NorthStar Real Estate Income Trust 10-Q 2012 Q2 Quarterly report

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TABLE OF CONTENTS

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

FORM 10-Q

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

For the quarterly period ended June 30, 2012

Commission File Number: 000-54671

NORTHSTAR REAL ESTATE INCOME TRUST, INC.
(Exact Name of Registrant as Specified in its Charter)

Maryland
(State or Other Jurisdiction of
Incorporation or Organization) 26-4141646
(IRS Employer
Identification No.)

399 Park Avenue, 18th Floor New York, NY 10022
(Address of Principal Executive Offices, Including Zip Code)

(212) 547-2600
(Registrant's Telephone Number, Including Area Code)

        Indicate by the check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o
(Do not check if a
smaller reporting company) Smaller reporting company ý

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

        The Company has one class of common stock, par value $0.01 per share, 38,086,462 shares outstanding as of August 9, 2012.

NORTHSTAR REAL ESTATE INCOME TRUST, INC.
TABLE OF CONTENTS

Index		Page
Part I.	Financial Information
Item 1.	Financial Statements
Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011		4
Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2012 and 2011		5
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2012 and 2011		6
Consolidated Statements of Equity as of June 30, 2012 (unaudited) and December 31, 2011		7
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011		8
Notes to the Consolidated Financial Statements (unaudited)		9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4.	Controls and Procedures	46
Part II.	Other Information	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits	49
Signatures		51

1

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, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "seek," "estimate," "believe," "could," "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 or state other forward-looking information. Such statements include, but are not limited to, those relating to our ability to successfully complete our continuous public offering, our ability to pay distributions to our stockholders, our reliance on our advisor and our sponsor, the operating performance of our investments, our financing needs, the effects of our current strategies and loan and security activities. 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. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements. These factors include, but are not limited to:

•

adverse economic conditions and the impact on the commercial real estate finance industry;

•

our ability to successfully complete a continuous public offering;

•

our ability to deploy capital quickly and successfully;

•

access to debt capital;

•

our liquidity;

•

our ability to make distributions to our stockholders;

•

the effect of paying distributions to our stockholders from sources other than cash flow from operations;

•

the performance of our advisor and our sponsor;

•

our dependence on the resources and personnel of our advisor and sponsor, including our advisor's ability to source and close on investment opportunities on our behalf;

•

the lack of a public trading market for our shares;

•

the limited operating history of us and our dealer manager;

•

the effect of economic conditions on the valuations of our investments;

•

the impact of economic conditions on the borrowers of the commercial real estate debt we originate and the commercial mortgage loans underlying the commercial mortgage-backed securities in which we invest;

•

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

•

tenant or borrower defaults or bankruptcy;

•

illiquidity of properties in our portfolio;

•

environmental compliance costs and liabilities;

2

•

effect of regulatory actions, litigation and contractual claims against us and our affiliates, including the potential settlement and litigation of such claims;

•

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

•

competition for investment opportunities;

•

the impact of any conflicts arising among us and our sponsor;

•

changes in laws or regulations governing various aspects of our business and non-traded REITs generally;

•

the loss of our exemption from the definition of "investment company" under the Investment Company Act of 1940, as amended;

•

the effectiveness of our risk management systems;

•

failure to maintain effective internal controls;

•

compliance with the rules governing REITs; and

•

the performance of our investments relative to our expectations and the impact on our actual return on equity.

        The foregoing list of factors is not exhaustive. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

        Factors that could have a material adverse effect on our operations and future prospects are set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. The factors set forth in these Risk Factor sections could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.

3

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30, 2012 (Unaudited)			December 31, 2011
Assets
Cash	$	47,603,118		$	53,859,334
Restricted cash		75,302,919			6,699,481
Real estate securities, available for sale		3,196,400			34,745,604
Real estate debt investments, net (see Note 7)		306,471,813			72,937,316
Receivables, net		2,648,200			1,087,677
Deferred costs and other assets, net		603,267			35,636
Total assets	$	435,825,717		$	169,365,048
Liabilities
Borrowings	$	75,043,750		$	24,061,212
Due to related party		888,119			1,288,946
Accounts payable and accrued expenses		142,674			412,568
Escrow deposits payable		75,302,919			6,699,481
Distribution payable		2,049,001			996,287
Total liabilities		153,426,463			33,458,494
Equity
NorthStar Real Estate Income Trust, Inc. Stockholders' Equity
Preferred stock, $0.01 par value per share; 50,000,000 shares authorized, no shares issued and outstanding at June 30, 2012 and December 31, 2011		—			—
Common stock, $0.01 par value per share; 400,000,000 shares authorized, 32,780,530 and 15,846,892 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		327,805			158,468
Additional paid-in capital		289,529,536			138,967,790
Retained earnings (accumulated deficit)		(7,779,305	)		(3,317,122	)
Accumulated other comprehensive income (loss)		316,730			93,071
Total NorthStar Real Estate Income Trust, Inc. stockholders' equity		282,394,766			135,902,207
Non-controlling interests		4,488			4,347
Total equity		282,399,254			135,906,554
Total liabilities and equity	$	435,825,717		$	169,365,048

See accompanying notes to consolidated financial statements.

