps	Derivative liabilities	$	20,398	$	52,204

59

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the effect of derivative instruments in the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
	Statements of Operations Location	2014			2013			2014			2013
Amount of gain (loss) recognized in earnings:
Adjustment to fair value interest rate swaps	Unrealized gain (loss) on investments and other	$	3,523		$	(8,540	)	$	7,755		$	29,661
Net cash payment for interest rate swaps	Unrealized gain (loss) on investments and other	$	(3,102	)	$	(11,379	)	$	(13,795	)	$	(44,053	)
Amount of swap gain (loss) reclassified from OCI into earnings	Interest expense on debt and securities	$	(228	)	$	(1,172	)	$	(686	)	$	(4,656	)
Reclassification of swap gain (loss) into gain (loss) from deconsolidation of N-Star CDOs (refer to Note 3)	Gain (loss) from deconsolidation of N-Star CDOs	$	—		$	(15,246	)	$	—		$	(15,246	)

The Company’s counterparties held no cash margin as collateral against the Company’s derivative contracts as of September 30, 2014 and December 31, 2013.

17. Commitments and Contingencies

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.

18.Segment Reporting

The Company currently conducts its business through the following five segments (excluding the asset management business which the Company spun off on June 30, 2014 which is no longer a separate operating segment), based on how management reviews and manages its business:

• Real Estate - The real estate business concentrates on various types of investments in commercial real estate located throughout the United States and internationally that includes healthcare, hotel, manufactured housing communities, net lease, multifamily and international properties. In addition, it includes PE Investments diversified by property type and geography.

• Healthcare - The healthcare properties are typically leased under net leases to healthcare operators and focus on mid-acuity facilities (i.e., skilled nursing and assisted living), with the highest concentration in private-pay assisted living facilities. In addition, the Company owns healthcare properties that operate under a RIDEA structure generating resident income from short-term residential agreements and incur customary related operating expenses.

• Hotel - The hotel portfolio is a geographically diverse portfolio primarily comprised of extended stay hotels and premium branded select service hotels located primarily in major metropolitan markets with the majority affiliated with top hotel brands.

• Manufactured Housing - The manufactured housing portfolio consists of communities that lease pad rental sites for placement of factory built homes located throughout the United States. In addition, the portfolio includes manufactured homes either for sale or rented and receivables related to the financing on homes sold to residents.

• Net Lease - The net lease properties are primarily office, industrial and retail properties typically under net leases to corporate tenants.

• Multifamily - The multifamily portfolio primarily focuses on owning properties located in suburban markets that are best suited to capture the formation of new households.

• International - The Company is expanding outside the United States and seeks to invest in various types of commercial real estate assets.

60

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

• Other - The Company may pursue other real estate opportunities such as the Company’s recent acquisition of multi-tenant office properties.

• PE Investments - The real estate business also includes investments (directly or indirectly in joint ventures) owning limited partnership interests in real estate private equity funds, managed by institutional quality sponsors and diversified by property type and geography.

• Commercial Real Estate Debt - The CRE debt business is focused on originating, structuring, acquiring and managing senior and subordinate debt investments secured primarily by commercial real estate and includes first mortgage loans, subordinate interests, mezzanine 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.

• Commercial Real Estate Securities - The CRE securities business is predominately comprised of N-Star CDO bonds and N-Star CDO equity of deconsolidated N-Star CDOs and includes other securities which are mostly conduit CMBS. The Company also invests in opportunistic CRE securities such as an investment in a “B-piece” CMBS.

• N-Star CDOs -The Company historically originated or acquired CRE debt and securities investments that were predominantly financed through permanent, non-recourse CDOs. 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, this distinct business is a significantly smaller portion of its business today than in the past. As of September 30, 2014, only N-Star securities CDOs I and IX continue to be consolidated. Refer to Note 3 for further disclosure regarding deconsolidated N-Star CDOs. The Company continues to receive collateral management fees related to administrative responsibilities for deconsolidated N-Star CDO financing transactions, which are recorded in other revenue and included in the N-Star CDOs segment.

• Corporate - The corporate segment includes corporate level interest income, interest expense and general and administrative expenses.

The Company primarily generates revenue from rental income from its real estate properties, operating income from healthcare and hotel properties permitted by the RIDEA and net interest income on the CRE debt and securities portfolios. 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.

Prior to the spin-off of its asset management business, the Company generated fee income from asset management activities. The asset management segment represents the consolidated results of operations and balance sheet of such asset management business which was transferred to NSAM in connection with the spin-off. Amounts related to the asset management business are reported in discontinued operations and include an allocation of indirect expenses related to managing the NSAM Sponsored Companies and owning NorthStar Securities, including salaries, equity-based compensation and other general and administrative expenses (primarily occupancy and other costs) based on an estimate had the asset management business been run as an independent entity.

The following tables present segment reporting for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

Statement of Operations:									N-Star CDOs(1)
Three months ended September 30, 2014:	Real Estate				CRE Debt		CRE Securities		CRE Securities		Corporate				Consolidated Total
Rental and escalation income	$	86,636			$	—	$	—	$	279	$	—			$	86,915
Hotel related income	79,194				—		—		—		—				79,194
Resident fee income	25,027				—		—		—		—				25,027
Net interest income on debt and securities	1,222			(3)	40,102		17,979		17,274		1,359			(4)	77,936
Income (loss) from operations	(44,154		)	(5)	38,291		21,456		15,832		(64,675		)		(33,250		)
Equity in earnings (losses) of unconsolidated ventures	35,609				2,625		—		—		—				38,234
Income (loss) from continuing operations	(7,511		)		38,700		25,254		1,344		(84,118		)		(26,331		)
Income (loss) from discontinued operations	(278		)		—		—		—		—				(278		)
Net income (loss)	(7,789		)		38,700		25,254		1,344		(84,118		)		(26,609		)

61

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Statement of Operations:									N-Star CDOs(1)
Three months ended September 30, 2013:	Real Estate				CRE Debt		CRE Securities		CRE Debt			CRE Securities		Corporate				Asset Management(2)		Consolidated Total
Rental and escalation income	$	60,318			$	260	$	—	$	10,983		$	388	$	—			$	—	$	71,949
Net interest income on debt and securities	221			(3)	12,512		11,543		10,371			21,399		8,963			(4)	—		65,009
Income (loss) from operations	(10,319		)	(5)	12,452		11,406		4,732			34,880		(20,479		)		—		32,672
Equity in earnings (losses) of unconsolidated ventures	29,826				1,256		—		(69		)	—		—				—		31,013
Income (loss) from continuing operations	19,498				15,933		45,895		(268,950		)	36,376		7,859				—		(143,389		)
Income (loss) from discontinued operations	22				—		—		—			—		—				1,618		1,640
Net income (loss)	19,520				15,933		45,895		(268,950		)	36,376		7,859				1,618		(141,749		)

___________________________________

(1) Based on CDO financing transactions that were primarily collateralized by either CRE debt or securities and may include other types of investments. $1.3 million and $3.0 million of collateral management fees were earned from CDO financing transactions for the three months ended September 30, 2014 and 2013, respectively, of which $0.6 million and $3.0 million, respectively, were eliminated in consolidation. The eliminated amounts are recorded as other revenue in the Corporate segment and as an expense in the N-Star CDO segment.

(2) Represents the consolidated statements of operations of NSAM reported in discontinued operations and includes an allocation of indirect expenses from the Company (refer to Note 10).

(3) Primarily represents interest income earned from notes receivable on manufactured homes.

(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 $51.3 million and $27.6 million for the three months ended September 30, 2014 and 2013, respectively. The three months ended September 30, 2014 also includes $41.4 million of transaction costs.

Statement of Operations:									N-Star CDOs(1)
Nine months ended September 30, 2014:	Real Estate				CRE Debt		CRE Securities		CRE Securities			Corporate				Asset Management(2)			Consolidated Total
Rental and escalation income	$	233,166			$	—	$	—	$	950		$	—			$	—		234,116
Hotel related income	101,720				—		—		—			—				—			101,720
Resident fee income	40,087				—		—		—			—				—			40,087
Net interest income on debt and securities	3,589			(3)	105,624		64,001		44,740			8,139			(4)	—			226,093
Income (loss) from operations	(87,258		)	(5)	103,194		65,962		44,301			(123,304		)		—			2,895
Equity in earnings (losses) of unconsolidated ventures	93,087				8,319		—		—			—				—			101,406
Income (loss) from continuing operations	1,770				108,586		72,284		(176,395		)	(209,459		)		—			(203,214	)
Income (loss) from discontinued operations	(915		)		—		—		—			—				(6,074		)	(6,989	)
Net income (loss)	855				108,586		72,284		(176,395		)	(209,459		)		(6,074		)	(210,203	)

Statement of Operations:									N-Star CDOs(1)
Nine months ended September 30, 2013:	Real Estate				CRE Debt		CRE Securities		CRE Debt			CRE Securities		Corporate				Asset Management(2)			Consolidated Total
Rental and escalation income	$	142,069			$	260	$	—	$	30,947		$	862	$	—			$	—		$	174,138
Net interest income on debt and securities	676			(3)	27,836		23,917		37,820			58,293		36,965			(4)	—			185,507
Income (loss) from operations	(11,078		)	(5)	27,693		32,275		17,046			67,984		(43,287		)		—			90,633
Equity in earnings (losses) of unconsolidated ventures	52,188				3,074		—		(817		)	—		—				—			54,445
Income (loss) from continuing operations	53,330				32,093		68,430		(302,344		)	95,920		(37,459		)		—			(90,030		)
Income (loss) from discontinued operations	291				—		—		—			—		—				(2,860		)	(2,569		)
Net income (loss)	53,621				32,093		68,430		(302,344		)	95,920		(37,459		)		(2,860		)	(92,599		)

_______________________________________________

(1) Based on CDO financing transactions that were primarily collateralized by either CRE debt or securities and may include other types of investments. $4.5 million and $9.2 million of collateral management fees were earned from CDO financing transactions for the nine months ended September 30, 2014 and 2013, respectively, of which $2.0 million and $9.2 million, respectively, were eliminated in consolidation. The eliminated amounts are recorded as other revenue in the Corporate segment and as an expense in the N-Star CDO segment.

(2) Represents the consolidated statements of operations of NSAM reported in discontinued operations and includes an allocation of indirect expenses from the Company (refer to Note 10).

(3) Primarily represents interest income earned from notes receivable on manufactured homes.

(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 $110.4 million and $52.7 million for the nine months ended September 30, 2014 and 2013, respectively. The nine months ended September 30, 2014 also includes $81.1 million of transaction costs.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents total assets by segment as of September 30, 2014 and December 31, 2013 (dollars in thousands):

							N-Star CDOs(1)
Total Assets	Real Estate		CRE Debt		CRE Securities		CRE Securities		Asset Management(2)		Corporate		Consolidated Total
September 30, 2014	$	7,349,016	$	1,319,466	$	459,951	$	515,746	$	—	$	226,594	$	9,870,773
December 31, 2013	$	3,343,402	$	1,211,079	$	418,837	$	727,875	$	31,709	$	627,148	$	6,360,050

______________________________________

(1) Based on CDO financing transactions that are primarily collateralized by CRE securities and may include other types of investments.

(2) Represents the consolidated balance sheet of NSAM (refer to Note 10). NSAM was spun off from the Company as of June 30, 2014.

19.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, 2014 and 2013 (dollars in thousands):

	Nine Months Ended September 30,
	2014		2013
Assumption of mortgage notes payable upon acquisition of operating real estate	$	870,871	$	—
Conversion of exchangeable senior notes	310,463		—
Exchangeable senior notes exchanged for Senior Notes (refer to Note 9)	296,382		—
PE Investment IX purchase price payable	186,454		—
Reclassification of operating real estate to deferred costs and intangible assets	132,197		18,375
Contribution from non-controlling interests	73,486		—
Escrow deposit payable related to CRE debt investments	50,360		62,811
Net assets distributed in spin-off of asset management business (refer to Note 10)	39,709		—
Reclassification of operating real estate to assets of properties held for sale	22,323		—
CRE debt investment payoff due from servicer	19,874		15,600
Conversion of Old LTIP Units (refer to Note 12)	18,611		—
Reclassification of CRE debt investment to held for sale	15,223		—
Reclassification of operating real estate to other assets	14,141		60,621
Issuance of common stock related to transactions (Refer to Note 13)	6,803		—
Non-cash related to PE Investments	1,847		44,021
Dividends payable related to RSUs	1,143		—
Acquisition of operating real estate / reduction of CRE debt investments (1)	—		135,361
Equity component of 5.375% Notes	—		45,740
Increase in restricted cash(1)	—		6,065

____________________________________________________________

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

20. Subsequent Events

Dividends

On October 29, 2014, the Company declared a dividend of $0.40 per share of common stock. The common stock dividend will be paid on November 14, 2014 to stockholders of record as of the close of business on November 10, 2014. On October 29, 2014, 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, $0.53125 per share of Series D Preferred Stock and $0.5469 per share of Series E Preferred Stock. Dividends will be paid on all series of preferred stock on November 17, 2014 to stockholders of record as of the close of business on November 10, 2014.

Griffin-American Healthcare REIT II, Inc.

On August 5, 2014, the Company and Griffin-American Healthcare REIT II, Inc. (“Griffin-American”) announced that the board of directors of both companies unanimously approved a definitive merger agreement under which the Company will acquire all of the outstanding shares of Griffin-American in a stock and cash transaction valued at $4 billion, including

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approximately $600 million of financing. Griffin-American is a non-traded REIT focused on medical office buildings, senior housing and other healthcare-related facilities and is co-sponsored by American Healthcare Investors LLC and Griffin Capital Corporation.

Griffin-American’s diversified portfolio is comprised of 296 healthcare-related real estate properties which are predominantly medical office buildings (43%) and senior housing facilities (30%) in the United States and the United Kingdom. Subject to the terms and conditions of the merger agreement, Griffin-American stockholders will receive $11.50 per Griffin-American share comprising: (i) $7.75 per share in cash; and (ii) $3.75 per share in the Company’s common stock. The common stock portion will be subject to a collar such that Griffin-American stockholders will receive 0.1859 shares of common stock if the Company’s stock price is above $20.17 per share at closing and 0.2344 shares of common stock if the Company’s stock price is below $16.00 at closing. If the Company’s stock price at closing is between $16.00 and $20.17 per share, Griffin-American stockholders will receive a number of the Company’s common stock between 0.1859 and 0.2344, equal to $3.75 in value. Transaction costs, including the Griffin-American promote, are expected to be approximately $130 million. The merger with Griffin-American is expected to close in the fourth quarter of 2014.

Additionally, on October 22, 2014, NorthStar Healthcare entered into a purchase and sale agreement with the Company pursuant to which NorthStar Healthcare agreed to acquire an equity interest in the Griffin-American healthcare real estate portfolio in connection with the completion of the merger of Griffin-American with and into a subsidiary of the Company. NorthStar Healthcare will acquire the interest for $100 million in cash, including its pro rata share of associated transaction costs, through a joint venture with the Company and will be purchased at the Company’s cost basis and is expected to represent an approximate 8.3% interest in the portfolio.

Inland Portfolio

In September 2014, the Company entered into an agreement to acquire a $1.1 billion hotel portfolio (“Inland Portfolio”) from Inland American Real Estate Trust. The Inland Portfolio is comprised of 48 upscale extended stay and select service hotels with approximately 6,400 rooms. The Company is acquiring the Inland Portfolio in a joint venture with Chatham where the Company will have an approximate 90% ownership interest. The Company recorded $9.4 million of estimated transaction costs in the third quarter 2014 in connection with this transaction.

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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 after the internal corporate restructuring and spin-off, as described further below, unless the context specifically requires otherwise.

Introduction

NorthStar Realty Finance Corp. is a diversified commercial real estate company. We invest in multiple asset classes across commercial real estate, or CRE, that we expect will generate attractive risk-adjusted returns and may take the form of acquiring real estate, originating or acquiring senior or subordinate loans, as well as pursuing opportunistic CRE investments, both in the United States and internationally. We seek to generate stable cash flow for distribution to our stockholders through our diversified portfolio of commercial real estate assets and in turn build long-term franchise value. Effective June 30, 2014, we are externally managed and advised by an affiliate of NorthStar Asset Management Group Inc. (NYSE: NSAM), or NSAM. We are a Maryland corporation and completed our initial public offering in October 2004. We conduct our operations so as to continue to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes.