4

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Revenues
Interest income	$	4,708,504		$	668,325	$	7,272,224		$	1,041,791
Total revenues		4,708,504			668,325		7,272,224			1,041,791
Expenses
Interest expense		363,382			224,929		613,749			447,498
Advisory fees—related party		511,343			62,663		818,018			80,245
General and administrative expenses		894,547			345,018		1,394,043			576,884
Total expenses		1,769,272			632,610		2,825,810			1,104,627
Income (loss) from operations		2,939,232			35,715		4,446,414			(62,836	)
Realized gains (losses) on investments and other		3,027,959			—		3,027,959			—
Unrealized gains (losses) on investments and other		(2,958,937	)		585,719		(2,456,869	)		581,312
Net income (loss)		3,008,254			621,434		5,017,504			518,476
Less: net income (loss) attributable to non-controlling interests		68			75		132			59
Net income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	3,008,186		$	621,359	$	5,017,372		$	518,417
Net income (loss) per share of common stock, basic / diluted	$	0.11		$	0.12	$	0.21		$	0.12
Weighted average number of shares of common stock outstanding		28,284,765			5,059,326		23,918,106			4,286,614
Distributions declared per share of common stock	$	0.20		$	0.20	$	0.40		$	0.40

See accompanying notes to consolidated financial statements.

5

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012		2011
Net income	$	3,008,254		$	621,434	$	5,017,504	$	518,476
Other comprehensive income (loss):
Unrealized gain (loss) on real estate securities, available for sale		(222,148	)		—		223,668		—
Total other comprehensive income (loss)		(222,148	)		—		223,668		—
Comprehensive income		2,786,106			621,434		5,241,172		518,476
Less:
Net income attributable to non-controlling interests		68			75		132		59
Other comprehensive income (loss) attributable to non-controlling interests		(5	)		—		9		—
Comprehensive income attributable to NorthStar Real Estate Income Trust, Inc.	$	2,786,043		$	621,359	$	5,241,031	$	518,417

See accompanying notes to consolidated financial statements.

6

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

	Common Stock									Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)		Total Company's Stockholders' Equity
							Additional Paid-in Capital											Non-controlling Interests		Total Equity
	Shares			Amount
Balance, December 31, 2010		3,193,414		$	31,934		$	26,775,538		$	740,547		$	—	$	27,548,019		$	4,234	$	27,552,253
Net proceeds from issuance of common stock		12,507,536			125,075			110,842,614			—			—		110,967,689			—		110,967,689
Proceeds from DRP		153,190			1,532			1,453,776			—			—		1,455,308			—		1,455,308
Shares redeemed for cash		(14,748	)		(148	)		(147,332	)		—			—		(147,480	)		—		(147,480	)
Issuance and amortization of equity-based compensation		7,500			75			43,194			—			—		43,269			—		43,269
Other comprehensive income (loss)		—			—			—			—			93,071		93,071			10		93,081
Distributions declared		—			—			—			(5,655,686	)		—		(5,655,686	)		—		(5,655,686	)
Net income (loss)		—			—			—			1,598,017			—		1,598,017			103		1,598,120
																						��
Balance, December 31, 2011		15,846,892		$	158,468		$	138,967,790		$	(3,317,122	)	$	93,071	$	135,902,207		$	4,347	$	135,906,554
Net proceeds from issuance of common stock (see Note 7)		16,667,343			166,674			148,084,563			—			—		148,251,237			—		148,251,237
Proceeds from DRP		347,797			3,478			3,300,597			—			—		3,304,075			—		3,304,075
Shares redeemed for cash		(89,002	)		(890	)		(849,729	)		—			—		(850,619	)		—		(850,619	)
Issuance and amortization of equity-based compensation		7,500			75			26,315			—			—		26,390			—		26,390
Other comprehensive income (loss)		—			—			—			—			223,659		223,659			9		223,668
Distributions declared		—			—			—			(9,479,555	)		—		(9,479,555	)		—		(9,479,555	)
Net income (loss)		—			—			—			5,017,372			—		5,017,372			132		5,017,504
Balance, June 30, 2012 (unaudited)		32,780,530		$	327,805		$	289,529,536		$	(7,779,305	)	$	316,730	$	282,394,766		$	4,488	$	282,399,254

See accompanying notes to consolidated financial statements.

7

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net income (loss)	$	5,017,504		$	518,476
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of premiums, discounts and fees on investments		(1,237	)		69,906
Amortization of deferred financing costs		84,199			5,212
Interest accretion on investments		(76,695	)		—
Realized gain on investments and other		(3,027,959	)		—
Unrealized (gains) losses on investments and other		2,456,869			(581,312	)
Equity-based compensation		26,390			17,955
Loan acquisition costs		—			(151,074	)
Changes in assets and liabilities:
Receivables, net		(1,004,880	)		(126,806	)
Deferred costs and other assets, net		(75,000	)		—
Due to related party		(400,827	)		448,054
Accounts payable and accrued expenses		667,703			(92,264	)
Net cash provided by (used in) operating activities		3,666,067			108,147
Cash flows from investing activities:
Origination of real estate debt investments		(233,491,295	)		(19,857,400	)
Proceeds from sales of real estate securities, available for sale		32,378,694			—
Net cash provided by (used in) investing activities		(201,112,601	)		(19,857,400	)
Cash flows from financing activities:
Net proceeds from issuance of common stock		144,842,597			23,757,849
Proceeds from issuance of common stock, related party		1,915,398			918,036
Proceeds from DRP		3,304,075			385,706
Redemption of common stock		(850,619	)		(147,480	)
Distributions paid on common stock		(8,426,841	)		(1,531,708	)
Repayment of secured term loans		(24,061,212	)		—
Borrowings under credit facility		75,043,750			—
Payment of deferred financing costs		(576,830	)		—
Net cash provided by (used in) financing activities		191,190,318			23,382,403
Net increase (decrease) in cash		(6,256,216	)		3,633,150
Cash—beginning of period		53,859,334			20,404,832
Cash—end of period	$	47,603,118		$	24,037,982
Supplemental disclosure of non-cash investing and financing activities:
Escrow deposits payable related to real estate debt investments	$	68,603,438		$	5,060,530
Distribution payable		2,049,001			368,652
Accrued cost of capital (see Note 7)		129,687			170,854
Subscriptions receivable, gross		1,449,225			803,845

See accompanying notes to consolidated financial statements.