Spin-off of Asset Management Business

On June 30, 2014, we completed our previously announced spin-off of our asset management business into a separate publicly-traded company, NSAM, in the form of a tax-free distribution, or the Distribution. In connection with the Distribution, each of our common stockholders received shares of NSAM’s common stock on a one-for-one basis, after giving effect to a one-for-two reverse stock split of our common stock, or Reverse Split. Upon completion of the spin-off, our asset management business is owned and operated by NSAM and we are externally managed by an affiliate of NSAM through a management contract with an initial term of 20 years. Subsequent to the spin-off, we continue to operate our commercial real estate debt origination business. Most of our employees at the time of the spin-off became employees of NSAM and executive officers, employees engaged in our loan origination business at the time of the spin-off and certain other employees became co-employees of both us and NSAM. Affiliates of NSAM also manage our previously sponsored non-traded REITs: 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, collectively referred to as the NSAM Sponsored Companies. In addition, NSAM owns NorthStar Realty Securities, LLC, or NorthStar Securities, our previously owned captive broker-dealer platform, and performs other asset management-related services.

Prior to the Distribution, we completed an internal corporate reorganization, or the Reorganization, whereby we collapsed our three tier holding company structure into a single tier. We previously conducted substantially all of our operations and made our investments through NorthStar Realty Finance Limited Partnership, or the Operating Partnership. In addition, following the Reorganization but prior to the Distribution, we completed a Reverse Split where every two shares of our issued and outstanding common stock were combined into one issued and outstanding share of our common stock.

Griffin-American

On August 5, 2014, we and Griffin-American Healthcare REIT II, Inc., or Griffin-American, announced that the board of directors of both us and Griffin-American unanimously approved a definitive merger agreement under which we will acquire all of the outstanding shares of Griffin-American in a stock and cash transaction valued at $4 billion, including approximately $600 million of borrowings. Griffin-American is a non-traded REIT focused on medical office buildings, senior housing and other healthcare-related facilities and is co-sponsored by American Healthcare Investors LLC and Griffin Capital Corporation. The merger with Griffin-American is expected to close in the fourth quarter of 2014. Refer to the Recent Developments section below for further discussion of the merger with Griffin-American. Additionally, in October 2014, we entered into a purchase and sale agreement with NorthStar Healthcare pursuant to which it agreed to acquire an 8.3% equity interest in the Griffin-American healthcare real estate portfolio in connection with the merger for $100 million in cash.

Summary of Business

Our primary business lines are as follows:

• Real Estate - Our real estate business concentrates on various types of investments in commercial real estate located throughout the United States and internationally that includes healthcare, hotel, manufactured housing communities, net lease, multifamily and international properties. In addition, it includes limited partnership interests in real estate private equity funds, or PE Investments, diversified by property type and geography.

• Healthcare - Our healthcare properties are typically leased under net leases to healthcare operators and focus on mid-acuity facilities (i.e., skilled nursing and assisted living), with the highest concentration in private-pay assisted living facilities which we believe have the most advantageous underlying demographic trends and fundamentals. In

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addition, we own healthcare properties that operate under the REIT Investment Diversification and Empowerment Act of 2007, or RIDEA, structure generating resident income from short-term residential agreements and incur customary related operating expenses.

• Hotel - Our hotel portfolio is a geographically diverse portfolio primarily comprised of extended stay hotels and premium branded select service hotels located primarily in major metropolitan markets with the majority affiliated with top hotel brands.

• Manufactured Housing - Our manufactured housing portfolio consists of communities that lease pad rental sites for placement of factory built homes located throughout the United States. In addition, the portfolio includes manufactured homes for sale or rented and receivables related to the financing on homes sold to residents.

• Net Lease - Our net lease properties are primarily office, industrial and retail properties typically under net leases to corporate tenants.

• Multifamily - Our multifamily portfolio primarily focuses on owning properties located in suburban markets that are best suited to capture the formation of new households.

• International - We are expanding outside the United States and seek to invest in various types of commercial real estate assets.

• Other - We may pursue other real estate opportunities such as our recent acquisition of multi-tenant office properties.

• PE Investments - Our real estate business also includes investments (directly or indirectly in joint ventures) owning PE Investments managed by institutional quality sponsors and diversified by property type and geography.

• 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 real estate and includes first mortgage loans, subordinate interests, mezzanine 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, which would be included in our CRE debt business.

• Commercial Real Estate Securities - Our CRE securities business is predominately comprised of N-Star CDO bonds and N-Star CDO equity of deconsolidated N-Star CDOs and includes other securities which are mostly conduit commercial mortgage-backed securities, or CMBS, meaning each asset is a pool backed by a large number of commercial real estate loans. We also invest in opportunistic CRE securities such as an investment in a “B-piece” CMBS.

We have the ability to invest in a broad spectrum of commercial real estate assets and seek to provide attractive risk-adjusted returns. 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. Additionally, we may pursue opportunistic investments across all our business lines including CRE equity and debt investments. Examples of opportunistic investments include PE Investments, strategic joint ventures and repurchasing our collateralized debt obligations, or CDO, bonds at a discount to their principal amount.

To date in 2014, we have issued aggregate net capital of $1.1 billion, including $882 million from the issuance of common equity and $242 million from the issuance of preferred equity. In addition, 24.7 million shares of common stock remain available under a forward sale agreement representing aggregate net proceeds of $432 million. Furthermore, we expect to issue $1.1 billion of common equity related to the Griffin-American acquisition. In 2013, we issued aggregate net capital of $1.9 billion, including $1.4 billion from the issuance of common equity, $193 million from the issuance of preferred stock and $335 million from the issuance of exchangeable senior notes.

We predominantly use investment-level financing as part of our strategy to prudently leverage our investments and deliver attractive risk-adjusted returns to our stockholders. We pursue a variety of financing arrangements such as mortgage notes and securitization financing transactions. In addition, we use corporate-level financing such as credit facilities and other term borrowings. We generally seek to limit our reliance on recourse borrowings. Borrowing levels for our CRE investments may be dependent upon the nature of the assets and the related financing that is available.

The current availability of attractive long-term, non-recourse, non mark-to-market, assignable financing through the CMBS and agency financing markets has bolstered opportunities to acquire real estate. For longer duration, stable investment cash flows such as those derived from net lease assets, we tend to use fixed rate financing. For investment cash flows with greater growth potential such as hotels and healthcare under a RIDEA structure, we tend to use floating rate financing which provides prepayment flexibility and may provide a better match between underlying cash flow and potential increases in interest rates.

Our financing strategy for debt investments is to obtain match-funded borrowing at rates that provide a positive net spread. In late 2011, we began using secured term credit facilities provided by major financial institutions to partially finance CRE debt

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which currently provide for an aggregate of up to $240 million. Then, in November 2012 and August 2013, we, and on behalf of NorthStar Income, entered into securitization financing transactions, or Securitization 2012-1 and Securitization 2013-1, respectively, collectively referred to as the Securitization Financing Transactions, to provide permanent, non-recourse, non-mark-to-market financing for newly-originated CRE debt investments.

With respect to corporate-level financing, in August 2014, we entered into a revolving credit facility with certain commercial bank lenders, with a total commitment amount of $500 million for a three-year term. As of September 30, 2014, $50 million of financing remains available under our revolving credit facility. In September 2014, we entered into a term facility with a commercial bank lender with respect to the establishment of term borrowings with an aggregate principal amount of up to $500 million. As of September 30, 2014, $225 million of financing remains available under our term credit facility.

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. All of our loan CDOs were deconsolidated in 2013 and currently only N-Star securities CDOs I and IX continue to be consolidated. The remaining CDOs are past their reinvestment period and given the nature of these transactions, these CDOs are amortizing over time as the underlying assets paydown or are sold. Refer to “Liquidity and Capital Resources” for a further discussion of our legacy CDO business.

We believe that we maintain a competitive advantage through a combination of deep industry relationships and access to market leading CRE credit underwriting and capital markets expertise which enables us to manage credit risk across our business lines as well as to structure and finance our assets efficiently. Our ability to invest across the spectrum of commercial real estate investments allows us to take advantage of complementary and overlapping sources of investment opportunities based on a common reliance on CRE fundamentals and application of similar underwriting and asset management skills as we seek to maximize stockholder value and to protect our capital.

Our Investments

The following table presents our assets as of September 30, 2014, adjusted for the Griffin-American merger and acquisitions and agreements to purchase real estate through November 7, 2014 (refer to Recent Developments) (dollars in thousands):

	Amount(1)		%
Real Estate
Healthcare	$	5,776,122	35.1	%
Hotel	3,043,216		18.5	%
Manufactured housing communities	1,554,917		9.5	%
Net lease	785,523		4.8	%
Multifamily	371,785		2.3	%
International	100,245		0.6	%
Other	56,950		0.3	%
Subtotal	11,688,758		71.1	%
Private equity fund investments	1,137,336		6.9	%
Corporate investments(2)	157,695		1.0	%
Total real estate	12,983,789		79.0	%
CRE Debt
First mortgage loans	460,175		2.8	%
Mezzanine loans	113,386		0.7	%
Subordinate interests	204,428		1.2	%
Corporate loans	360,343		2.2	%
Subtotal	1,138,332		6.9	%
CRE debt of consolidated N-Star CDOs	41,117		0.3	%
Other	37,295		0.2	%
Total CRE debt	1,216,744		7.4	%
CRE Securities
N-Star CDO bonds(3)	554,667		3.4	%
N-Star CDO equity	146,754		0.9	%
Other securities	108,995		0.6	%
Total CRE securities	810,416		4.9	%
Subtotal	15,010,949		91.3	%
Assets underlying deconsolidated CRE Debt CDOs(4)	1,422,289		8.7	%
Grand total	$	16,433,238	100.0	%

____________________________________________________________

(1) Based on cost for real estate investments which includes net purchase price allocation related to net intangibles, deferred costs and other assets, if any, fair value for our investments (directly or indirectly in joint ventures) owning limited partnership interests in PE Investments and includes the deferred purchase price for PE Investment II, principal amount for our CRE debt and securities investments and amortized cost for N-Star CDO equity.

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(2) Represents our investments in RXR Realty LLC, or RXR Realty, Aerium Group, or Aerium, and Legacy Partners Commercial LLC, or Legacy Commercial.

(3) Includes N-Star CDO bonds with a principal amount of $85 million related to CRE securities CDOs that are eliminated in consolidation.

(4) Includes assets of deconsolidated CRE debt CDOs, referred to as N-Star CDOs. Based on the respective remittance report issued on date nearest to September 30, 2014. This amount excludes $617 million of aggregate N-Star CDO equity and N-Star CDO bonds included in CRE securities.

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 all our business lines including CRE equity and debt investments.

For financial information regarding our reportable segments, refer to Note 18. “Segment Reporting” in our accompanying consolidated financial statements included in Item 1. “Financial Statements.”

Real Estate

Overview

As part of our real estate strategy, we explore a variety of real estate investments. Opportunities to purchase real estate have been bolstered by attractive long-term, non-recourse, non mark-to-market financing available through CMBS and agency financing markets. Our portfolio is currently comprised of healthcare, hotel, manufactured housing communities, net lease, multifamily properties and international real estate. We also invest in other opportunistic real estate investments such as indirect interests in real estate through real estate private equity funds and acquire healthcare and hotel property owned through structures permitted by RIDEA, where we participate directly in the operational cash flow of a property.  Our real estate equity investments that operate under the RIDEA structure generate resident and hotel guest related income from short-term residential agreements and incur customary related operating expenses.

Our Portfolio

As of September 30, 2014, $13.0 billion, or 79.0%, of our assets were invested directly in real estate properties and indirectly through our PE Investments and our corporate interests.

The following table presents our direct investments in real estate properties as of September 30, 2014, adjusted for the Griffin-American merger and acquisitions and agreements to purchase through November 7, 2014 (refer to Recent Developments) (dollars in thousands):

Type	Number	Amount(1)		%
Healthcare(2)
Medical office building	147	$	1,949,535	16.7	%
Assisted living facilities-Net Lease	127	1,300,856		11.1	%
Skilled nursing facilities	108	1,300,143		11.1	%
Assisted living facilities-RIDEA	67	966,739		8.3	%
Hospital	14	258,849		2.2	%
Subtotal	463	5,776,122		49.4	%
Hotel	155	3,043,216		26.0	%
Manufactured housing communities	123	1,554,917		13.3	%
Net lease
Industrial	35	410,376		3.5	%
Office(3)	19	310,644		2.7	%
Retail	10	64,503		0.6	%
Subtotal	64	785,523		6.8	%
Multifamily(4)	12	371,785		3.2	%
International
UK Office	1	100,245		0.9	%
Other	4	56,950		0.4	%
Total	822	$	11,688,758	100.0	%

___________________________________________________________

(1) Represents cost, which includes net purchase price allocation of $237 million related to net intangibles and other assets and liabilities. Additionally, includes $72 million of manufactured homes, $45 million of notes receivable and $187 million of escrows and other assets.

(2) Includes our pending $4.1 billion merger with Griffin-American.

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(3) Includes our interest in a joint venture that owns a net lease property of $27 million.

(4) The multifamily portfolio represents the entire property in joint ventures that are consolidated, which includes an aggregate $37 million of joint venture partner interests.

Healthcare Properties

As of September 30, 2014, $5.8 billion, or 35.1%, of our assets were invested in healthcare properties, including the pending merger with Griffin-American. As of September 30, 2014, the healthcare portfolio, including the Griffin-American assets, was 96% leased to third-party operators, with a weighted average lease coverage of 1.6x and a 8.5 year weighted average remaining lease term.

The following table summarizes our healthcare portfolio, including the pending merger with Griffin-American, as of September 30, 2014 (dollars in millions):

		Purchase			Properties								Ownership
Acquisition Date	Name	Price			ALF	MOB	SNF	Other	Primary Locations	Equity			Interest
May 2014	Formation Portfolio	$	1,061	(1)	44	—	36	—	FL, IL, OR, TX	$	358		86	%
Expected in the fourth quarter 2014(2)	Griffin-American	4,136			91	146	45	14	Various	1,100			92	%
Various	Existing portfolio (3)	579			59	1	27	—	Various	142		(4)	100	%
	Total	$	5,776		194	147	108	14		$	1,600

_______________________________________                                

(1) Includes all transaction costs, escrows and reserves.

(2) In August 2014, we announced that we entered into a definitive agreement to acquire Griffin-American. Additionally, in October 2014, NorthStar Healthcare entered into a purchase and sale agreement with us pursuant to which it agreed to acquire an 8.3% equity interest in the Griffin-American healthcare real estate portfolio in connection with the completion of the merger (refer to Recent Developments).

(3) Represents healthcare facilities acquired prior to 2014.

(4) Represents current equity based on cost less borrowings as of September 30, 2014.

The following presents our healthcare portfolio’s diversity across property type and type of net cash flow:

	Total Portfolio		Healthcare by Property Type
Number of facilities	463
Number of units/beds(1)	24,170
Weighted average occupancy	96	%
Weighted average lease coverage	1.6x
Weighted average lease term	8.5 years

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(1) Represents number of units for ALF/ILF property types and number of beds for SNF property types.

Hotel Portfolio

As of September 30, 2014, $3.0 billion, or 18.5%, of our assets were invested in hotel properties, including the expected acquisition of the Inland Portfolio (refer to Recent Developments). Our hotel portfolio is a geographically diverse portfolio primarily comprised of extended stay hotels and premium branded select service hotels located primarily in major metropolitan markets with the majority affiliated with top hotel brands.

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The following table summarizes our hotel portfolio, including the pending acquisition of the Inland Portfolio (refer to Recent Developments), September 30, 2014 (dollars in millions):

Acquisition Date	Description	Name	Purchase Price (1)		Properties	Rooms	Primary Location(s)	Equity		Ownership Interest		Primary Brand(s)
June 2014	Upscale extended stay and premium branded select service	Innkeepers Portfolio	$	1,058	47	6,094	CA, NJ, TX	$	193	90	%	Marriott
August 2014	Premium branded select service	K Partners Portfolio	266		20	1,922	CA, TX	52		98	%	Marriott and Hilton
September 2014	Premium branded select service	Courtyard Portfolio	683		40	5,833	CA, VA, TX, GA, FL	267		100	%	Marriott
Expected in the fourth quarter 2014	Upscale extended stay and premium branded select service	Inland Portfolio	1,071		48	6,401	TX, NJ, NC, NY, VA	245		90	%	Marriott and Hilton
Total			$	3,078	155	20,250		$	757

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(1) Includes all transaction costs, escrows and reserves.