8

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Formation and Organization

        NorthStar Real Estate Income Trust, Inc. (the "Company") was formed on January 26, 2009 and elected to qualify as a real estate investment trust ("REIT") beginning with the taxable year ended December 31, 2010. The Company was organized primarily to originate, acquire and asset manage portfolios of commercial real estate ("CRE") debt, CRE securities and select CRE equity investments. CRE debt investments may include first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests. CRE securities will primarily consist of commercial mortgage-backed securities ("CMBS") and may include unsecured REIT debt, collateralized debt obligation ("CDO") notes and other securities. The Company is externally managed by NS Real Estate Income Trust Advisor, LLC (the "Advisor") and has no employees. The Advisor uses the real estate and debt finance professionals of NorthStar Realty Finance Corp. (the "Sponsor") to manage the Company's business. The Sponsor is a real estate finance company publicly traded on the New York Stock Exchange and was formed in October 2003.

        Substantially all of the Company's business is conducted through NorthStar Real Estate Income Trust Operating Partnership, LP, the Company's operating partnership (the "OP"). The Company is the sole general partner of the OP. The initial limited partners of the OP are the Advisor and NorthStar OP Holdings, LLC (the "Special Unit Holder"). The Advisor invested $1,000 in the OP in exchange for common units and the Special Unit Holder invested $1,000 in the OP and has been issued a separate class of limited partnership units (the "Special Units"), which are collectively recorded as non-controlling interests on the consolidated balance sheets as of June 30, 2012 and December 31, 2011. As the Company accepts subscriptions for shares, it will transfer substantially all of the net proceeds from the continuous public offering to the OP as a capital contribution.

        The Company's charter authorizes the issuance of up to 400,000,000 shares of common stock with a par value of $0.01 per share and 50,000,000 shares of preferred stock with a par value of $0.01 per share. The Company's board of directors is authorized to amend its charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue. On February 19, 2009, the Company was initially capitalized through the sale of 24,039 shares of common stock to NRFC Sub-REIT Corp., a wholly-owned subsidiary of the Sponsor, for $200,004.

        On March 4, 2009, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the "SEC") to offer a minimum of 200,000 shares and a maximum of 110,526,315 shares of common stock in a continuous, public offering, of which 100,000,000 shares can be offered pursuant to the Company's primary offering (the "Primary Offering"), and 10,526,315 shares can be offered pursuant to the Company's distribution reinvestment plan (the "DRP"), and are herein collectively referred to as the Offering. The SEC declared the Company's registration statement effective on July 19, 2010 and the Company retained NorthStar Realty Securities, LLC (the "Dealer Manager"), formerly known as NRF Capital Markets, LLC and a wholly-owned subsidiary of the Sponsor, to serve as the dealer manager of the Primary Offering. The Dealer Manager is responsible for marketing the Company's shares being offered pursuant to the Primary Offering. As described above, the Company intends to use substantially all of the net proceeds from the Offering to invest in a diverse portfolio of CRE debt, CRE securities and select CRE equity investments.

        From inception through June 30, 2012, the Company has raised gross proceeds of $324.8 million from the Offering, including proceeds from the merger with NorthStar Income Opportunity

9

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

1. Formation and Organization (Continued)

REIT I, Inc. completed on October 18, 2010 as a reverse merger and recapitalization (the "Merger Transaction").

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

        The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC.

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company and its subsidiaries, which are majority-owned and controlled by the Company. All significant intercompany balances have been eliminated in consolidation.

Estimates

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

Reclassifications

        During the fourth quarter 2011, the Company capitalized fees incurred to its Advisor in connection with the origination of CRE debt investments in accordance with accounting standards for loan originations. The deferred CRE debt investment origination costs are amortized as an adjustment to yield using the effective interest method. Such fees were previously expensed. The Company's consolidated financial statements contain immaterial reclassifications of prior period amounts to conform with such presentation.

Variable Interest Entities

        A variable interest entity ("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

10

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and its quantitative analysis on the forecasted cash flows of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

        A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents, has a potentially significant interest in the entity and controls such entity's significant decisions. 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 has evaluated its CRE debt and security investments to determine whether they are a VIE. The Company monitors these investments and, to the extent it has determined that it owns a majority of the current controlling class, analyzes them for potential consolidation. The Company will continue to analyze future investments and liabilities, as well as reconsideration events, including a modified loan deemed to be a troubled debt restructuring, if any, pursuant to the VIE requirements. These analyses require considerable judgment in determining the primary beneficiary of a VIE since they involve estimated probability weighting of subjectively determined possible cash flow scenarios. This could result in the consolidation of an entity that would otherwise not have been consolidated or the non-consolidation of an entity that would have otherwise have been consolidated.

Real Estate Debt Investments

        CRE debt investments are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, discounts, premiums 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. As of June 30, 2012, the Company did not have any impaired CRE debt investments.

Real Estate Securities

        All of the Company's CRE securities are classified as available for sale on the acquisition date, which are carried at fair value, with any unrealized gains (losses) reported as a component of accumulated other comprehensive income (loss) in the Company's consolidated statements of equity. However, the Company may elect the fair value option for certain of its available for sale securities, and as a result, any unrealized gains (losses) on such securities are recorded in unrealized gains (losses) on investments and other in the Company's consolidated statements of operations. As of June 30, 2012, the Company did not have any CRE securities for which it elected the fair value option.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Revenue Recognition

Real Estate Debt Investments

        Interest income is recognized on an accrual basis and any related discount, premium, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the Company's consolidated statements of operations.

Real Estate Securities

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

Credit Losses and Impairment on Investments

Real Estate Debt Investments

        Loans are considered impaired when based on current information and events it is probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment of the Company is required in this analysis. The Company considers the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded with a corresponding charge to the provision for loan losses. The loan loss reserve for each loan is maintained at a level that is determined to be adequate by management to absorb probable losses. As of June 30, 2012, the Company did not have any impaired CRE debt investments.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Real Estate Securities

        CRE securities for which the fair value option is not elected are periodically evaluated for other-than-temporary impairment ("OTTI"). CRE securities for which the fair value option was elected are not evaluated for OTTI as changes in fair value are recorded in the Company's consolidated statements of operations. Realized losses on such securities are reclassified to realized gains (losses) on investments and other as losses occur. As of June 30, 2012, the Company did not have any OTTI recorded on its CRE security investment.

Comprehensive Income (Loss)

        The Company reports consolidated statements of comprehensive income (loss) in separate statements consecutive to the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and other comprehensive income (loss) ("OCI"). The Company's principal component of OCI is unrealized gain (loss) on CRE securities for which the fair value option of accounting was not elected.

Recently Issued Pronouncements

        In May 2011, the Financial Accounting Standards Board ("FASB") issued an accounting update to amend existing guidance concerning fair value measurements and disclosures. The update is intended to achieve common fair value measurements and disclosure requirements under U.S. GAAP and International Financial Reporting Standards and is effective in the first interim or annual period beginning after December 15, 2011. The Company adopted this accounting update in the first quarter 2012 and the required disclosures have been incorporated into Note 3 of the consolidated financial statements. The adoption did not have a material impact on the consolidated financial statements.

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

3. Fair Value

Fair Value Measurement

        The Company follows fair value guidance in accordance with U.S. GAAP to account for its financial instruments. The Company categorizes its financial instruments based on the priority of the inputs to the valuation technique into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. Fair Value (Continued)

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

        Level 1. Quoted prices for identical assets or liabilities in an active market.

        Level 2. Financial assets and liabilities whose values are based on the following:

a)

Quoted prices for similar assets or liabilities in active markets.



b)

Quoted prices for identical or similar assets or liabilities in non-active markets.



c)

Pricing models whose inputs are observable for substantially the full term of the asset or liability.



d)

Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.

        Level 3. Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Determination of Fair Value

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

Real Estate Securities

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

Fair Value Hierarchy

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

	June 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Real estate securities:
CMBS	$	—	$	3,196,400	$	—	$	3,196,400	$	—	$	34,745,604	$	—	$	34,745,604

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. Fair Value (Continued)

        As of June 30, 2012 and December 31, 2011, the Company had no financial assets or liabilities that were accounted for at fair value on a non-recurring basis.

Fair Value Option

        The Company will generally not elect the fair value option of accounting for its financial assets and liabilities. However, the Company may elect to apply the fair value option of accounting to certain of its CRE security investments.

        Changes in fair value for assets and liabilities for which the election is made will be recognized in income as they occur. The fair value option may be elected on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

        In the second quarter 2012, the Company sold the only two CRE securities for which the fair value option was elected. As a result, the Company did not have any financial assets or liabilities for which it elected the fair value option as of June 30, 2012.

        For the three and six months ended June 30, 2012, the Company recorded unrealized losses of ($2,958,937) and ($2,456,869), respectively, for financial assets for which the fair value option was elected. For the three and six months ended June 30, 2011, the Company recorded unrealized gains of $585,719 and $581,312, respectively, for financial assets for which the fair value option was elected. These amounts are recorded as unrealized gains (losses) on investments and other in the Company's consolidated statements of operations.

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 disclosures of estimated fair value of financial instruments were 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 the estimated fair value amounts.

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(Unaudited)

3. Fair Value (Continued)

        The following table shows the principal amount, carrying value and fair value for the Company's financial assets and liabilities as of June 30, 2012 and December 31, 2011:

	June 30, 2012						December 31, 2011
	Principal Amount		Carrying Value		Fair Value		Principal Amount		Carrying Value		Fair Value
Financial assets:(1)
Real estate securities, available for sale(2)	$	4,000,000	$	3,196,400	$	3,196,400	$	32,856,000	$	34,745,604	$	34,745,604
Real estate debt investments, net		306,375,390		306,471,813		306,375,390		72,807,400		72,937,316		72,807,400
Financial liabilities:(1)
Borrowings	$	75,043,750	$	75,043,750	$	75,043,750	$	24,061,212	$	24,061,212	$	25,451,764

(1)

The fair value of other financial instruments not included in this table are estimated to approximate their carrying amounts.

(2)

Refer to the "Determination of Fair Value" above for a discussion of methodologies used to determine fair value.

        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 the fair value amounts, 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 require to purchase such investment. Prices were calculated assuming fully-extended maturities regardless of structural or economic tests required to achieve such extended maturities. Fair value of CRE debt investments are generally based on unobservable inputs and are therefore classified as Level 3 of the fair value hierarchy.

Borrowings

        The estimated fair value is based on interest rates available for issuance of debt with similar terms and remaining maturities. These measurements are based on observable inputs and are classified as Level 2 of the fair value hierarchy.

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(Unaudited)

4. Real Estate Securities

        CRE securities are comprised of CMBS backed by a pool of CRE loans which are typically well-diversified by type and geography. The following is a summary of the Company's CRE securities:

											Weighted Average
							Cumulative Unrealized Gain (Loss) on Investments
	Number		Principal Amount		Amortized Cost				Fair Value		Coupon(1)			Current Yield			Yield to Maturity(2)
CMBS:
June 30, 2012		1	$	4,000,000	$	2,879,651	$	316,749	$	3,196,400		5.48	%		8.06	%		14.91	%
December 31, 2011		3	$	32,856,000	$	32,195,653	$	2,549,951	$	34,745,604		5.53	%		8.94	%		12.33	%

(1)

All CMBS are fixed rate.