The following presents a summary of our hotel portfolio by brand and diversity across geographic location based on number of rooms:

Hotel by Brand	Hotel by Geographic Region

Manufactured Housing Communities

Our manufactured housing portfolio consists of communities that lease pad rental sites for placement of factory built homes located throughout the United States. In addition, the portfolio includes manufactured homes for sale or rented and receivables related to the financing on homes sold to residents. As of September 30, 2014, $1.6 billion, or 9.5%, of our assets were invested in manufactured housing communities. Our aggregate portfolio includes 123 communities in 12 states totaling approximately 29,000 pad rental sites. The aggregate portfolio also consists of approximately 3,500 homes on the sites with the remaining homes owned by the respective tenants. As of September 30, 2014, our manufactured housing communities were 87% 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 a summary of our manufactured housing communities portfolio and diversity across geographic location based on net cash flow:

	Total Portfolio		Manufactured Housing Communities by Geographic Location
Number of communities	123
Number of pad rental sites	29,041
Net cash flow related to:
Pad rental sites	89.0	%
Other	11.0	%
Weighted average occupancy	87	%

PE Investments

Our PE Investments own limited partnership interests in real estate private equity funds managed by institutional-quality sponsors, which we refer to as fund interests. As of September 30, 2014, $1.1 billion, or 6.9%, of our assets were invested in PE Investments through unconsolidated ventures or direct 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.

The following table presents our indirect investment in real estate through PE Investments as of September 30, 2014 (dollars in thousands):

	Portfolios	Amount(1)		%
PE Investment I	1	$	204,267	18.0	%
PE Investment II	1	530,237		46.6	%
Other PE Investments	7	402,832		35.4	%
Total	9	$	1,137,336	100.0	%

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(1) Represents fair value and includes the deferred purchase price for PE Investment II.

Summary of PE Investments

The following tables present a summary of our PE Investments (dollars in millions):

PE Investment (1)	Number of Funds		Number of General Partners		Initial NAV		Closing NAV as a Percentage of Cost (2)		Reported NAV Growth (3)		Underlying Assets, at Cost		Implied Leverage (4)	Expected Future Contributions (5)
PE Investment I	49		26		$	802.4	66.2	%	22.5	%	$	22,500	50.4%	$	9
PE Investment II	24		15		910.0		73.5	%	15.0	%	24,200		32.5%	7
Other PE Investments:
PE Investment III	8		4		80.3		119.0	%	6.8	%	3,100		49.5%	1
PE Investment IV	1		1		8.8		113.4	%	8.1	%	600		44.9%	—
PE Investment V	3		1		23.0		57.8	%	18.7	%	1,000		58.6%	—
PE Investment VI	20		12		98.3		77.5	%	N/A		9,300		43.0%	3
PE Investment VII	18		15		71.3		83.4	%	7.9	%	1,400		36.6%	2
PE Investment IX	11		7		232.8		136.2	%	8.2	%	17,300		35.2%	4
Total	134	(6)	81	(6)	$	2,226.9					$	79,400		$	26

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(1) Based on financial data reported by the underlying funds as of June 30, 2014, except as otherwise noted.

(2) Net cost represents total funded capital less distributions received. For PE Investment I, excludes any distributions in excess of contributions for funds, which represented 4% of reported NAV.

(3) The reported NAV growth is measured from the agreed upon reported NAV at date of acquisition, or Initial NAV. The reported NAV growth for PE Investments owned for less than twelve months is annualized based on actual reported income from the Initial NAV through June 30, 2014.

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

(5) Represents the estimated amount of expected future contributions to funds as of September 30, 2014.

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(6) Includes 12 funds and seven general partners held across multiple PE Investments.

	Our Proportionate Share of PE Investments
	Income		Return of Capital		Total Distributions (2)		Contributions		Net
PE Investment I
Quarter ended September 30, 2014	$	13.9	$	4.1	$	18.0	$	0.9	$	17.1
February 15, 2013 to September 30, 2014 (1)	$	95.3	$	99.6	$	194.9	$	21.8	$	173.1
PE Investment II
Quarter ended September 30, 2014	$	13.9	$	26.8	$	40.7	$	—	$	40.7
July 3, 2013 to September 30, 2014 (1)	$	69.2	$	125.9	$	195.1	$	16.5	$	178.6
Other PE Investments
Quarter ended September 30, 2014	$	5.7	$	18.3	$	24.0	$	0.4	$	23.6
Various to September 30, 2014 (1)	$	8.9	$	34.2	$	43.1	$	0.9	$	42.2

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(1) Represents activity from the respective initial closing date through September 30, 2014.

(2) Net of a $12 million reserve for taxes in the aggregate for all PE Investments.

The following presents the underlying fund interests in our PE Investments by investment type and geographic location based on NAV as of June 30, 2014:

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

____________________________________________________________

(1) Based on individual fund financial statements.

Unconsolidated PE Investments

PE Investment I

On February 15, 2013, we completed the initial closing of our first joint venture that owns limited partnership interests in real estate funds, or PE Investment I. We, together with NorthStar Income, entered into an agreement to acquire limited partnership interests in real estate private equity funds with an aggregate reported net asset value, or NAV, of approximately $802 million as of June 30, 2012. 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%.

PE Investment II

On July 3, 2013, we completed the initial closing of our second joint venture that owns limited partnership interests in real estate private equity funds, or PE Investment II. We, NorthStar Income and the funds managed by Goldman Sachs Asset Management, or the Vintage Funds, entered into an agreement to acquire limited partnership interests in real estate private equity funds with an aggregate reported NAV of approximately $910 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.

PE Investment II paid $505 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 $411 million, or 45% of the September 30, 2012 NAV, or the Deferred Amount, by the last day of the fiscal quarter after the four year anniversary of the applicable closing date of each fund interest. We funded all of our proportionate share of the Initial Amount at the initial closing. For the nine months ended September 30, 2014, PE

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Investment II paid $2.4 million of the Deferred Amount, of which our share was $1.7 million. As of September 30, 2014, our share of the Deferred Amount was $286 million.

Net Lease Properties

Our real estate that is net leased to corporate tenants is primarily comprised of industrial, office and retail properties. These net lease properties are typically leased to a single tenant who agrees to pay basic rent, plus all taxes, insurance, capital and operating expenses arising from the use of the leased property generally leaving us, as owner, with minimal ongoing operational or expense obligations. We may also invest in properties that are leased to tenants for which we are responsible for some of the operating expenses and capital costs. At the end of the lease term, the tenant typically has a right to renew the lease at market rates or to vacate the property with no further ongoing obligation. In August 2014, we purchased an investment in an approximately $406 million, 6.3 million square foot industrial portfolio that is 100% net leased with a remaining weighted average lease term of over 12 years. This portfolio consists of 39 properties across 17 states with the largest concentration of net operating income from properties in California.  In connection with this investment, we have a 40% equity interest and we are entitled to 50% of the cash flow.

As of September 30, 2014, $786 million, or 4.8%, of our assets were invested in 64 net lease properties, including one property owned through an unconsolidated joint venture. As of September 30, 2014, our net lease properties total 8.8 million square feet and were 99% leased with a 10.0 year weighted average remaining lease term.

The following presents our net lease portfolio’s diversity across property type and geographic location:

Net Lease by Property Type(1)	Net Lease by Geographic Location(2)

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(1) Based on net cash flow.

(2) Based on number of properties.

Multifamily Properties

Our multifamily portfolio primarily focuses on properties located in suburban markets that we believe are best suited to capture the formation of new households. As of September 30, 2014, $372 million, or 2.3%, of our assets were invested in multifamily properties, including one property owned through an unconsolidated joint venture. As of September 30, 2014, our portfolio includes 12 properties in six states totaling approximately 4,500 rental units that were 94% occupied.

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The following presents our multifamily portfolio’s diversity across geographic location based on net cash flow:

Multifamily by Geographic Location

International

We are expanding outside the United States and seek to invest in various types of commercial real estate assets. In September 2014, we completed our first international acquisition of a 224,000 square foot multi-tenant office complex located in the South East United Kingdom submarket of Woking, or UK Property. UK Property, which is located in close proximity to London, is 100% leased to 17 tenants with a weighted average lease term of 8.0 years.  Approximately 70% of contractual lease income is secured by government and other high quality tenants.

Other

In September and October 2014, we, through a joint venture with Legacy Commercial, acquired three office buildings and one laboratory building located in Boulder and Denver, Colorado and five office properties located in Austin, Texas.

Corporate Investments

RXR Realty

In December 2013, we entered into a strategic transaction with RXR Realty, a leading real estate owner, developer and investment management company focused on high-quality real estate investments in the New York Tri-State area. The investment includes an approximate 30% equity interest in RXR Realty.

Aerium

In June 2014, we acquired a 15% interest in Aerium, a pan-European real estate investment manager specializing in commercial real estate properties and is headquartered in Luxembourg with additional offices in London, Paris, Istanbul, Geneva, Düsseldorf and Bahrain. As of September 30, 2014, Aerium managed approximately €6.1 billion of real estate assets across 12 countries and employed over 200 professionals, some of whom provide services to NSAM following the spin-off.

Legacy Commercial

In September 2014, we entered into a debt and equity investment with Legacy Commercial, comprised of a 40% interest in the common equity of certain entities affiliated with Legacy Commercial. Legacy Commercial is a leading real estate investment manager, owner and operator with a portfolio of commercial assets focused in key markets in the western United States.

Commercial Real Estate Debt

Overview

Our CRE debt investment strategy is focused on originating, acquiring and asset managing CRE debt investments, including first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests.

We emphasize direct origination of our debt investments as this allows us a greater degree of control over how they are underwritten and structured and it provides us the opportunity to syndicate senior or subordinate interests in the loan, if desired. Further, it facilitates a more direct relationship with our borrowers which helps us maintain a robust pipeline, provides an opportunity for us to earn origination and other fees and offers us an important advantage when considering any potential future modifications or restructurings.

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We believe the supply/demand imbalance driven by the large amount of maturing CRE loans creates an opportunity for us. Even with some increased supply by lenders, demand for debt capital is allowing investors with capital and real estate expertise, such as us, the opportunity to make investments with attractive risk/return profiles.

We believe we have built a franchise with a reputation for providing capital to high-quality real estate owners who want a responsive and flexible balance sheet lender. Given that we are a lender who generally retains control of the loans we originate, we are able to maintain flexibility in how we structure loans to meet the needs of our borrowers. Typical CMBS and other capital markets driven lenders generally cannot provide these types of loans due to constraints within their funding structures and because of their requirement to sell the entire loan to third parties and relinquish all control. Even when we finance our investments through securitizations, we maintain a significant capital investment in our loans and as a result, continue to maintain control and influence over such loans. Our centralized investment organization has enabled senior management to review potential new loans early in the origination process which, unlike many large institutional lenders with several levels of approval required to commit to a loan, allows us to respond quickly and provide a high degree of certainty to our borrowers that we would close a loan on terms substantially similar to those initially proposed. We believe that this level of service has enhanced our reputation in the marketplace. In addition, we believe the early and active role of senior management in our portfolio management process has been key to maximizing recoveries of invested capital from our investments and our ability to be responsive to changing market conditions.

Our Portfolio

As of September 30, 2014, $1.1 billion, or 6.9%, of assets were invested in CRE debt, excluding CRE debt financed in consolidated N-Star CDOs and other CRE debt accounted for as joint ventures. This portfolio consists of 38 loans with an average investment size of $30 million and weighted average extended maturity of 4.6 years. We directly originated approximately 95% of our current portfolio of CRE debt investments. The following table presents a summary of our CRE debt investments as of September 30, 2014 (dollars in thousands):

								Weighted Average(4)						Floating Rate as % of Principal Amount(4)
	Number(2)	Principal Amount		Carrying Value		Allocation by Investment Type(3)		Fixed Rate		Spread Over LIBOR		Yield
Asset Type:
First mortgage loans	15	$	460,175	$	430,072	40.3	%	13.21	%	7.25	%	10.77	%	78.9	%
Mezzanine loans	7	113,386		109,876		10.0	%	13.44	%	13.84	%	14.21	%	74.4	%
Subordinate interests	8	204,428		202,723		18.0	%	13.08	%	12.33	%	13.13	%	40.2	%
Corporate loans(1)	8	360,343		376,050		31.7	%	12.37	%	—		12.97	%	—
Total/Weighted average	38	$	1,138,332	$	1,118,721	100.0	%	12.69	%	9.02	%	12.25	%	46.2	%

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(1) Corporate loans include one revolver of $25 million, of which $19 million is outstanding as of September 30, 2014.

(2) Excludes amounts related to joint ventures and CRE debt underlying our CDOs.

(3) Based on principal amount.

(4) Excludes three CRE debt investments with an aggregate principal amount of $13 million that were originated prior to 2008.

The following presents our $1.1 billion CRE debt portfolio’s diversity across property type and geographic location based on principal amount.

Debt Investments by Property Type	Debt Investments by Geographic Location

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CRE Securities

We historically originated or acquired CRE debt and securities investments that were predominately financed through permanent, non-recourse CDOs. We sponsored nine CDOs, three of which were primarily collateralized by CRE debt and six of which were primarily collateralized by CRE securities. In addition, we acquired the equity interests of two CRE debt focused CDOs, the CSE CDO and the 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. At the time of issuance of the N-Star CDOs, we 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, since the initial issuance of the N-Star CDOs, we 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. All of our loan CDOs were deconsolidated in 2013 and currently only N-Star securities CDOs I and IX continue to be consolidated. The remaining CDOs are past their reinvestment period and given the nature of these transactions, these CDOs are amortizing over time as the underlying assets paydown or are sold.

In March 2014 and May 2014, N-Star CDOs V and III were deconsolidated from our consolidated balance sheets. Additionally, in 2013, our CRE debt CDOs were deconsolidated from our consolidated balance sheets. N-Star CDOs I and IX continue to be consolidated. Refer to “Liquidity and Capital Resources” for further discussion of our legacy CDO business.

Our CRE securities portfolio is predominately comprised of N-Star CDO bonds and N-Star CDO equity of our deconsolidated N-Star CDOs and includes other securities, mostly conduit CMBS, meaning each asset is a pool backed by a large number of commercial real estate loans. We also invest in opportunistic CRE securities such as an investment in a “B-piece” CMBS.

The following table presents our interest in the N-Star CDOs as of September 30, 2014 (dollars in thousands):

	Number	Amount(1)
N-Star CDO bonds(2)	44	$	554,667
N-Star CDO equity (3)	5	146,754
Total	49	$	701,421

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(1) Based on principal amount for N-Star CDO bonds and amortized cost for N-Star CDO equity.

(2) Includes eight N-Star CDO bonds with a principal amount of $85 million related to our securities CDOs that are eliminated in consolidation.

(3) Represents our equity interests in the deconsolidated CRE debt N-Star CDOs.

Sources of Operating Revenues and Cash Flows

Since the spin-off of our asset management business, we primarily generate revenue from rental and other operating income from our real estate properties and net interest income on our CRE debt and securities portfolios. 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.

For financial information regarding our asset management segment prior to the spin-off, refer to Note 18. “Segment Reporting” in our accompanying consolidated financial statements included in Item 1. “Financial Statements.”

Profitability and Performance Metrics

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

• Cash available for distribution, or CAD (refer to “Non-GAAP Financial Measure—Cash Available for Distribution” 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.

• Growth in total assets is a driver of our ability to grow our income.

Outlook and Recent Trends

The Great Recession, which officially lasted from December 2007 to June 2009, began with the bursting of an $8 trillion housing bubble and had a dramatic negative impact globally on properly functioning capital markets and liquidity across all asset classes. It was not until the beginning of 2012 that liquidity and capital started to become more available in the commercial real estate markets to stronger sponsors and both Wall Street and commercial banks began to more actively provide credit to real estate borrowers accelerating the pace of investment in real estate. In late 2012, in order 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, which has facilitated keeping interest rates low.

A proxy for the liquidity in the commercial real estate market is non-agency CMBS issuance. Approximately $45 billion and $80 billion of non-agency CMBS was issued in 2012 and 2013, respectively, with industry experts currently predicting approximately $90 billion of non-agency CMBS issuance in 2014. The 2014 pace is higher than initially expected with $27 billion issued in the third quarter 2014, representing the highest quarterly issuance since the fourth quarter 2007.

Since mid-2013, there has been a focus on the pace at which the U.S. Federal Reserve and other sovereign national banks will taper their respective stimulus efforts. The U.S. economy appears to be on a relatively healthy growth path. However, there are concerns that slowdowns of major global economies could spill over into the United States. Slowing overseas growth and a move by the U.S. Federal Reserve to raise interest rates could result in increased market volatility through the end of the year.

Valuations in the commercial real estate markets are approaching, and in some cases exceeding, 2007 levels. However, global economic and political headwinds remain, that along with global market instability and the risk of maturing commercial real estate debt that may have difficulties being refinanced, may continue to cause periodic volatility in the CRE market for some time. It is currently estimated that approximately $1.4 trillion of commercial real estate debt will mature through 2017. While there is an increased supply of liquidity in the commercial real estate market, we still anticipate that certain of these loans will not be able to be refinanced, potentially inhibiting growth and contracting credit.