(2)

Represents the leveraged yield, if applicable, based on cash flows through expected repayment/sale dates.

        On June 14, 2012, the Company sold two CRE securities for proceeds of $32,378,694. In connection with the sale, the Company recorded a realized gain on investments and other of $3,027,959 in its consolidated statement of operations.

        The Company recorded unrealized gains (losses) in OCI for the three and six months ended June 30, 2012 of ($222,148) and $223,668, respectively. The Company did not record any unrealized gains (losses) in OCI for the three and six months ended June 30, 2011.

        As of June 30, 2012, the contractual maturity of the CRE security was 27 years with an expected life of 4.2 years.

5. Real Estate Debt Investments

        The following is a summary of the Company's CRE debt investments, all of which have been directly originated by the Company, as of June 30, 2012:

							Weighted Average
																					Floating Rate as % of Principal Amount
	Number		Principal Amount(1)		Carrying Value		Fixed Rate			Spread over LIBOR(2)			Current Yield			Yield to Maturity(3)			Initial Maturity
Asset Type:
First mortgage loans		13	$	274,006,806	$	274,103,229		13.25	%		5.97	%		8.93	%		12.12	%		Jan-15		85.2	%
Mezzanine loans(4)		2		56,557,289		32,368,584		11.50	%		10.00	%		12.23	%		15.93	%		Jul-13		14.1	%
Total/Weighted average		15	$	330,564,095	$	306,471,813		12.54	%		6.04	%		9.28	%		12.65	%		Nov-14		77.7	%

(1)

Principal amount includes interest accretion, to the extent applicable.

(2)

All floating-rate loans are subject to a fixed minimum LIBOR rate ("LIBOR floor"). As of June 30, 2012, the weighted average LIBOR floor for all floating-rate loans was 2.33%.

(3)

Represents the leveraged yield, if applicable, to initial maturity and includes fees received or expected to be received from the Company's borrowers and excludes any fees paid or expected to be paid to the Company's Advisor.

(4)

Includes future funding commitments of $24.2 million which will be funded over the next 15 months.

        As of June 30, 2012, the Company's weighted average leveraged current yield was 11.4%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. Real Estate Debt Investments (Continued)

        The following is a summary of the Company's CRE debt investments, all of which have been directly originated by the Company, as of December 31, 2011:

							Weighted Average
																		Floating Rate as % of Principal Amount
	Number		Principal Amount		Carrying Value		Spread over LIBOR(1)			Current Yield			Yield to Maturity(2)			Initial Maturity
Asset Type:
First mortgage loans		5	$	68,307,400	$	68,436,947		4.95	%		8.28	%		8.96	%		Sep-14		100	%
Mezzanine loans		1		4,500,000		4,500,369		10.00	%		15.15	%		16.15	%		Dec-16		100	%
Total/Weighted average		6	$	72,807,400	$	72,937,316		5.26	%		8.70	%		9.41	%		Nov-14		100	%

(1)

All loans are subject to a LIBOR floor. As of December 31, 2011, the weighted average LIBOR floor for all loans was 3.37%.

(2)

Based on initial maturity and includes fees received or expected to be received from the Company's borrowers and excludes any fees paid or expected to be paid to the Company's Advisor.

        Maturities of principal amount of CRE debt investments as of June 30, 2012 are as follows:

	Initial Maturity		Maturity Including Extensions(1)
July 1 - December 31, 2012	$	—	$	—
Years Ending December 31:
2013		52,000,000		—
2014		108,826,806		52,000,000
2015		165,180,000		—
2016		4,557,289		68,307,400
Thereafter		—		210,256,695
Total	$	330,564,095	$	330,564,095

(1)

Maturity Including Extensions assumes that all debt with extension options will qualify for extension at initial maturity according to the conditions stipulated in the related debt agreements.

Credit Quality Monitoring

        The Company's CRE debt investments are typically first mortgage 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 differentiates the relative credit quality of its debt investments principally based upon whether the borrower is currently paying contractual debt service and/or whether the Company believes it will be able to do so in the future, as well as the Company's expectations as to the ultimate recovery of principal at maturity and updates this information quarterly. Those debt investments for which the Company expects to receive full payment of contractual principal and interest payments are categorized as "performing." The Company will group weaker credit quality debt investments that are currently

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. Real Estate Debt Investments (Continued)

performing, but for which it believes future collection of all or some portion of principal and interest is in doubt, into a category called "performing with a loan loss reserve." The Company's weakest credit quality debt investments are non-performing loans ("NPL"). The Company categorizes debt investments as a NPL if it is in maturity default and/or is past due at least 90 days on its contractual debt service payments. The Company's definition of an NPL may differ from that of other companies that track NPLs.

        As of June 30, 2012, all of the Company's CRE debt investments were performing in accordance with the terms of the loan agreements and were categorized as performing loans. For the three and six months ended June 30, 2012, three and one, respectively, CRE debt investments contributed more than 10% of total revenue.

6. Borrowings

        The following is a summary of the Company's borrowings as of June 30, 2012 and December 31, 2011:

							June 30, 2012				December 31, 2011
	Type	Final Stated Maturity		Contractual Interest Rate			Principal Amount		Carrying Value		Principal Amount		Carrying Value
Credit facility	Partial Recourse(1)		Feb-16		LIBOR + 2.58%	(2)	$	75,043,750	$	75,043,750	$	—	$	—
Secured term loans
TALF I	Non-recourse		Jan-15		3.73%			—		—		11,629,213		11,629,213
TALF II	Non-recourse		Feb-15		3.69%			—		—		12,431,999		12,431,999
Subtotal secured term loans								—		—		24,061,212		24,061,212
Grand Total							$	75,043,750	$	75,043,750	$	24,061,212	$	24,061,212

(1)

This facility is recourse solely with respect to 25% of "core" assets and 100% of "flex" assets, which may only represent 25% of the total credit facility, as such terms are defined in the governing documents.