Virtually all commercial real estate property types were adversely impacted by the credit crisis and subsequent recession, while others such as land, condominium and other commercial property types were more severely impacted. Our commercial real estate equity, debt and securities investments could be negatively impacted by weak real estate markets and economic conditions. While the U.S. economy is stronger today, a return to weak economic conditions in the future could reduce a

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tenant’s/operator’s/resident’s/guest’s ability to make payments in accordance with the contractual terms and for companies to lease or occupy new space. To the extent that market rental and occupancy rates are reduced, property-level cash flow could be negatively affected.

Our Strategy

Our primary business objectives are to invest in commercial real estate assets that we expect will generate attractive risk-adjusted returns and in turn will generate stable cash flow for distribution to our stockholders. We currently anticipate that most of our investment activity and uses of available cash liquidity will be focused on our businesses of acquiring real estate, originating or acquiring loans, as well as pursuing opportunistic CRE investments across our businesses, both in the United States and internationally. Opportunistic investments may include investing in real estate private equity funds, strategic joint ventures 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.

Since 2013, we have taken advantage of improved market conditions with respect to capital raising. We issued $1.1 billion of capital thus far in 2014 and a total of $1.9 billion of capital in 2013. In addition, 24.7 million shares of common stock remain available under the forward sale agreement representing aggregate net proceeds of $432 million and we expect to issue $1.1 billion of common equity related to the Griffin-American acquisition. Further, we have access to other forms of corporate-level financing. In August 2014, we entered into a corporate revolving credit facility with certain commercial bank lenders, with a total commitment amount of $500 million for a three-year term. In September 2014, we entered into a corporate term facility with a commercial bank lender with respect to the establishment of term borrowings to be made to us with an aggregate principal amount of up to $500 million. The corporate term facility provides that we may enter into one or more credit agreements for term borrowings with varying amounts, borrowing dates, maturities and interest rates, from time to time until September 2015.

In addition, as of September 30, 2014, we have two credit facilities with an aggregate of $240 million to finance the origination of CRE first mortgage loans. Additionally, 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.

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.

We predominantly use investment-level financing as part of our strategy to prudently leverage our investments and deliver attractive risk-adjusted returns to our stockholders. We pursue a variety of financing arrangements such as mortgage notes and securitization financing transactions. In addition, we use corporate-level financing such as credit facilities and other term borrowings. We generally seek to limit our reliance on recourse borrowings. Borrowing levels for our CRE investments may be dependent upon the nature of the assets and the related financing that is available.

The current availability of attractive long-term, non-recourse, non mark-to-market assignable financing through the CMBS and agency financing markets has bolstered opportunities to acquire real estate. For longer duration, stable investment cash flows such as those derived from net lease assets, we tend to use fixed rate financing. For investment cash flows with greater growth potential such as hotels and healthcare under a RIDEA structure, we tend to use floating rate financing which provides prepayment flexibility and may provide a better match between underlying cash flow and potential increases in interest rates.

Our financing strategy for debt investments is to obtain match-funded borrowing at rates that provide a positive net spread. 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 $240 million. Then, in November 2012 and August 2013, we, and on behalf of NorthStar Income, entered into Securitized Financing Transactions to provide permanent, non-recourse, non-mark-to-market financing for newly-originated CRE debt investments.

With respect to corporate-level financing, in August 2014, we entered into a corporate revolving credit facility with certain commercial bank lenders, with a total commitment amount of $500 million for a three-year term. In September 2014, we entered into a corporate term facility with a commercial bank lender with respect to the establishment of term borrowings with an aggregate principal amount of up to $500 million. As of September 30, 2014, we had $62 million issued as part of Securitization 2012-1 and $101 million outstanding with $142 million available borrowing under our loan facilities. As of September 30, 2014, $50 million of financing remains available under our corporate revolving credit facility and $225 million of financing remains available under our corporate term credit facility.

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.

Portfolio Management

Subsequent to the spin-off, NSAM performs portfolio management on our behalf. The comprehensive portfolio management process generally includes day-to-day oversight by the portfolio management and servicing team, weekly management meetings and an exhaustive quarterly credit review process. These processes are designed to enable management to evaluate and proactively identify asset-specific credit issues and trends on a portfolio-wide basis. Nevertheless, we cannot be certain that such 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 during these credit reviews. The portfolio management team uses many methods to actively manage our asset base to preserve our income and capital. Credit risk management is the ability to manage our assets in a manner that preserves principal/cost and income and minimizes credit losses that could decrease income and portfolio value. For CRE debt and real estate investments, frequent re-underwriting and dialogue with borrowers/tenants/operators/partners and regular inspections of our collateral and owned properties have proven to be an effective process for identifying issues early. With respect to our healthcare properties, we consider the impact of regulatory changes on operator performance and property values. During the quarterly credit review, or more frequently as necessary, investments are put on highly-monitored status and identified for possible asset impairment/loan loss reserves, as appropriate, 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 invested capital from an investment.

The 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.”

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Critical Accounting Policies

Principles of Consolidation

Our consolidated financial statements include the accounts of NorthStar Realty Finance Corp. and its 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 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 our 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 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 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. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity 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 and certain investments in unconsolidated ventures. PE Investments are recorded as investments in private equity funds, at fair value. We record the change in fair value for our share of the projected future cash flow of such investments from one period to another in equity in earnings (losses) from unconsolidated ventures in the

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consolidated statements of operations. Any change in fair value attributed to market related assumptions is 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 may elect to apply the fair value option for certain investments due to the nature of the instrument. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.

Operating Real Estate

We follow 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, such as goodwill. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life. Ordinary repairs and maintenance are expensed as incurred. Operating real estate is carried at historical cost less accumulated depreciation. Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in our consolidated statements of operations. We evaluate 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, or 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.

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. CRE debt investments where we do not have the intent to hold the loan for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or estimated value.

Real Estate Securities

We classify our CRE securities investments as available for sale on the acquisition date, which are carried at fair value. We have historically elected to apply the fair value option for our 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.

We 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 gain (loss) from the change in fair value is recorded as a component of accumulated other comprehensive income, or OCI, in the consolidated statements of equity, to the extent impairment losses are considered temporary.

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 our consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

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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.

With respect to valuation for CRE securities, we generally obtain at least one quote from a pricing service or broker. Furthermore, 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 of CRE securities, 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 of CRE securities, 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.

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.

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Revenue Recognition

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.

We generate operating income from healthcare and hotel properties under a RIDEA structure. Revenue related to healthcare properties includes resident room and care charges and other resident charges. Revenue related to operating hotel properties primarily consists of room and food and beverage sales. Revenue is recognized when such services are provided, generally defined as the date upon which a resident or guest occupies a room or uses the healthcare property or hotel services and is recorded in resident fee income for healthcare properties and hotel related income for hotel properties in the consolidated statements of operations.

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.

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.

Credit Losses and Impairment on Investments

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.

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

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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 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.

Investments in 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: (a) the amount related to expected credit losses; and (b) 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, 2013 for a complete discussion of our critical accounting policies.

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Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting update that changes the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity or a business. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The requirements of this accounting update will be effective for us for the annual period beginning after December 15, 2014, however, early adoption is permitted but only for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issue. We early adopted this accounting pronouncement effective January 1, 2014 and the update did not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers.  When it becomes effective on January 1, 2017, the accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP.  We are in the process of evaluating the impact, if any, of the update on our consolidated financial statements and related disclosures.

Results of Operations

Comparison of the Three Months Ended September 30, 2014 to September 30, 2013 (Dollars in Thousands):

The consolidated financial statements for the three months ended September 30, 2014 represent our results of operations subsequent to the spin-off of our historical asset management business of managing our Sponsored Companies, owning NorthStar Securities and operating our special servicing business, herein referred to as our historical asset management business. In connection with the spin-off, most of our employees at the time of the spin-off became employees of NSAM. Executive officers, employees engaged in our existing loan origination business at the time of the spin-off and certain other employees became co-employees of us and NSAM. Therefore, subsequent to June 30, 2014, NSAM generally incurs substantially all employee-related cash costs.

Periods prior to June 30, 2014 present a carve-out of our historical financial information including revenues and expenses allocated related to our historical asset management business. Expenses also included an allocation of indirect expenses, including salaries, equity-based compensation and other general and administrative expenses (primarily occupancy and other cost) based on an estimate had our historical asset management business been run as an independent entity.  This allocation method was principally based on relative headcount and management’s knowledge of our operations. 

As a result, results of operations for the three months ended September 30, 2014 may not be comparative to our results of operations reported for the prior periods presented. The following table represents our results of operations for the three months ended September 30, 2014 and 2013 (dollars in thousands):

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	Three Months Ended September 30,						Increase (Decrease)
	2014			2013			Amount			%
Property and other revenues
Rental and escalation income	$	86,915		$	71,949		$	14,966		20.8	%
Hotel related income	79,194			—			79,194			NA
Resident fee income	25,027			—			25,027			NA
Other revenue	3,189			1,346			1,843			136.9	%
Total property and other revenues	194,325			73,295			121,030			165.1	%
Net interest income
Interest income	80,915			75,141			5,774			7.7	%
Interest expense on debt and securities	2,979			10,132			(7,153		)	(70.6	)%
Net interest income on debt and securities	77,936			65,009			12,927			19.9	%
Expenses
Management fee, related party	39,363			—			39,363			NA
Other interest expense	59,923			41,270			18,653			45.2	%
Real estate properties—operating expenses	95,061			23,943			71,118			297.0	%
Other expenses	520			1,085			(565		)	(52.1	)%
Transaction costs	44,410			298			44,112			14,802.7	%
Provision for (reversal of) loan losses, net	—			(11,122		)	11,122			(100.0	)%
General and administrative expenses
Salaries and related expense	3,160			10,286			(7,126		)	(69.3	)%
Equity-based compensation expense	8,478			2,414			6,064			251.2	%
Other general and administrative expenses	2,821			3,881			(1,060		)	(27.3	)%
Total general and administrative expenses	14,459			16,581			(2,122		)	(12.8	)%
Depreciation and amortization	51,775			33,577			18,198			54.2	%
Total expenses	305,511			105,632			199,879			189.2	%
Income (loss) from operations	(33,250		)	32,672			(65,922		)	(201.8	)%
Equity in earnings (losses) of unconsolidated ventures	38,234			31,013			7,221			23.3	%
Unrealized gain (loss) on investments and other	(15,377		)	18,791			(34,168		)	(181.8	)%
Realized gain (loss) on investments and other	(15,938		)	28,341			(44,279		)	(156.2	)%
Gain (loss) from deconsolidation of N-Star CDOs	—			(254,206		)	254,206			(100.0	)%
Income (loss) from continuing operations	(26,331		)	(143,389		)	117,058			(81.6	)%
Income (loss) from discontinued operations	(278		)	1,640			(1,918		)	(117.0	)%
Net income (loss)	$	(26,609	)	$	(141,749	)	$	115,140		(81.2	)%

Property and Other Revenues

Rental and Escalation Income

Rental and escalation income increased $15.0 million, primarily attributable to new acquisitions including manufactured housing, healthcare and industrial investments in our real estate segment ($31.2 million), offset by lower income on our net lease and healthcare properties ($4.4 million) in our real estate segment and lower income related to REOs that were deconsolidated in the N-Star CDO CRE debt segment ($11.9 million).

Hotel Related Income

We generated hotel related income of $79.2 million in 2014 related to new hotel acquisitions, predominantly from the Innkeepers Portfolio and K Partners Portfolio. We did not generate any hotel related income in 2013.

Resident Fee Income

We generated resident fee income of $25.0 million in 2014 related to the RIDEA portion of the Formation Portfolio. We did not generate any resident fee income in 2013.

Other Revenue

Other revenue increased $1.8 million primarily due to increases in various fees such as administrative fees from our deconsolidated N-Star CDOs which were eliminated in consolidation in 2013 and other fees recorded in our real estate segment.

Net Interest Income

Net interest income is generated on our interest-earning assets less 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

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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.

The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the three months ended September 30, 2014 and 2013. Amounts presented have been impacted by the timing of new investments and repayments during the periods (dollars in thousands):

	Three Months Ended September 30,
	2014							2013
	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	$	1,190,289	$	44,591	14.98	%		$	1,539,745	$	36,257	9.42	%
CRE securities investments	1,023,821		36,324		14.19	%		1,445,587		38,884		10.76	%
	$	2,214,110	80,915		14.62	%		$	2,985,332	75,141		10.07	%
Interest-bearing liabilities:(1)
CDO bonds payable	$	314,048	1,340		1.71	%	(5)	$	2,122,562	7,947		3.64	%	(5)
Securitization bonds payable	71,952		604		3.36	%		97,943		763		3.12	%
Credit facilities	461,878		1,035		0.90	%		81,357		1,278		6.28	%
Secured term loan	—		—		—			7,298		144		7.89	%
	$	847,878	2,979		1.41	%		$	2,309,160	10,132		3.73	%
Net interest income			$	77,936						$	65,009

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(1) Excludes $24.6 million and $116.9 million average carrying value of REO and investments in unconsolidated ventures, net of related financing as of September 30, 2014 and 2013, 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 and interest income earned on notes receivable from sales of manufactured homes.

(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 $3.1 million and $11.4 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, 2014 and 2013, respectively.

Interest income increased $5.8 million, primarily attributable to increased income related to CRE debt and securities investments ($26.2 million) and investments in deconsolidated N-Star CDO bonds and equity notes ($9.7 million), offset by decreased interest income on CRE debt and securities investments in the N-Star CDOs segment ($30.2 million).

Interest expense decreased $7.2 million, primarily attributable to the deconsolidation of N-Star CDO bonds payable ($6.3 million) and reduced interest on other borrowings in the CRE debt segment ($0.9 million).

Expenses

Management Fee, Related Party

For the three months ended September 30, 2014, we recorded $38.0 million related to the base management fee and $1.3 million related to the incentive management fee to NSAM. The management contract with NSAM commenced on July 1, 2014, and as such, there were no management fees incurred for the three months ended September 30, 2013.

Other Interest Expense

Other interest expense increased $18.7 million, primarily attributable to increased interest expense related to new mortgage notes payable associated with new property acquisitions in our real estate segment ($25.7 million) and interest expense on the new senior notes at the corporate level ($3.6 million), offset by lower interest expense from mortgage notes on REO that were deconsolidated in our N-Star CDO CRE debt segment ($3.3 million) and lower interest expense at the corporate level primarily due to conversions of exchangeable senior notes ($7.4 million).

Real Estate Properties—Operating Expenses

Real estate properties operating expenses increased $71.1 million, primarily attributable to new acquisitions including manufactured housing, healthcare, hotel and industrial investments in our real estate segment ($76.9 million), offset by lower expenses related to REO that were deconsolidated in our N-Star CDO CRE debt segment ($5.8 million).

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Other Expenses

Other expenses decreased $0.6 million related to decreased expense from N-Star debt CDOs that were deconsolidated in 2013 and were 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 and restructuring charges related to existing investments. For the three months ended September 30, 2014, transaction costs of $44.4 million primarily related to real estate acquisitions and restructurings ($41.4 million), which includes estimated transaction costs related to the Inland Portfolio (refer to Recent Developments) and our acquisition of certain PE Investments ($3.0 million), both in our real estate segment. For the three months ended September 30, 2013, transaction costs of $0.3 million related to our manufactured housing and PE Investments, both in our real estate segment.

Provision for Loan Losses, Net

For the three months ended September 30, 2013, reversal of provision for loan loss of $11.1 million primarily related to a loan that paid off at par during the fourth quarter. There was no provision for loan loss for the three months ended September 30, 2014.

General and Administrative Expenses

General and administrative expenses are principally incurred at the corporate level.

General and administrative expenses decreased $2.1 million primarily attributable to the following:

Salaries and related expense decreased $7.1 million primarily due to the spin-off of our historical asset management business which resulted in most of our existing employees at the time of the spin-off becoming employees of NSAM.

Equity-based compensation expense for the three months ended September 30, 2014 represents our expense following the spin-off. Equity-based compensation expense for the three months ended September 30, 2013 reported by us excludes an allocation to NSAM only related to our historical asset management business had it been run as an independent entity reported in discontinued operations. The following table presents equity-based compensation expense for the three months ended September 30, 2014 and 2013 (dollars in thousands):

	Three Months Ended September 30,
	2014		2013
NorthStar Realty	$	8,478	$	2,414
Allocation to NSAM (1)	—		1,006
Total	$	8,478	$	3,420

___________________________________________________________

(1)Allocation recorded in discontinued operations.

Other general and administrative expenses decreased $1.1 million due to the spin-off of our historical asset management business.

Depreciation and Amortization

Depreciation and amortization expense increased $18.2 million, primarily related to new acquisitions in our real estate segment ($23.8 million), offset by lower expenses related to REO that were deconsolidated in our N-Star CDO CRE debt segment ($4.8 million) and furniture, fixtures and equipment that were transferred to NSAM in connection with the spin-off ($0.7 million).

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) of unconsolidated ventures increased $7.2 million, primarily attributable to increased earnings from PE Investments ($3.3 million) and other indirect interests in real estate ($4.8 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. The following table presents a summary of unrealized gain (loss) on investments and other for the three months ended September 30, 2014 and 2013 (dollars in thousands):

	Three Months Ended September 30, 2014
										N-Star CDOs
	Real Estate			CRE Debt			CRE Securities			CRE Securities			Corporate		Total
Change in fair value of:
Real estate securities, available for sale	$	—		$	—		$	604		$	(7,271	)	$	—	$	(6,667	)
CDO bonds payable, at fair value	—			—			—			(8,397		)	—		(8,397		)
Junior subordinated notes, at fair value	—			—			—			—			2,193		2,193
Derivatives, at fair value	187			—			—			3,336			—		3,523
Foreign currency remeasurement(1)	(740		)	(2,187		)	—			—			—		(2,927		)
Net cash payments on interest rate swaps	—			—			(92		)	(3,010		)	—		(3,102		)
Total unrealized gain (loss) on investments and other	$	(553	)	$	(2,187	)	$	512		$	(15,342	)	$	2,193	$	(15,377	)

__________________________________________________________

(1) Primarily represents foreign currency remeasurement on an investment denominated in Euros.

			Three Months Ended September 30, 2013
					N-Star CDOs
	CRE Debt		CRE Securities		CRE Debt			CRE Securities			Corporate		Total
Change in fair value of:
Real estate securities, available for sale	$	—	$	48	$	(21,251	)	$	(14,721	)	$	—	$	(35,924	)
CDO bonds payable, at fair value	—		—		39,947			4,123			—		44,070
Junior subordinated notes, at fair value	—		—		—			—			28,338		28,338
Derivatives, at fair value	—		—		(5,564		)	(2,976		)	—		(8,540		)
Foreign currency remeasurement(1)	2,226		—		—			—			—		2,226
Net cash payments on interest rate swaps	—		—		(2,947		)	(8,432		)	—		(11,379		)
Total unrealized gain (loss) on investments and other	$	2,226	$	48	$	10,185		$	(22,006	)	$	28,338	$	18,791

__________________________________________________________

(1) Primarily represents foreign currency remeasurement on an investment denominated in Euros.

Realized Gain (Loss) on Investments and Other

Realized losses of $15.9 million for the three months ended September 30, 2014 primarily related to losses on exchangeable senior notes ($21.1 million) in our corporate segment, offset by gains on the sale of manufactured homes ($1.1 million) in our real estate segment and net gains from the sale of CRE securities, including N-Star CDO bonds ($4.1 million).

Realized gains of $28.3 million for the three months ended September 30, 2013 primarily related to gains from an investment in the CRE securities segment ($33.1 million) and the sale of timeshare units ($0.3 million) in our real estate segment, offset by net losses from the sale of CRE securities ($4.9 million).

Gain (Loss) from Deconsolidation of N-Star CDOs

The loss of $254.2 million for the three months ended September 30, 2013 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

There was no income (loss) from discontinued operations related to NSAM for three months ended September 30, 2014. The three months ended September 30, 2013 represents an allocation of revenues and expenses to NSAM only related to our historical asset management business had it been run as an independent entity.

Income (loss) from operating real estate in discontinued operations represents an immaterial amount for the three months ended September 30, 2014 and 2013 and primarily represents the operations of five healthcare properties classified as held for sale or sold in our real estate segment.

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Comparison of the Nine Months Ended September 30, 2014 to September 30, 2013 (Dollars in Thousands):

The nine months ended September 30, 2014 includes: (i) our results of operations for the three months ended September 30, 2014 which represents the activity following the spin-off of our historical asset management business on June 30, 2014; and (ii) our results of operations for the six months ended June 30, 2014 which represents a carve-out of revenues and expenses attributable to NSAM recorded in discontinued operations. Our historical financial information for the nine months ended September 30, 2013 was prepared on the same basis as the six months ended June 30, 2014. The following table represents our results of operations for the nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Nine Months Ended September 30,						Increase (Decrease)
	2014			2013			Amount			%
Property and other revenues
Rental and escalation income	$	234,116		$	174,138		$	59,978		34.4	%
Hotel related income	101,720			—			101,720			NA
Resident fee income	40,087			—			40,087			NA
Other revenue	8,668			2,652			6,016			226.8	%
Total property and other revenues	384,591			176,790			207,801			117.5	%
Net interest income
Interest income	235,461			218,624			16,837			7.7	%
Interest expense on debt and securities	9,368			33,117			(23,749		)	(71.7	)%
Net interest income on debt and securities	226,093			185,507			40,586			21.9	%
Expenses
Management fee, related party	39,363			—			39,363			NA
Other interest expense	143,836			101,394			42,442			41.9	%
Real estate properties—operating expenses	168,690			50,677			118,013			232.9	%
Other expenses	1,450			3,744			(2,294		)	(61.3	)%
Transaction costs	84,170			10,801			73,369			679.3	%
Provision for (reversal of) loan losses, net	2,719			(8,786		)	11,505			(130.9	)%
General and administrative expenses
Salaries and related expense	23,880			23,180			700			3.0	%
Equity-based compensation expense	20,262			9,102			11,160			122.6	%
Other general and administrative expenses	10,923			11,744			(821		)	(7.0	)%
Total general and administrative expenses	55,065			44,026			11,039			25.1	%
Depreciation and amortization	112,496			69,808			42,688			61.2	%
Total expenses	607,789			271,664			336,125			123.7	%
Income (loss) from operations	2,895			90,633			(87,738		)	(96.8	)%
Equity in earnings (losses) of unconsolidated ventures	101,406			54,445			46,961			86.3	%
Unrealized gain (loss) on investments and other	(214,322		)	(27,187		)	(187,135		)	688.3	%
Realized gain (loss) on investments and other	(61,770		)	46,285			(108,055		)	(233.5	)%
Gain (loss) from deconsolidation of N-Star CDOs	(31,423		)	(254,206		)	222,783			(87.6	)%
Income (loss) from continuing operations	(203,214		)	(90,030		)	(113,184		)	125.7	%
Income (loss) from discontinued operations	(6,989		)	(2,569		)	(4,420		)	172.1	%
Net income (loss)	$	(210,203	)	$	(92,599	)	$	(117,604	)	127.0	%

Property and Other Revenues

Rental and Escalation Income

Rental and escalation income increased $60.0 million, primarily attributable to new acquisitions including manufactured housing, healthcare and industrial investments in our real estate segment ($93.8 million), offset by lower income on our net lease and healthcare properties ($1.3 million) in our real estate segment and lower income related to REOs that were deconsolidated in the N-Star CDO CRE debt segment ($32.5 million).

Hotel Related Income

We generated hotel related income of $101.7 million in 2014 related to new hotel acquisitions, predominantly from the Innkeepers Portfolio and K Partners Portfolio. We did not generate any hotel related income in 2013.

Resident Fee Income

We generated resident fee income of $40.1 million in 2014 related to the RIDEA portion of the Formation Portfolio. We did not generate any resident fee income in 2013.

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Other Revenue

Other revenue increased $6.0 million primarily due to increases in various fees such as administrative fees from our deconsolidated N-Star CDOs which were eliminated in consolidation in 2013 and other fees recorded in our real estate segment.

Net Interest Income

Net interest income is generated on our interest-earning assets less 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.

The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the nine months ended September 30, 2014 and 2013. Amounts presented have been impacted by the timing of new investments and repayments during the periods (dollars in thousands):

	Nine Months Ended September 30,
	2014							2013
	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	$	1,142,428	$	120,490	14.06	%		$	1,676,094	$	102,411	8.15	%
CRE securities investments	1,142,315		114,971		13.42	%		1,601,705		116,213		9.67	%
	$	2,284,743	235,461		13.74	%		$	3,277,799	218,624		8.89	%
Interest-bearing liabilities:(1)
CDO bonds payable	$	584,560	4,684		2.61	%	(5)	$	2,602,427	26,976		3.64	%	(5)
Securitization bonds payable	77,153		1,970		3.40	%		97,986		2,345		3.19	%
Credit facilities	263,956		2,714		1.37	%		69,827		3,368		6.43	%
Secured term loan	—		—		—			10,971		428		5.20	%
	$	925,669	9,368		2.32	%		$	2,781,211	33,117		3.70	%
Net interest income			$	226,093						$	185,507

____________________________________________________________

(1) Excludes $30.4 million and $154.5 million average carrying value of REO and investments in unconsolidated ventures, net of related financing as of September 30, 2014 and 2013, 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 and interest income earned on notes receivable from sales of manufactured homes.

(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 $13.8 million and $44.1 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, 2014 and 2013, respectively.

Interest income increased $16.8 million, primarily attributable to increased income related to CRE debt and securities investments ($80.1 million) and investments in deconsolidated N-Star CDO bonds and equity notes ($39.5 million), offset by decreased interest income on CRE debt and securities investments in the N-Star CDOs segment ($102.8 million).

Interest expense decreased $23.7 million, primarily attributable to the deconsolidation of N-Star CDO bonds payable ($21.3 million) and reduced interest on other borrowings in the CRE debt segment ($2.5 million).

Expenses

Management Fee, Related Party

For the nine months ended September 30, 2014, we recorded $38.0 million related to the base management fee and $1.3 million related to the incentive management fee to NSAM representing the three months ended September 30, 2014. The management contract with NSAM commenced on July 1, 2014, and as such, there were no management fees incurred for the six months ended June 30, 2014.

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Other Interest Expense

Other interest expense increased $42.4 million, primarily attributable to increased interest expense related to new mortgage notes payable associated with new property acquisitions in our real estate segment ($55.6 million) and interest expense on the new senior notes at the corporate level ($3.6 million), offset by lower interest expense from mortgage notes on REO that were deconsolidated in our N-Star CDO CRE debt segment ($9.4 million) and lower interest expense at the corporate level primarily due to conversions of exchangeable senior notes ($7.4 million).

Real Estate Properties—Operating Expenses

Real estate properties operating expenses increased $118.0 million, primarily attributable to new acquisitions including manufactured housing, healthcare, hotel and industrial investments in our real estate segment ($133.6 million), offset by lower expenses related to REO that were deconsolidated in our N-Star CDO CRE debt segment ($15.6 million).

Other Expenses

Other expenses decreased $2.3 million related to decreased expense from N-Star debt CDOs that were deconsolidated in 2013 and were 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 and restructuring charges related to existing investments. For the nine months ended September 30, 2014, transaction costs of $84.2 million primarily related to real estate acquisitions and restructurings ($81.1 million), which includes estimated transaction costs related to the Inland Portfolio (refer to Recent Developments) and our acquisition of certain PE Investments ($3.1 million), both in our real estate segment. For the nine months ended September 30, 2013, transaction costs of $10.8 million related to our acquisition of PE Investments and of real estate properties, all in our real estate segment.

Provision for Loan Losses, Net

Provision for loan losses, net on our CRE debt investments increased $11.5 million. For the nine months ended September 30, 2014, provision for loan losses, net of $2.7 million related to a provision for loan loss for an existing mezzanine loan and an existing first mortgage loan. 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 paid off at par during the fourth quarter.

General and Administrative Expenses

General and administrative expenses are principally incurred at the corporate level.

General and administrative expenses increased $11.0 million primarily attributable to the following:

Salaries and related expense increased $0.7 million primarily due to the spin-off of our historical asset management business which resulted in most of our existing employees at the time of the spin-off becoming employees of NSAM.

Equity-based compensation expense for the nine months ended September 30, 2014 represents our expense for the three months ended September 30, 2014 following the spin-off and an allocation to NSAM only related to our historical asset management business had it been run as an independent entity for the six months ended June 30, 2014. The nine months ended September 30, 2013 represents an allocation of expense to NSAM prepared on the same basis as the six months ended June 30, 2014. The following table presents equity-based compensation expense for the nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Nine Months Ended September 30,
	2014			2013
NorthStar Realty	$	20,262		$	9,102
Allocation to NSAM (1)	13,745			4,513
Total	$	34,007	(2)	$	13,615

____________________________________________________________

(1) Allocation recorded in discontinued operations.

(2) Represents $23.4 million related to the NorthStar Realty Equity Plans and $10.6 million related to the NSAM Stock Plan.

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Other general and administrative expenses decreased $0.8 million due to the spin-off of our historical asset management business.

Depreciation and Amortization

Depreciation and amortization expense increased $42.7 million, primarily related to new acquisitions in our real estate segment ($57.8 million), offset by lower expenses related to REO that were deconsolidated in our N-Star CDO CRE debt segment ($14.6 million) and furniture, fixtures and equipment that were transferred to NSAM in connection with the spin-off ($0.4 million).

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) of unconsolidated ventures increased $47.0 million, primarily attributable to increased earnings from PE Investments ($38.5 million), other indirect interests in real estate ($7.3 million) and earnings from equity investments in our CRE debt segment ($1.2 million).

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. The following table presents a summary of unrealized gain (loss) on investments and other for the nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Nine Months Ended September 30, 2014
										N-Star CDOs
	Real Estate			CRE Debt			CRE Securities			CRE Securities			Corporate			Total
Change in fair value of:
Real estate securities, available for sale	$	—		$	—		$	(6,896	)	$	10,567		$	—		$	3,671
CDO bonds payable, at fair value				—			—			(190,176		)	—			(190,176		)
Junior subordinated notes, at fair value				—			—			—			(18,050		)	(18,050		)
Derivatives, at fair value	(822		)	—						8,577			—			7,755
Foreign currency remeasurement(1)	(740		)	(2,987		)	—			—			—			(3,727		)
Net cash payments on interest rate swaps				—			—			(13,795		)	—			(13,795		)
Total unrealized gain (loss) on investments and other	$	(1,562	)	$	(2,987	)	$	(6,896	)	$	(184,827	)	$	(18,050	)	$	(214,322	)

___________________________________________________________

(1) Primarily represents foreign currency remeasurement on an investment denominated in Euros.

			Nine Months Ended September 30, 2013
						N-Star CDOs
	CRE Debt		CRE Securities			CRE Debt			CRE Securities			Corporate		Total
Change in fair value of:
Real estate securities, available for sale	$	—	$	(1,811	)	$	1,445		$	86,710		$	—	$	86,344
CDO bonds payable, at fair value	—		—			(25,829		)	(79,530		)	—		(105,359		)
Junior subordinated notes, at fair value	—		—			—			—			4,894		4,894
Derivatives, at fair value	—		—			3,291			26,370			—		29,661
Foreign currency remeasurement(1)	1,326		—			—			—			—		1,326
Net cash payments on interest rate swaps	—		—			(9,481		)	(34,572		)	—		(44,053		)
Total unrealized gain (loss) on investments and other	$	1,326	$	(1,811	)	$	(30,574	)	$	(1,022	)	$	4,894	$	(27,187	)

___________________________________________________________

(1) Primarily represents foreign currency remeasurement on an investment denominated in Euros.

Realized Gain (Loss) on Investments and Other

Realized losses of $61.8 million for the nine months ended September 30, 2014 primarily related to losses on exchangeable senior notes ($65.8 million) in our corporate segment, losses on the sale of manufactured homes ($3.4 million) in our real estate segment, offset by realized gains from the sale of timeshare units ($0.5 million) in our real estate segment and net gains from the sale of CRE securities, including N-Star CDO bonds ($7.0 million).

Realized gains of $46.3 million for the nine months ended September 30, 2013 primarily related to gains from an investment in the CRE securities segment ($33.1 million), realized gains from the sale of timeshare units ($12.0 million) and a gain from the

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liquidation of N-Star CDO II ($7.0 million), offset by losses on the repurchases of CDO bonds ($5.1 million) and net losses from the sale of CRE securities ($0.9 million).

Gain (Loss) from Deconsolidation of N-Star CDOs

The loss of $31.4 million for the nine months ended September 30, 2014 is related to the deconsolidation of N-Star CDOs III and V, 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. The loss of $254.2 million for the nine months ended September 30, 2013 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

The following table presents discontinued operations and excludes the effect of any fees that NSAM will earn in connection with the management agreement with us (dollars in thousands):

	Nine Months Ended September 30,						Increase (Decrease)
	2014			2013			Amount				%
NSAM
Total revenues	$	56,013		$	69,033		$	(13,020	)	(1)	(18.9	)%
Total expenses	62,087			71,893			(9,806		)		(13.6	)%
NSAM income (loss) in discontinued operations	(6,074		)	(2,860		)	(3,214		)		112.4	%
Income (loss) from operating real estate discontinued operations (2)	(915		)	291			(1,206		)		(414.4	)%
Total income (loss) from discontinued operations	$	(6,989	)	$	(2,569	)	$	(4,420	)		172.1	%

___________________________________________________________

(1) The decrease is because the nine months ended September 30, 2014 represents only six months of total revenues and expenses of NSAM included in discontinued operations prior to the spin-off on June 30, 2014, whereas 2013 is based on an allocation of expense for the nine months ended September 30, 2013.