(2)

Represents a weighted average spread and based on one-month LIBOR.

        On June 14, 2012, the Company repaid in full the secured term loans that were used to finance two CRE securities.

        On February 29, 2012, NSREIT WF Loan, LLC ("NSREIT WF"), an indirect wholly-owned subsidiary of the Company, entered into a Master Repurchase and Securities Contract with Wells Fargo Bank, National Association (the "Wells Facility"). The Wells Facility provides up to $100 million to finance first mortgage loans secured by commercial real estate and has an initial term of two years, with two, one-year extensions at the Company's option, subject to the satisfaction of certain conditions. During the initial term, the Wells Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments. Borrowings under the Wells Facility accrue interest at a range of one-month LIBOR plus 2.5% to 3.0% with advance rates up to 75%, depending on asset type, subject to adjustment. The Company incurred an immaterial amount of non-utilization fees for the period beginning 90 days from the closing date of the Wells Facility to June 30, 2012.

        As of June 30, 2012, the Company held $126,200,000 principal amount of CRE debt investments, financed with $75,043,750, resulting in a weighted average leveraged yield to maturity of 16.3%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. Borrowings (Continued)

        In connection with the Wells Facility, the Company entered into a guaranty agreement, under which the Company guarantees certain obligations under the Wells Facility. Additionally, the OP provided a pledge and security agreement over its interests in NSREIT WF. The Wells 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. The Company has also agreed to guarantee certain customary obligations under the Wells Facility if the Company or an affiliate of the Company engages in certain customary bad acts.

        The Wells Facility contains a liquidity covenant that requires NSREIT WF to maintain at least $5.0 million and a maximum of $15.0 million in unrestricted cash or cash equivalents at all times during the term of the Wells Facility. As of June 30, 2012, the Company was in compliance with this covenant. In addition, the Wells Facility requires the maintenance of a loan-to-collateral value ratio that may require the Company to provide additional collateral or make cash payments. As of June 30, 2012, the Company was not required to post additional collateral or make cash payments to maintain such ratio.

7. Related Party Arrangements

NS Real Estate Income Trust Advisor, LLC

        Subject to certain restrictions and limitations, the Advisor is responsible for managing the Company's affairs on a day-to-day basis and for identifying, originating, acquiring and asset managing investments on behalf of the Company. For such services, the Advisor receives fees and compensation from the Company. Below is a summary of the fees due the Advisor.

Organization and Offering Costs

        The Advisor and certain affiliates of the Advisor are entitled to receive reimbursement for costs paid on behalf of the Company in connection with the Offering. The Company is obligated to reimburse the Advisor for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs do not exceed 15% of gross offering proceeds from the Primary Offering. The Advisor does not expect reimbursable organization and offering costs, excluding selling commissions and the dealer manager fee, to exceed $15 million, or 1.5% of the total proceeds available to be raised from the Primary Offering. The Company shall not reimburse the Advisor for any organization and offering costs that the Company's independent directors determine are not fair and commercially reasonable to the Company.

Operating Costs

        The Advisor and certain affiliates of the Advisor are entitled to receive reimbursement for direct and indirect operating costs incurred by the Advisor in connection with administrative services provided to the Company. Indirect includes the Company's allocable share of costs incurred by the Advisor for personnel and other overhead such as rent, technology and utilities. However, there is no reimbursement for personnel costs related to executive officers and other personnel involved in activities for which the Advisor receives an acquisition fee, asset management fee or disposition fee. The Company reimburses the Advisor for operating costs (including the asset management fee) at the end of the four preceding fiscal quarters not to exceed the greater of: (i) 2.0% of its average invested

20

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. Related Party Arrangements (Continued)

assets; or (ii) 25% of its net income determined without reduction for any additions to reserves for depreciation, loan losses or other similar non-cash reserves and excluding any gain from the sale of the Company's assets for that period (the "2%/25% Guidelines"). Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of this limitation if a majority of the Company's independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. The Company calculates the expense reimbursement quarterly based upon the trailing twelve-month period.

Advisory Fees

Asset Management Fee

        The Company pays the Advisor a monthly asset management fee equal to one-twelfth of 1.25% of the sum of the principal amount funded or allocated for CRE debt originated and the cost of all other investments made less any principal received on the Company's debt and security investments (or the Company's proportionate share thereof in the case of debt investments made through joint ventures).

Asset Acquisition Fee

        The Advisor also receives an acquisition fee equal to 1.0% of the principal amount funded or allocated by the Company to originate CRE debt or the amount invested in the case of other real estate investments including acquisition expenses and any financings attributable to such investments. Acquisition fees paid to the Advisor related to the origination of CRE debt investments are included in CRE debt investments, net on the consolidated balance sheets and amortized to interest income over the life of the investment using the effective interest method.

Asset Disposition Fee

        For substantial assistance in connection with the sale of investments, the Company will pay the Advisor or its affiliate a disposition fee of 1.0% of the contract sales price of each CRE debt or select CRE equity investment sold. The Company will not pay a disposition fee upon the maturity, prepayment, workout modification or extension of a loan or other debt-related investment unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of: (i) 1.0% of the principal amount of the loan or debt-related investment prior to such transaction; or (ii) the amount of the fee paid by the borrower in connection with such transaction. If the Company takes ownership of a property as a result of a workout or foreclosure of a loan, the Company will pay a disposition fee upon the sale of such property. Disposition fees incurred to the Advisor are amortized to interest income over the life of the investment using the effective interest method and included in CRE debt investments, net on the consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. Related Party Arrangements (Continued)

NorthStar Realty Securities, LLC

Selling Commissions and Dealer Manager Fees

        Pursuant to a dealer manager agreement, the Company pays the Dealer Manager selling commissions of up to 7.0% of gross offering proceeds from the Primary Offering, all of which are reallowed by the Dealer Manager to participating broker-dealers. In addition, the Company will pay the Dealer Manager a dealer manager fee of 3.0% of gross offering proceeds from the Primary Offering, a portion of which may be reallowed by the Dealer Manager to participating broker-dealers. No selling commissions or dealer manager fee will be paid for sales under the DRP.