(2) Income (loss) from operating real estate in discontinued operations primarily represents the operations of five healthcare properties classified as held for sale or sold in our real estate segment.

Liquidity and Capital Resources

We require capital to fund our investment activities and operating expenses. Our capital sources may include cash flow from operations, net proceeds from asset repayments and sales, borrowings under credit facilities, financings secured by our assets such as mortgage notes, securitization financing transactions, long-term senior and subordinate corporate capital such as revolving credit facilities, senior term loans, senior notes, 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, return of capital from investments 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, 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.

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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 4, 2014 was approximately $167 million. In addition, 24.7 million shares of common stock remain available under the forward sale agreement representing aggregate net proceeds of $432 million. Furthermore, as of November 4, 2014, $75 million of financing remains available under our corporate revolving credit facility and $225 million of financing remains available under our corporate term credit facility.

Securitization Financing Transactions

We, and on behalf of NorthStar Income, entered into two Securitization Financing Transactions in 2012 and 2013 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 senior loans of $79 million and subordinate 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 the senior loans at cost to Securitization 2013-1. We did not retain any interest in such senior loans and retained the subordinate interests on an unleveraged basis.

Corporate Credit Facilities

Corporate Revolving Credit Facility

In August 2014, we entered into a corporate revolving credit facility with certain commercial bank lenders, with a total commitment amount of $500 million for a three year term. As of September 30, 2014, we had $50 million of available borrowing under our revolving credit facility.

Corporate Term Facility

In September 2014, we entered into a corporate term facility with respect to the establishment of term borrowings with an aggregate principal amount of up to $500 million. As of September 30, 2014, we had $225 million of available borrowing under our corporate term facility.

Loan Facilities

With respect to investment-level financing, we maintain two separate loan facilities that provide up to an aggregate of $240 million to finance the origination of first mortgage loans and senior loan participations secured by commercial real estate. The interest rate and advance rate depend on asset type and characteristic. Maturity dates for these facilities range from March 2015 to July 2015 and both have extensions available at our option, subject to the satisfaction of certain customary conditions, with maturity dates extending through July 2018.

Our credit 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.

Senior Notes and Exchangeable Senior Notes

In March 2014, $172.5 million principal amount of the 7.50% Notes were exchanged for $481 million principal amount of senior notes due September 30, 2014, or the Senior Notes. On September 30, 2014, we repaid the Senior Notes in cash, including interest, in the amount of $488 million.

For the nine months ended September 30, 2014, holders exchanged $303 million principal amount of our 5.375% Exchangeable Senior Notes and $12 million principal amount of our 8.875% Exchangeable Senior Notes for an aggregate 23.7 million shares of our common stock.

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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 continue to receive collateral management fees as named collateral manager or collateral manager delegate in connection with certain CDOs. In connection with 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.

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 equity 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 is invested 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 are in compliance with their OC and IC tests. Currently, two CRE securities CDOs (N-Star CDOs II and VII) have been liquidated and two have been deconsolidated (N-Star CDOs III and V). One of the remaining two CRE securities CDOs (N-Star CDO I) is out of compliance with its 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 the fourth quarter 2013, N-Star CDO VII was liquidated.

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 no longer have the power to direct the activities that most significantly impact the economic performance of these CDOs and therefore these CDOs were deconsolidated effective September 30, 2013. In December 2013, we delegated the collateral management rights of the CSE CDO to a third-party collateral manager but retained administrative responsibilities. As a result, we no longer have the power to direct the activities that most significantly impact the economic performance of this CDO and therefore this CDO was deconsolidated effective December 31, 2013.

In March 2014, we determined that we no longer had the power to direct the activities that most significantly impact the economic performance of N-Star CDO V 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 V was deconsolidated in March 2014.

In May 2014, we determined that we no longer had the power to direct the activities that most significantly impact the economic performance of N-Star CDO III 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 III was deconsolidated in May 2014.

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N-Star CDOs I and IX continue to be consolidated.

The following table presents our deconsolidated N-Star CRE debt CDOs as of September 30, 2014 (dollars in thousands):

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, 2014(1)
Assets, principal amount	$	261,789	$	365,508	$	857,250	$	136,720		$	636,556			$	2,257,823
CDO bonds, principal amount(2)	147,952		295,085		671,722		122,633			568,798				1,806,190
Net assets	$	113,837	$	70,423	$	185,528	$	14,087		$	67,758			$	451,633
CDO quarterly cash distributions and coverage tests(3)
Equity notes and subordinate bonds	$	727	$	762	$	2,652	$	586		$	4,092			$	8,819
Collateral management and other fees	187		342		751		36			329				1,645
Interest coverage cushion(1)	773		2,188		3,680		102			4,526
Overcollateralization cushion(1)	57,783		35,339		110,894		9,725			89,140
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, 2014.

(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, 2014, all of which are consolidated on our balance sheets (dollars in thousands):

Issue/Acquisition Date	N-Star I Aug-03		N-Star IX Feb-07		Total
Balance sheet as of September 30, 2014(1)
Assets, principal amount	$	59,162	$	875,360	$	934,522
CDO bonds, principal amount(2)	56,622		647,919		704,541
Net assets	$	2,540	$	227,441	$	229,981
CDO quarterly cash distributions and coverage tests(3)
Equity notes and subordinate bonds	$	—	$	850	$	850
Collateral management and other fees	20		504		524
Interest coverage cushion(1)	NEG		160,303
Overcollateralization cushion(1)	NEG		2,286
At offering	8,687		24,516

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(1) Based on remittance report issued on date nearest to September 30, 2014.

(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, 2014 (dollars in thousands):

Based on original credit rating:	Principal Amount(1)
AAA	$	56,032
AA through BBB	338,188
Below investment grade	160,447
Total(2)(3)	$	554,667
Weighted average original credit rating of repurchased N-Star CDO bonds	A / A2
Weighted average purchase price of repurchased N-Star CDO bonds	31		%

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(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 $421 million were repurchased at a discount to par.

(3) $85 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 in our consolidated statements of operations under U.S. GAAP. These amounts are recorded as inter-segment revenues and expense as disclosed in Note 18. “Segment Reporting” in Item 1. “Financial Statements.” We generate cash flow in future periods through the interest paid on these bonds, as well as realize (in cash) the discount if and when the bonds repay.

Cash Flows

The following presents a summary of our consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Nine Months Ended September 30,
Cash flow provided by (used in):	2014			2013
Operating activities	$	220,753		$	178,027
Investing activities	(2,888,351		)	(1,808,445		)
Financing activities	2,222,776			1,514,894
Effect of foreign currency translation on cash and cash equivalents	(277		)	—
Net increase (decrease) in cash and cash equivalents	$	(445,099	)	$	(115,524	)

Nine Months Ended September 30, 2014 Compared to September 30, 2013

Net cash provided by operating activities was $221 million for the nine months ended September 30, 2014 compared to $178 million for the nine months ended September 30, 2013. The increase was primarily due to increased income from new investment activity.

Net cash used in investing activities was $2.9 billion for the nine months ended September 30, 2014 compared to $1.8 billion for the nine months ended September 30, 2013. The increase in net cash used was primarily due to an increase of $1.2 billion of new acquisitions of operating real estate and $277 million of net repayments from CRE securities, offset by a decrease of $438 million of investments in PE Investments.

Net cash provided by financing activities was $2.2 billion for the nine months ended September 30, 2014 compared to $1.5 billion for the nine months ended September 30, 2013. The primary cash inflows for the nine months ended September 30, 2014 was $1.0 billion of net new capital, $2.2 billion of net new borrowings and $18 million of net contributions from non-controlling interests, offset by $327 million for the payment of dividends (common and preferred), $119 million distributed to NSAM in connection with the spin-off, $481 million for the repayment of Senior Notes and $58 million for net repurchase/repayment of CDO bonds. The primary cash inflows for the nine months ended September 30, 2013 was $1.2 billion of net new capital and $948 million of net new borrowings, offset by $399 million for net repurchase/repayment of CDO bonds, $10 million for net swap activities and $161 million for the payment of dividends (common and preferred).

Contractual Obligations and Commitments

For the nine months ended September 30, 2014, we had all of the material contractual obligations and commitments referred to in our annual report on Form 10-K for the year ended December 31, 2013, except for the following material contractual obligations that we entered into during the nine months ended September 30, 2014:

• NSAM Management Agreement - We entered into a management contract with NSAM for an initial term of 20 years. Refer to Note 10. “Related Party Arrangements” in Item 1. “Financial Statements” for a further discussion.

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• Mortgage and Other Notes Payable - We obtained mortgage financing on the newly acquired Formation Portfolio, Innkeepers Portfolio, K Partners Portfolio, Industrial Portfolio and Courtyard Portfolio. Refer to Note 9. “Borrowings” in Item 1. “Financial Statements” for a further discussion.

• Corporate Facilities - We entered into a corporate revolving credit facility with certain commercial bank lenders, with a total commitment amount of $500 million for a three-year term.Additionally, weentered into a term facility with a commercial bank lender with an aggregate principal amount of up to $500 million and that provides that we may enter into one or more credit agreements for term borrowings with varying amounts, borrowing dates, maturities and interest rates, from time to time until September 2015.

• NSAM Credit Agreement - In connection with the spin-off, we entered into a revolving credit agreement with NSAM pursuant to which we will make available to NSAM, on an “as available basis,” up to $250 million of financing for a five year term at LIBOR plus 3.50%.

In connection with the spin-off, operating leases of our New York, New York, Dallas, Texas, Englewood, Colorado, Los Angeles, California and Bethesda, Maryland offices were transferred to affiliates of NSAM and no longer are obligations of ours.

Off-Balance Sheet Arrangements

As of September 30, 2014, 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 Private Equity Funds” and Note 7. “Investments in 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 Arrangements

NorthStar Asset Management Group

Management Agreement

Upon completion of the spin-off of our asset management business, we entered into a management agreement with an affiliate of NSAM for an initial term of 20 years, which will be automatically renewed for additional 20-year terms each anniversary thereafter unless earlier terminated. As asset manager, NSAM is responsible for our day-to-day operations, subject to the supervision of our board of directors. Through its global network of subsidiaries and branch offices, NSAM will perform services and activities relating to, among other things, investments and financing, portfolio management and other administrative services, such as accounting and investor relations, to us and our subsidiaries other than our CRE loan origination business. The management agreement with NSAM is for an initial term of 20 years and provides for a base management fee and incentive fee.

For the three months ended September 30, 2014, we incurred $38 million related to the base management fee. The management contract with NSAM commenced on July 1, 2014, and as such, there were no management fees incurred for the six months ended June 30, 2014. The base management fee to NSAM will increase subsequent to September 30, 2014 by 1.5% per annum of the sum of:

• cumulative net proceeds of all future common equity and preferred equity issued by us;

• equity issued by us in exchange or conversion of exchangeable senior notes based on the stock price at the date of issuance;

• any other issuances by us of common equity, preferred equity or other forms of equity, including but not limited to units in an operating partnership (excluding equity-based compensation, but including issuances related to an acquisition, investment, joint venture or partnership); and

• our cumulative CAD in excess of cumulative distributions paid on our common stock, LTIP units or other equity awards beginning the first full calendar quarter after completion of the spin-off.

Additionally, our equity interest in RXR Realty and Aerium is structured so that NSAM is entitled to the portion of distributable cash flow from each investment in excess of the $10 million minimum annual base amount.

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For the three months ended September 30, 2014, we incurred $1.3 million related to the incentive management fee. The incentive management fee is calculated and payable quarterly in arrears in cash, equal to:

• the product of: (a) 15% and (b) our CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, when such amount is in excess of $0.39 per share but less than $0.45 per share; plus

• the product of: (a) 25% and (b) our CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, when such amount is equal to or in excess of $0.45 per share;

• multiplied by our weighted average shares outstanding for the calendar quarter.

In addition, NSAM may also earn an incentive fee from our healthcare investments in connection with NSAM’s Healthcare Strategic Partnership (refer to below).

Weighted average shares represents the number of shares of our common stock, LTIP units or other equity-based awards (with some exclusions), outstanding on a daily weighted average basis. With respect to the base management fee, all issuances shall be allocated on a daily weighted average basis during the fiscal quarter of issuances.

Furthermore, if we were to spin-off any asset or business in the future, such entity would be managed by NSAM on terms substantially similar to those set forth in the management agreement between us and NSAM. The management agreement further provides that the aggregate base management fee in place immediately after the spin-off will not be less than our aggregate base management fee in place immediately prior to the spin-off.

Payment of Costs and Expenses and Expense Allocation

We are responsible for all of our direct costs and expenses and will reimburse NSAM for costs and expenses incurred by NSAM on our behalf. In addition to our costs and expenses, following the Distribution, we are obligated to reimburse NSAM for additional costs and expenses incurred by NSAM for an amount not to exceed the following: (i) 20% of the combined total of: (a) our general and administrative expenses as reported in its consolidated financial statements excluding: (1) equity-based compensation expense, (2) non-recurring items, (3) fees payable to NSAM under the terms of the management agreement and (4) any allocation of expenses from us, or NorthStar Realty G&A; and (b) NSAM’s general and administrative expenses as reported in its consolidated financial statements, excluding equity-based compensation expense and adding back any costs or expenses allocated to any managed company of NSAM, less (ii) the NorthStar Realty G&A. For the three months ended September 30, 2014, NSAM allocated $1.2 million to us.

Investment Opportunities

Under the management agreement, we agreed to make available to NSAM for the benefit of NSAM and its managed companies, including us, all investment opportunities that we source. NSAM agreed to fairly allocate such opportunities among NSAM’s managed companies, including us, and NSAM in accordance with an investment allocation policy. Pursuant to the management agreement, we will be entitled to fair and reasonable compensation for our services in connection with any loan origination opportunities sourced by us, which may include first mortgage loans, subordinate mortgage interests, mezzanine loans and preferred equity interests, in each case relating to commercial real estate.

NSAM provides services with regard to such areas as payroll, human resources and employee benefits, financial systems management, treasury and cash management, accounts payable services, telecommunications services, information technology services, property management services, legal and accounting services and various other corporate services to us as it relates to our loan origination business for CRE debt.

Credit Agreement

In connection with the Distribution, we entered into a revolving credit agreement with NSAM pursuant to which we will make available to NSAM, on an “as available basis,” up to $250 million of financing for a five year term at LIBOR plus 3.50%. The revolving credit facility is unsecured. NSAM expects to use the proceeds for general corporate purposes, including potential future acquisitions.  In addition, NSAM may use the proceeds to acquire assets on behalf of its managed companies, including us, that it intends to allocate to such managed company but for which such managed company may not then have immediately available funds. The terms of the revolving credit facility contain various representations, warranties, covenants and conditions, including the condition that our obligation to advance proceeds to NSAM is dependent upon us and its affiliates having at least $100 million of either unrestricted cash and cash equivalents or amounts available under committed lines of credit, after taking into account the amount NSAM seeks to draw under the facility. As of September 30, 2014, we have not funded any amounts to NSAM in connection with this agreement.

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Healthcare Strategic Joint Venture

In January 2014, NSAM entered into a long-term strategic partnership with James F. Flaherty III, former Chief Executive Officer of HCP, Inc., focused on expanding our healthcare business into a preeminent healthcare platform, or the Healthcare Strategic Partnership. In connection with the partnership, Mr. Flaherty oversees and seeks to grow both our healthcare real estate portfolio and the portfolio of NorthStar Healthcare. In connection with entering into the partnership, we granted Mr. Flaherty certain RSUs (refer to Note 12. “Equity-Based Compensation” in Item 1. “Financial Statements.” The Healthcare Strategic Partnership is entitled to incentive fees ranging from 20% to 25% above certain hurdles for new and existing healthcare real estate investments held by us. For the three and nine months ended September 30, 2014, we have not incurred any incentive fees related to Healthcare Strategic Partnership.

NSAM Sponsored Companies

Prior to the spin-off of our asset management business, we had agreements with each of the NSAM Sponsored Companies to manage their day-to-day operations, including identifying, originating and acquiring investments on their behalf and earning fees for our services. For the nine months ended September 30, 2014, we earned $22 million of fees related to these agreements, which are recorded in discontinued operations in the consolidated statements of operations. In addition, we were entitled to certain expense allocations for costs paid on behalf of the NSAM Sponsored Companies. For the nine months ended September 30, 2014, we received $14 million of reimbursement from the NSAM Sponsored Companies.

We committed to purchase up to $10.0 million in shares of each of NSAM’s Sponsored Companies’ common stock during the two year period from when each offering was declared effective through the end of their respective offering period, in the event that NSAM Sponsored Companies’ distributions to its stockholders, on a quarterly basis, exceeds its modified funds from operations (as defined in accordance with the current practice guidelines issued by the Investment Program Association). In addition, pursuant to the management agreement with NSAM, we committed up to $10 million to invest as distribution support consistent with past practice in each future public non-traded NSAM Sponsored Company, up to a total of five new companies per year. We have the following ownership interest in the NSAM Sponsored Companies:

• NorthStar Income - We purchased an aggregate 645,847 shares (including 507,980 shares related to the distribution support agreement) of NorthStar Income’s common stock for $6 million from inception of NorthStar Income through the expiration of this commitment on July 19, 2013.

• NorthStar Healthcare - We purchased an aggregate 325,471 shares of NorthStar Healthcare’s common stock (including 222,223 shares for the satisfaction of the minimum offering amount) for $3 million. The commitment to NorthStar Healthcare ends in August 2015, unless extended at our discretion.

• NorthStar Income II - We purchased an aggregate 307,734 shares of NorthStar Income II’s common stock (including 222,223 shares for the satisfaction of the minimum offering amount) for $2.6 million. The commitment to NorthStar Income II ends in May 2015, unless extended at our discretion.

On March 31, 2014, NorthStar/RXR New York Metro Income, Inc., NorthStar/RXR New York Metro, confidentially submitted its registration statement on Form S-11 to the SEC seeking to raise up to $2 billion in a public offering of common stock. NorthStar/RXR New York Metro will be structured as a public, non-traded corporation that intends to qualify as a REIT and is co-sponsored by NSAM and RXR Realty. NorthStar/RXR New York Metro intends to make commercial real estate investments in the New York City metropolitan area. The distribution support agreement related to NorthStar/RXR New York Metro is expected to be an obligation of both us and RXR Realty, where each is expected to agree to purchase up to an aggregate of $10 million in Class A common stock during the two-year period following commencement of the offering, with us and RXR Realty agreeing to purchase 75% and 25% of any shares purchased, respectively.

In January 2014, we sold a $9.0 million pari passu participation in a first mortgage loan at cost originated by us to NorthStar Income II. Additionally, in April 2014, we sold a $5 million pari passu participation in a first mortgage loan at cost to NorthStar Income II. Such sales were approved by the independent board of directors of NorthStar Income II.

NorthStar Securities

Prior to the spin-off of our asset management business, we earned selling commissions and dealer manager fees for selling equity in the NSAM Sponsored Companies through NorthStar Securities and paid commission expense to participating broker-dealers with whom NorthStar Securities has selling agreements and commissions to employees of NorthStar Securities. For the nine months ended September 30, 2014, commission expense was $32 million, of which $4 million related to employees of NorthStar Securities. These amounts are recorded in discontinued operations in the consolidated statements of operations.

N-Star CDOs

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We earn certain collateral management fees from the N-Star CDOs primarily for administrative services. For the nine months ended September 30, 2014, we earned $4.5 million in fee income, of which $2 million eliminated in consolidation. Prior to the third quarter 2013, all amounts were eliminated in consolidation as all of the N-Star CDOs were consolidated by us.

Additionally, we earn interest income from the N-Star CDO bonds and N-Star CDO equity in deconsolidated N-Star CDOs. For the nine months ended September 30, 2014, we earned $54 million of interest income from such investments in deconsolidated N-Star CDOs.

Legacy Commercial

In September 2014, we entered into a debt and equity investment with Legacy Commercial, comprised of a 40% interest in entities affiliated with Legacy Commercial and loans to certain Legacy Commercial entities totaling $30 million. C. Preston Butcher, a former director of ours, held certain preferred and other significant interests in Legacy Commercial and was the chairman of the board of directors and chief executive officer of Legacy Commercial. $15 million of the proceeds from the Legacy Investment will be used by the Legacy Commercial Entities for future investments, subject to certain approval rights held by us and $15 million of the proceeds of the Legacy Investment was used by the Legacy Commercial Entities to redeem the majority of the interests held by Mr. Butcher and a family limited partnership controlled by Mr. Butcher in the Legacy Commercial Entities. The Legacy Investment was made on a pari passu basis with the investment held by the two remaining partners in Legacy Commercial, Mr. Butcher and certain employees of Legacy Commercial. We own 75% of the senior debt and preferred equity and 40% of the common equity issued by the applicable Legacy Commercial Entities. Mr. Butcher and a family limited partnership controlled by Mr. Butcher received total consideration of $30 million, of which $15 million was in the form of a cash distribution from the Legacy Commercial Entities and $15 million was funded from the Legacy Investment. At closing, Mr. Butcher retained a 15% indirect interest in the senior debt and 15% indirect interest in the preferred equity issued by the applicable Legacy Commercial Entities. In addition, a family limited partnership controlled by Mr. Butcher indirectly owns 10% of the common equity issued by the applicable Legacy Commercial Entities. The transaction also includes up to an additional $10 million in future preferred loans from us for additional real estate investments, subject to our approval. In connection with this transaction, Mr. Butcher stepped down as chairman and chief executive officer of Legacy Commercial and retains no ongoing voting or decision making rights. Subject to certain approval rights held by us, Mr. Butcher has been hired as an employee of a Legacy Commercial Entity and Legacy Commercial is now controlled by the two remaining principals. Mr. Butcher retained his ownership interests in Legacy Partners Residential, Inc. and certain other related entities and companies that are not owned by Legacy Commercial or any Legacy Commercial Entity in which we are making investments. 

In addition, we have an interest in four CRE debt investments, two of which are in deconsolidated N-Star CDOs, with a subsidiary of Legacy Partners Realty Fund I, LLC, or the Legacy Fund, as borrower. Legacy Commercial indirectly owns an equity interest in, and owns the manager of, the Legacy Fund.

Two loans with an aggregate principal amount of $40 million were deconsolidated in September 2013, and as a result, we no longer record these loans on our consolidated balance sheets. For the three and nine months ended September 30, 2013, we recorded an aggregate $0.5 million and $2 million, respectively, of interest income in our consolidated statements of operations related to these loans.

The third loan with a principal amount of $39 million matures in October 2016 and has two one-year extension options, at the borrower’s option. In March 2014, we originated the fourth loan, a senior mortgage loan with a principal amount of $17 million and a mezzanine loan with a principal amount of $8 million, both of which mature in April 2021. For the three and nine months ended September 30, 2014, we recorded an aggregate $1 million and $3 million, respectively, of interest income in our consolidated statements of operations related to these loans.

Furthermore, in February 2013, NorthStar Income made a $91 million loan to the Legacy Fund. In connection with this loan, we acting in our capacity as the former advisor to NorthStar Income, received a customary 1.0% origination fee and further earned an annual asset management fee of 1.25% through June 30, 2014, the time of the spin-off. In addition, prior to the spin-off, we leased 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. NSAM assumed the lease in connection with the spin-off.

PE Investments

We guaranteed all of our funding obligations that may be due and owed under the respective agreement of the respective PE Investments directly to the PE Investment entities. We 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 us and NorthStar Income. We and NorthStar Income further agreed to indemnify

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each other for all of the losses that may arise as a result of a default that was solely caused by us or NorthStar Income, as the case may be.

PE Investment I

In connection with PE Investment I, we assigned our rights to subscribe to 29.5% of our interest in PE Investment I to a subsidiary of NorthStar Income.

West Point Partners

In June 2014, we paid $0.8 million to West Point Partners in connection with its services facilitating the acquisition of the Innkeepers Portfolio for an aggregate purchase price of approximately $1.1 billion, including all costs, reserves and escrows. West Point Partners is a real estate investment and advisory firm based in New York. Sridhar Sambamurthy, who was a member of our board of directors at the time of such payment, is managing principal and co-founder of West Point Partners and owns a 50% interest in that company and consequently ceased to be independent at that time. Mr. Sambamurthy is no longer a member of our board of directors.

Recent Developments

Dividends

On October 29, 2014, we declared a dividend of $0.40 per share of common stock. The common stock dividend will be paid on November 14, 2014 to stockholders of record as of the close of business on November 10, 2014. On October 29, 2014, we 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, $0.53125 per share of Series D Preferred Stock and $0.5469 per share of Series E Preferred Stock. Dividends will be paid on all series of preferred stock on November 17, 2014 to stockholders of record as of the close of business on November 10, 2014.

Griffin-American

On August 5, 2014, we and Griffin-American announced that the board of directors of both us and Griffin-American unanimously approved a definitive merger agreement under which we will acquire all of the outstanding shares of Griffin-American in a stock and cash transaction valued at $4 billion, including approximately $600 million of financing. Griffin-American is a non-traded REIT focused on medical office buildings, senior housing and other healthcare-related facilities and is co-sponsored by American Healthcare Investors LLC and Griffin Capital Corporation.

Griffin-American’s diversified portfolio is comprised of 296 healthcare-related real estate properties which are predominantly medical office buildings (43%) and senior housing facilities (30%) in the United States and the United Kingdom. Subject to the terms and conditions of the merger agreement, Griffin-American stockholders will receive $11.50 per Griffin-American share comprising: (i) $7.75 per share in cash; and (ii) $3.75 per share in our common stock. The common stock portion will be subject to a collar such that Griffin-American stockholders will receive 0.1859 shares of common stock if our stock price is above $20.17 per share at closing and 0.2344 shares of common stock if our stock price is below $16.00 at closing. If our stock price at closing is between $16.00 and $20.17 per share, Griffin-American stockholders will receive a number of our common stock between 0.1859 and 0.2344, equal to $3.75 in value. Transaction costs, including the Griffin-American promote, are expected to be approximately $130 million. The merger with Griffin-American is expected to close in the fourth quarter of 2014.

Additionally, on October 22, 2014, NorthStar Healthcare entered into a purchase and sale agreement with us pursuant to which NorthStar Healthcare agreed to acquire an equity interest in the Griffin-American healthcare real estate portfolio in connection with the completion of the merger of Griffin-American with and into a subsidiary of ours. NorthStar Healthcare will acquire the interest for $100 million in cash, including its pro rata share of associated transaction costs, through a joint venture with us and will be purchased at our cost basis and is expected to represent an approximate 8.3% interest in the portfolio.

Inland Portfolio

In September 2014, we entered into an agreement to acquire a $1.1 billion hotel portfolio, the Inland Portfolio, from Inland American Real Estate Trust. The Inland Portfolio is comprised of 48 upscale extended stay and select service hotels with approximately 6,400 rooms. We are acquiring the Inland Portfolio in a joint venture with Chatham where we will have an approximate 90% ownership interest. We recorded $9.4 million of estimated transaction costs in the third quarter 2014 in connection with this transaction.

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Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance significantly more than inflation does. Changes in interest rates may correlate with inflation rates. Substantially all of the leases at our manufactured housing communities and multifamily properties allow for monthly or annual rent increases which provide us with the opportunity to achieve increases, where justified by the market, as each lease matures. Such types of leases generally minimize the risks of inflation on our manufactured housing communities and multifamily properties.

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

Non-GAAP Financial Measure

Cash Available for Distribution

We believe that CAD provides investors and management with a meaningful indicator of operating performance. Management also uses CAD, among other measures, to evaluate profitability. We also believe that CAD is useful because it adjusts for a variety of cash (such as transaction costs and cash flow related to N-Star CDO equity interests) and non-cash items (such as depreciation and amortization, equity-based compensation, realized gain (loss) on investments, provision for loan losses, net and non-cash interest income and expense items). We adjust for transaction costs because these costs are not a meaningful indicator of our recurring operating performance. For instance, these transaction costs represent costs such as professional fees associated with new investments, which are non-recurring expenses related to specific transactions. We also adjust for the cash flow related to N-Star CDO equity interests which represents the net interest generated from the N-Star CDO equity interests. This net interest is a component of our ongoing return on its investment, and therefore, is adjusted in CAD as it provides investors and management with a meaningful indicator of our recurring operating performance. Furthermore, CAD adjusts N-Star CDO bond discounts to record such investments on an effective yield basis over the expected weighted average life of the investment. N-Star CDO bond discounts relates to repurchased CDO bonds of consolidated CDO financing transactions at a discount to par. These CDO bonds typically have a low interest rate and the majority of the return is generated from repurchasing the CDO bonds at a discount to expected recovery value. Because the return generated through the accretion of the discount is a meaningful contributor to our recurring operating performance, such accretion is adjusted in CAD. The computation for the accretion of the discount under U.S. GAAP and CAD is the same. However, for CDO financing transactions that are consolidated under U.S. GAAP, the CDO bonds are not presented as an investment but rather are eliminated in our consolidated financial statements. In addition, we adjust for distributions to joint venture partners, which approximate the net return to our non-controlling interests. CAD may fluctuate from period to period based upon a variety of factors, including, but not limited to, the timing and amount of investments, repayments and asset sales, capital raised, use of leverage, changes in the expected yield of investments and the overall conditions in commercial real estate and the economy generally. Management also believes that quarterly distributions are principally based on operating performance and our board of directors includes CAD as one of several metrics it reviews to determine quarterly distributions to stockholders.

We calculate CAD by subtracting from or adding to net income (loss) attributable to common stockholders, non-controlling interests attributable to the Operating Partnership and the following items: depreciation and amortization items including depreciation and amortization, straight-line rental income or expense, amortization of above/below market leases, amortization of deferred financing costs, amortization of discount on financings and other and equity-based compensation; cash flow related to N-Star CDO equity interests; accretion of consolidated N-Star CDO bond discounts; non-cash net interest income in consolidated N-Star CDOs; unrealized gain (loss) from the change in fair value; realized gain (loss) on investments and other, excluding accelerated amortization related to sales of CDO bonds or other investments; provision for loan losses, net; impairment on depreciable property; acquisition gains or losses; distributions to joint venture partners; transaction costs; foreign currency gains (losses); impairment on goodwill and other intangible assets; gains (losses) on sales; and one-time events pursuant to changes in U.S. GAAP and certain other non-recurring items. For example, CAD has been adjusted to exclude non-recurring gain (loss) from deconsolidation of certain N-Star CDOs. These items, if applicable, include any adjustments for unconsolidated ventures.

CAD should not be considered as an alternative to net income (loss), determined in accordance with U.S. GAAP, as an indicator of operating performance. In addition, our methodology for calculating CAD may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.

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The following table presents a reconciliation of CAD to net income (loss) attributable to common stockholders for the three and nine months ended September 30, 2014 (dollars in thousands):

	September 30, 2014
	Three Months Ended				Nine Months Ended
Net income (loss) attributable to common stockholders	$	(46,525	)		$	(255,052	)
Non-controlling interests attributable to the Operating Partnership	—				(5,296		)
(Gain) loss from deconsolidation of N-Star CDOs	—				31,423
Subtotal	(46,525		)		(228,925		)
Adjustments:
Depreciation and amortization items	64,329			(1)	161,514			(2)
N-Star CDO bond discounts(3)	1,359				8,139
Non-cash net interest income in consolidated N-Star CDOs	(12,024		)		(26,746		)
Unrealized (gain) loss from fair value adjustments / Provision for loan losses	12,117				203,088
Realized (gain) loss on investments(4)	20,540				72,839
Distributions to joint venture partners	(2,047		)		(4,213		)
Other(5)	48,392				95,742
CAD	$	86,141			$	281,438

____________________________________________________________

(1) The three months ended September 30, 2014 includes depreciation and amortization of $52.2 million including $0.5 million related to unconsolidated ventures, straight-line rental income of ($2.3) million, amortization of above/below market leases of ($0.7) million, amortization of deferred financing costs of $5.4 million, amortization of discount on financings and other of $1.2 million and amortization of equity-based compensation of $8.5 million.

(2) The nine months ended September 30, 2014 includes depreciation and amortization of $109.5 million including $1.4 million related to unconsolidated ventures, straight-line rental income of ($2.4) million, amortization of above/below market leases of ($0.9) million, amortization of deferred financing costs of $11.0 million, amortization of discount on financings and other of $7.6 million and amortization of equity-based compensation of $34.2 million.

(3) For CAD, realized discounts on CDO bonds are accreted on an effective yield basis based on expected maturity. For CDOs that were deconsolidated, CDO bond accretion is included in net income attributable to common stockholders from the date of deconsolidation.

(4) The three and nine months ended September 30, 2014 includes ($21.1) million and ($65.8) million, respectively, of non-cash loss from extinguishment and exchange of debt.