        The following table summarizes the fees and reimbursements incurred to the Advisor for the three and six months ended June 30, 2012 and 2011 and the amounts payable at June 30, 2012 and December 31, 2011:

		Three Months Ended June 30,				Six Months Ended June 30,				Due to related party at
										June 30, 2012		December 31, 2011
Type of Fee or Reimbursement	Financial Statement Location	2012		2011		2012		2011
Organization and offering costs
Organization	General and administrative expenses	$	118,074	$	175,545	$	269,875	$	261,907	$	—	$	23,514
Offering	Cost of capital		767,705		96,833		1,754,694		133,449		—		937,597
Operating costs(1)	General and administrative expenses		762,739		157,669		1,097,778		288,313		653,137		230,985
Advisory fees
Asset management	Advisory fees—related party		511,343		62,663		818,018		80,245		234,982		—
Acquisition(2)	Real estate debt investments, net		2,321,300		151,074		2,576,800		198,574		—		96,850
Disposition(3)	Real estate debt investments, net		—		—		—		—		—		—
Selling commissions / dealer manager fees	Cost of capital		8,678,430		1,726,575		16,077,518		2,644,340		—		—
Total										$	888,119	$	1,288,946

(1)

As of June 30, 2012, the Advisor has incurred unreimbursed operating costs of $4,548,725 on behalf of the Company, of which $3,895,588 has not yet been allocated per the 2%/25% Guidelines.

(2)

Acquisition fees are amortized to interest income over the life of the investment using the effective interest method and are included in real estate debt investments, net on the consolidated balance sheets.

(3)

Disposition fees are amortized to interest income over the life of the investment using the effective interest method and are included in real estate debt investments, net on the consolidated balance sheets. Disposition fees incurred to the Advisor are offset by exit fees expected to be received from the Company's borrowers.

Sponsor Purchase of Common Stock

        The Company is party to a Second Amended and Restated Distribution Support Agreement (the "Distribution Support Agreement") with the Sponsor pursuant to which the Sponsor has committed to purchase up to $10 million of shares of the Company's common stock at a price of $9.00 per share if cash distributions exceed modified funds from operations (as defined in accordance with the current practice guidelines issued by the Investment Program Association) to provide additional funds to support distributions to stockholders. On April 11, 2012, the Distribution Support Agreement was extended until July 19, 2013. For the three and six months ended June 30, 2012, the Sponsor purchased 95,767 and 212,822 shares, respectively, of the Company's common stock for $861,903 and $1,915,398,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. Related Party Arrangements (Continued)

respectively. For the three and six months ended June 30, 2011, the Sponsor purchased 58,565 and 102,004 shares, respectively, of the Company's common stock for $527,087 and $918,036, respectively. From inception through June 30, 2012, the Sponsor purchased 466,024 shares for $4,194,223 pursuant to the Distribution Support Agreement.

8. Stockholders' Equity

Common Stock

        For the six months ended June 30, 2012, the Company sold 16,667,343 shares of common stock pursuant to its Primary Offering, generating gross proceeds of $166.1 million. For the year ended December 31, 2011, the Company sold 12,507,536 shares of common stock pursuant to its Primary Offering, generating gross proceeds of $124.6 million. From inception through June 30, 2012 and excluding proceeds raised from the Merger Transaction, the Company sold 29,425,346 shares of common stock pursuant to its Primary Offering, generating gross proceeds of $293.2 million.

Distribution Reinvestment Plan

        The Company has adopted a DRP through which common stockholders may elect to reinvest an amount equal to the distributions declared on their shares in additional shares of the Company's common stock in lieu of receiving cash distributions. The initial purchase price per share under the DRP is $9.50. Once the Company establishes an estimated value per share, shares issued pursuant to the DRP will be priced at the estimated value per share of the Company's common stock, as determined by the Advisor or another firm chosen for that purpose. The Company expects to establish an estimated value per share after the completion of its organization and offering stage. The organization and offering stage will be considered complete when the Company is no longer publicly offering equity securities, whether through the Offering or follow-on public offerings, and has not done so for 18 months. No selling commissions or dealer manager fees will be paid on shares sold under the DRP. The Company's board of directors may amend or terminate the DRP for any reason upon ten-days' notice to participants. For the six months ended June 30, 2012, the Company issued 347,797 shares totaling $3,304,075 of proceeds pursuant to the DRP. For the year ended December 31, 2011, the Company issued 153,190 shares totaling $1,455,308 of proceeds pursuant to the DRP. From inception through June 30, 2012 and excluding proceeds raised from the Merger Transaction, the Company issued 507,201 shares totaling $4,818,415 of proceeds pursuant to the DRP.

23

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. Stockholders' Equity (Continued)

Distributions

        Distributions to stockholders are declared quarterly by the Company's board of directors and are paid monthly based on a daily amount of $0.002185792 per share. The following summarizes distributions declared for the six months ended June 30, 2012:

	Distributions(1)
Period	Cash		DRP		Total
January	$	716,208	$	428,126	$	1,144,334
February		755,997		477,595		1,233,592
March		905,776		596,606		1,502,382
April		982,541		659,062		1,641,603
May		1,125,321		783,322		1,908,643
June		1,198,712		850,289		2,049,001

(1)

Represents distributions declared for such period, even though such distributions are actually paid to stockholders the month following such period.