(5) The three and nine months ended September 30, 2014 includes transaction costs in connection with real estate related acquisitions and restructurings of $44.4 million and $84.2 million, respectively, and $4.0 million and $11.6 million of cash flow related to N-Star CDO equity interests, respectively.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

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

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

Our general financing strategy has focused on the use of “match-funded” structures. This means that we seek to align the maturities of our liabilities with the maturities on our assets as closely as possible in order to manage the risks of being forced to refinance our liabilities prior to the maturities of our assets. Substantially all of our investments are financed with either non-recourse securitization financing transactions or non-recourse mortgage notes. In addition, we seek to match the interest rate on our assets with like-kind borrowings, so fixed-rate investments are financed with fixed-rate borrowings and floating-rate assets are financed with floating-rate borrowings, directly or indirectly, through the use of interest rate swaps, caps and other financial instruments or through a combination of these strategies. For longer duration, stable investment real estate cash flows such as those derived from net lease assets, we tend to use fixed rate financing. For real estate cash flows with greater growth potential such as hotels and healthcare under a RIDEA structure, we tend to use floating rate financing which provides prepayment flexibility and may provide a better match between underlying cash flow and potential increases in interest rates. As of September 30, 2014, a hypothetical 100 basis point increase in one-month LIBOR applied to our floating-rate assets and liabilities (including derivatives) would result in a decrease in net interest income of approximately $19.9 million annually, of which $17.6 million of the change is attributable to floating rate financing of hotel and healthcare operating real estate and does not reflect the potential increase in rental cash flow associated with economic growth that may be typical in a rising interest rate environment.

A change in interest rates could affect the value of our fixed-rate CRE debt and securities investments and our real estate investments. For example, increasing interest rates could result in a higher required yield on investments, which could decrease the value on existing fixed-rate investments in order to adjust their yields to current market levels. In addition, the value of our real estate properties may be influenced by changes in interest rates and credit spreads (as discussed below) because value is typically derived by discounting expected future cash flow generated by the property using interest rates (such as the 10-year U.S. Treasury Note yield) plus a risk premium based on the property type and creditworthiness of the tenants/operators. A lower risk-free rate generally results in a lower discount rate and, therefore, a higher valuation, and vice versa; however, an increase in the risk-free rate would not impact our net interest income.

A change in the interest rate and credit spread may also impact our net book value as CRE securities are marked-to-market each quarter with any change in fair value reflected in unrealized gains (losses) or OCI. Generally, as interest rates increase, the value of fixed-rate securities within our CDO financing transaction, such as CMBS, decreases and as interest rates decrease, the value of these securities will increase. A change in unrealized gains (losses) do not directly affect our operating cash flow or our ability to pay a dividend to stockholders.

We use derivative instruments primarily to manage interest rate exposure. These derivatives are typically in the form of interest rate swap agreements and the primary objective is to minimize interest rate risks associated with our investments and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties and we monitor their financial condition. As of September 30, 2014, our counterparties do not hold any cash margin as collateral against our swap contracts. As of September 30, 2014, all of our derivatives do not qualify for hedge accounting treatment, therefore, gains (losses) resulting from their fair value measurement at the end of each reporting period are recognized as an increase or decrease in unrealized gain (loss) on investments and other in our consolidated statements of operations. In addition, we are, and may in the future be, subject to additional expense based on the notional amount of the derivative and a specified spread over the applicable LIBOR. Because the fair value of these instruments can vary significantly between periods, we may experience significant fluctuations in the amount of our unrealized gain (loss) in any given period.

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Credit Spread Risk

The value of our fixed and floating-rate investments also changes with market credit spreads. This means that when market-demanded risk premium, or credit spread, increases, the value of our fixed- and floating-rate assets decrease and vice versa. Fixed-rate assets are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasury of like maturity. This means that their value is dependent on the yield demanded on such assets by the market, based on their credit relative to U.S. Treasuries. The floating-rate CRE debt and securities investments are valued based on a market credit spread over the applicable LIBOR. Demand for a higher yield on investments results in higher or “wider” spread over the benchmark rate (usually the applicable U.S. Treasury yield) to value these assets. Under these conditions, the value of our portfolio should decrease. Conversely, if the spread used to value these assets were to decrease or “tighten,” the value of these assets should increase.

Credit Risk

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

Most of our CMBS investments are generally junior in right of payment of interest and principal to one or more senior classes but benefit from the support of one or more subordinate classes of securities or other form of credit support within a securitization transaction. The senior unsecured REIT debt we invest in generally reflects comparable credit risk. Our CRE debt investments are collateral dependent, meaning the principal source of repayment is from a sale or refinancing of the collateral securing our debt. In the event that a borrower cannot repay our debt, we may exercise our remedies under the debt agreements, which may include taking title to collateral. We describe many of the options available to us in this situation in the “Portfolio Management” section of this Quarterly Report on Form 10-Q. To the extent the value of our collateral exceeds the amount of our debt (including all debt senior to us) and the expense we incur in collecting the debt, we would collect 100% of our debt amount. To the extent the amount of our debt investment plus all senior debt to our position exceeds the realizable value to our collateral (net of expenses), then we would incur a loss.

We are subject to the credit risk of the corporate lessee of our net lease properties and the operators of our healthcare properties. We undertake a rigorous credit evaluation of each tenant and healthcare operator prior to acquiring net lease properties. This analysis includes an extensive due diligence investigation of the tenant/operator’s business as well as an assessment of the strategic importance of the underlying real estate to the tenant/operator’s core business operations. Where appropriate, we may seek to augment the tenant/operator’s commitment to the facility by structuring various credit enhancement mechanisms into the underlying leases. These mechanisms could include security deposit requirements or guarantees from entities we deem creditworthy. In addition, we actively monitor lease coverage at each facility within our healthcare portfolio. However, approximately 64% of our tenant/operator revenues are derived from government sources, notably Medicare or Medicaid, not including the effects of the announced merger with Griffin-American. Previously announced and potential future changes to these programs may have a material impact on the valuation and financial performance of this portion of our portfolio.

Foreign Currency Exchange Rate Risk

Foreign currency exchange rate risk is the risk that the financial results of our international real estate investments are materially impacted by fluctuations in foreign currency exchange rates. We may manage such risk through a combination of foreign currency derivative instruments and use non-U.S. denominated borrowings, where appropriate, associated with such investments.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended, or Exchange Act, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). We acquired real estate in the third quarter 2014, including the K Partners Portfolio, Industrial Portfolio, Courtyard Portfolio, UK Property and Legacy Property. As these acquisitions occurred during the third quarter of 2014, the scope of our assessment of the effectiveness of disclosure controls and procedures do not include such real estate acquisitions. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition.

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Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in our periodic reports.

Internal Control over Financial Reporting

Changes in internal control over financial reporting

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

PART II. Other Information

Item 1. Legal Proceedings

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

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Item 6. Exhibits

Exhibit Number		Description of Exhibit
2.1		Agreement and Plan of Merger, dated as of August 5, 2014, by and among NorthStar Realty Finance Corp., NRF Healthcare Subsidiary, LLC, NRF OP Healthcare Subsidiary, LLC, Griffin-American Healthcare REIT II Holdings, LP and Griffin-American Healthcare REIT II, Inc. (incorporated by reference to Exhibit 2.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on August 5, 2014).
3.1		Articles of Restatement of NorthStar Realty Finance Corp. incorporated by reference to Exhibit 3.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on August 7, 2014)
3.2		Amended and Restated Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.4 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
4.1		Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership, dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to NorthStar Realty Finance Corp.’s Registration Statement on Form S-3 (File No. 333-146679))
4.2		Indenture dated as of June 18, 2007, among NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp., as Guarantor, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on June 22, 2007)
4.3		Supplemental Indenture dated as of June 30, 2014, relating to the 7.25% Exchangeable Senior Notes, by and among NorthStar Realty Finance Corp., NRFC Sub-REIT Corp. (renamed NorthStar Realty Finance Corp.) and Wilmington Trust, National Association (incorporated by reference to Exhibit 4.9 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
4.4		Registration Rights Agreement relating to the 8.875% Exchangeable Senior Notes due 2032 of NorthStar Realty Finance Limited Partnership, dated as of June 12, 2012 (incorporated by reference to Exhibit 4.4 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed June 12, 2012)
4.5		Indenture dated as of June 12, 2012, among NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp. and NRFC Sub-REIT Corp., as Guarantors, and Wilmington Trust, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed June 12, 2012)
4.6		Supplemental Indenture, relating to the 8.875% Exchangeable Senior Notes, dated as of June 30, 2014, by and among NorthStar Realty Finance Corp., NRFC Sub-REIT Corp. (renamed NorthStar Realty Finance Corp.) and Wilmington Trust, National Association (incorporated by reference to Exhibit 4.6 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
4.7		Registration Rights Agreement relating to the 5.375% Exchangeable Senior Notes due 2033 of NorthStar Realty Finance Limited Partnership, dated as of June 19, 2013 (incorporated by reference to Exhibit 4.4 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed June 19, 2013)
4.8		Indenture, dated as of June 19, 2013, among NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp. and NRFC Sub-REIT Corp., as Guarantors, and Wilmington Trust, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed June 19, 2013)
4.9		Supplemental Indenture dated as of June 30, 2014, relating to the 5.375% Exchangeable Senior Notes, by and among NorthStar Realty Finance Corp., NRFC Sub-REIT Corp. (renamed NorthStar Realty Finance Corp.) and Wilmington Trust, National Association (incorporated by referent to Exhibit 4.3 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
4.10		Indenture, dated as of March 31, 2014, between NorthStar Realty Finance Corp. and Wilmington Trust, National Association, as Trustee (including the Form of Security) (incorporated by reference to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed March 31, 2014)
		Certain Instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
10.1	+	NorthStar Realty Finance Corp. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.31 to NorthStar Realty Finance Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
10.2	+	Amendment to the NorthStar Realty Finance Corp. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.26 to NorthStar Realty Finance Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011)
10.3	+	Form of Amended and Restated Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.25 to NorthStar Realty Finance Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011)
10.4		Subscription Agreement dated as of December 10, 2012, by and among NRFC PE Fund Investor LLC, NRFC Inception, LP, Inception GP, LLC, Teachers Insurance and Annuity Association of America and NRFC PE Fund GP, LLC, portions of which have been omitted pursuant to a request for confidential treatment (incorporated by reference to Exhibit 10.23 to Amendment No. 1 to NorthStar Realty Finance Corp.’s Annual Report on Form 10-K/A for the year ended December 31, 2013)
10.5	+	Amendment to the NorthStar Realty Finance Corp. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.30 to NorthStar Realty Finance Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013)
10.6		Purchase and Sale Agreement, effective as of February 15, 2013 among NRFC MH II Holdings, LLC. ARC Real Estate Holdings, LLC and certain of its affiliates (incorporated by reference to Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K/A filed May 6, 2013)
10.7		Amendment to Purchase and Sale Agreement, made as of March 27, 2013 among NRFC MH II Holdings, LLC, ARC Real Estate Holdings, LLC and certain of its affiliates (incorporated by reference to Exhibit 10.2 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K/A filed May 6, 2013)
10.8		Master Repurchase Agreement, dated as of March 11, 2013, by and among NRFC DB Loan, LLC, as master seller, and Deutsche Bank AG, Cayman Islands Branch, as buyer (incorporated by reference to Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed March 12, 2013)

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Exhibit Number		Description of Exhibit
10.9		Limited Guaranty, dated as of March 11, 2013, executed and delivered by NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRFC Sub-REIT Corp. to Deutsche Bank AG, Cayman Islands Branch (incorporated by reference to Exhibit 10.2 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed March 12, 2013)
10.10	+	Second Amended and Restated 2004 Omnibus Stock Incentive Plan of NorthStar Realty Finance Corp. (incorporated by reference to Appendix A to NorthStar Realty Finance Corp.’s Definitive Proxy Statement on Schedule 14A filed April 19, 2013)
10.11		Agreement of Purchase and Sale, dated as of June 12, 2013, by and between Project Shore JV I, LLC and Project Shore JV II, LLC, as Buyers, and Common Pensions Fund E, as Seller (incorporated by reference to Exhibit 10.36 to NorthStar Realty Finance Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013)
10.12		Portfolio Acquisition Agreement and Interest Purchase and Sale Agreement dated as of March 14, 2014, by and among Seller (as defined therein) Eclipse Health Holdings-T, LLC, as Purchaser, Formation Capital Asset Management III LLC and Safanad, Inc., as Stakeholder Representatives and Madison Title Agency, LLC, as Escrow Agent (solely for the purposes of Sections 4(b), 11(l) and 34(c)) (incorporated by reference to Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed March 17, 2014)
10.13		Limited Liability Company Agreement of Eclipse Investment, LLC, dated as of May 7, 2014, by and between FC Eclipse Investment, LLC and Eclipse Health Holdings-T, LLC (incorporated by reference to Exhibit A to the Portfolio Acquisition Agreement and Interest Purchase and Sale Agreement filed as Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed March 17, 2014)
10.14		Separation Agreement, dated June 30, 2014, between NorthStar Asset Management Group Inc. and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
10.15		Asset Management Agreement dated June 30, 2014, between NSAM J-NRF Ltd and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.2 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
10.16		Loan Origination Services Agreement, dated June 30, 2014, between NSAM US LLC and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.3 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
10.17		Tax Disaffiliation Agreement, dated June 30, 2014, between NorthStar Asset Management Group Inc. and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.4 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
10.18		Employee Matters Agreement, dated June 30, 2014, between NorthStar Asset Management Group Inc. and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.5 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
10.19		Contribution Agreement, dated June 30, 2014, between NorthStar Asset Management Group Inc. and NRFC Sub-REIT Corp. (renamed NorthStar Realty Finance Corp.) (incorporated by reference to Exhibit 10.6 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
10.20		Credit Agreement, dated June 30, 2014, between NorthStar Asset Management Group Inc. and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.7 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on July 1, 2014)
10.21		Credit and Guaranty Agreement, dated as of August 5, 2014, by and among NorthStar Realty Finance Corp., as borrower, certain subsidiaries of NorthStar Realty Finance Corp., as guarantors, the various lenders party thereto from time to time, Deutsche Bank AG New York Branch, as administrative agent and collateral agent, and Deutsche Bank Securities Inc., as sole lead arranger and sole bookrunner (incorporated by reference to Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on August 6, 2014)
10.22		Debt Commitment Letter, dated as of August 5, 2014, by and among NorthStar Realty Finance Corp., Citigroup Global Markets Inc., JPMorgan Chase Bank, National Association, Barclays Bank plc, and Column Financial, Inc. (incorporated by reference to Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on August 5, 2014)
10.23		Confirmation of Registered Forward Transaction, dated September 3, 2014, by and among NorthStar Realty Finance Corp., Deutsche Bank Securities Inc. and Deutsche Bank AG, London Branch, including the First Amendment thereto dated September 4, 2014(incorporated by reference to Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on September 9, 2014)
10.24		Asset Purchase Agreement, dated as of September 17, 2014, by and among Inland American Real Estate Trust, Inc., as Parent, IHP I Owner JV, LLC, as Buyer I, IHP West Homestead (PA) Owner LLC, as Buyer II, and NorthStar Realty Finance Corp., as Buyer Parent (solely for the purposes of Article V, Section 10.11 and Article X as it relates to Article V and Section 10.11) (incorporated by reference to Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on September 23, 2014)
10.25		Facility Agreement, dated as of September 26, 2014, by and between NorthStar Realty Finance Corp., and UBS AG, Stamford Branch (incorporated by reference to Exhibit 10.1 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on September 29, 2014)
10.26		Credit Agreement, dated as of September 26, 2014, by and among NorthStar Realty Finance Corp., as borrower, the various lenders party thereto from time to time, and UBS AG, Stamford Branch, as administrative agent (incorporated by reference to Exhibit 10.2 to NorthStar Realty Finance Corp.’s Current Report on Form 8-K filed on September 29, 2014)
31.1	*	Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	*	Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	*	Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	*	Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Exhibit Number		Description of Exhibit
101	*	The following materials from NorthStar Realty Finance Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013; (ii) Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2014 and 2013; (iv) Consolidated Statements of Equity for the nine months ended September 30, 2014 (unaudited) and year ended December 31, 2013; (v) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2014 and 2013; and (vi) Notes to Consolidated Financial Statements (unaudited)

____________________________________________________________

* Filed herewith.

+ Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.

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SIGNATURES

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

		NorthStar Realty Finance Corp.
Date:	November 10, 2014		By:	/s/ DAVID T. HAMAMOTO
				David T. Hamamoto
				Chief Executive Officer
			By:	/s/ DEBRA A. HESS
				Debra A. Hess
				Chief Financial Officer

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