Share Repurchase Program

        The Company has adopted a share repurchase program that may enable stockholders to sell their shares to the Company in limited circumstances. The Company may not repurchase shares unless a stockholder has held shares for one year. However, the Company may repurchase shares held less than one year in connection with a stockholder's death or qualifying disability, if the disability is deemed qualifying by the Company's board of directors, in its sole discretion, and after receiving written notice from the stockholder. The Company is not obligated to repurchase shares under this share repurchase program. For the six months ended June 30, 2012, the Company repurchased 89,002 shares for a total of $850,619, or an average price of $9.56 per share. For the year ended December 31, 2011, the Company repurchased 14,748 shares for a total of $147,480, or $10 per share.

9. Equity-Based Compensation

Director's Shares

        On June 7, 2011 and 2012, each of the Company's three independent directors received 2,500 shares of restricted stock in connection with their re-election to the board of directors. The restricted stock will generally vest over four years; provided, however, that the restricted stock will become fully vested on the earlier occurrence of: (i) the termination of the independent director's service as a director due to his or her death or disability; or (ii) a change in control of the Company. Total equity-based compensation cost recognized in connection with the granting of the restricted stock is $270,000, which is recorded in general and administrative expenses ratably over the four-year vesting period.

        For the three and six months ended June 30, 2012, the Company recognized $13,734 and $26,390 of equity-based compensation expense, respectively, related to the issuance of restricted stock, which was recorded in general and administrative expenses in the consolidated statements of operations. For the three and six months ended June 30, 2011, the Company recognized $9,516 and $17,955 of equity-

24

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. Equity-Based Compensation (Continued)

based compensation expense, respectively, related to the issuance of restricted stock, which was recorded in general and administrative expenses in the consolidated statements of operations.

10. Non-controlling Interests

Operating Partnership

        Non-controlling interests represent the aggregate limited partnership interests in the OP held by limited partners. Income (loss) allocated to the non-controlling interests is based on the limited partners' ownership percentage of the OP. Income (loss) allocated to the operating partnership non-controlling interests for the three and six months ended June 30, 2012 and 2011 was an immaterial amount.

11. Segment Reporting

        The Company currently conducts its business through the following segments:

•

The CRE debt business 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.

•

The CRE securities business is focused on investing in and asset managing CRE securities primarily consisting of CMBS and may include unsecured REIT debt, CDO notes and other securities.

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

Three Months Ended June 30, 2012	Real Estate Debt		Real Estate Securities			Corporate(1)			Total
Total revenues	$	4,292,571	$	415,933		$	—		$	4,708,504
Total expenses		164,588		213,275			1,391,409			1,769,272
Income (loss) from operations		4,127,983		202,658			(1,391,409	)		2,939,232
Realized gains (losses) on investments and other		—		3,027,959			—			3,027,959
Unrealized gains (losses) on investments and other		—		(2,958,937	)		—			(2,958,937	)
Net income (loss)	$	4,127,983	$	271,680		$	(1,391,409	)	$	3,008,254

Three Months Ended June 30, 2011	Real Estate Debt		Real Estate Securities		Corporate(1)			Total
Total revenues	$	291,847	$	376,478	$	—		$	668,325
Total expenses		1,032		225,804		405,774			632,610
Income (loss) from operations		290,815		150,674		(405,774	)		35,715
Unrealized gains (losses) on investments and other		—		585,719		—			585,719
Net income (loss)	$	290,815	$	736,393	$	(405,774	)	$	621,434

25

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. Segment Reporting (Continued)

Six Months Ended June 30, 2012	Real Estate Debt		Real Estate Securities			Corporate(1)			Total
Total revenues	$	6,389,709	$	882,515		$	—		$	7,272,224
Total expenses		198,719		438,391			2,188,700			2,825,810
Income (loss) from operations		6,190,990		444,124			(2,188,700	)		4,446,414
Realized gains (losses) on investments and other		—		3,027,959			—			3,027,959
Unrealized gains (losses) on investments and other		—		(2,456,869	)		—			(2,456,869	)
Net income (loss)	$	6,190,990	$	1,015,214		$	(2,188,700	)	$	5,017,504

Six Months Ended June 30, 2011	Real Estate Debt		Real Estate Securities		Corporate(1)			Total
Total revenues	$	293,958	$	747,833	$	—		$	1,041,791
Total expenses		1,032		450,065		653,530			1,104,627
Income (loss) from operations		292,926		297,768		(653,530	)		(62,836	)
Unrealized gains (losses) on investments and other		—		581,312		—			581,312
Net income (loss)	$	292,926	$	879,080	$	(653,530	)	$	518,476

(1)

Includes corporate level and general and administrative expenses.

        For all periods presented above, all revenues were generated from external customers located in the United States.

        The following summarizes total assets by segment as of June 30, 2012 and December 31, 2011:

Total Assets	Real Estate Debt		Real Estate Securities		Corporate(1)		Total
June 30, 2012	$	398,694,407	$	3,208,654	$	33,922,656	$	435,825,717
December 31, 2011	$	80,880,851	$	35,429,729	$	53,054,468	$	169,365,048

(1)

Predominantly includes cash.

12. Subsequent Events

Offering Proceeds

        For the period from July 1, 2012 to August 9, 2012, the Company sold 5,321,657 common shares pursuant to its Offering generating gross proceeds of $53.2 million.

26

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. Subsequent Events (Continued)

Distributions

        On August 8, 2012, the Company's board of directors approved a daily cash distribution of $0.002185792 per share of common stock for each of the three months ended December 31, 2012. The distribution will be paid in cumulative amounts to the stockholders of record entitled to receive such distribution on November 1, 2012, December 3, 2012 and January 2, 2013.

Sponsor Purchase of Common Stock

        On August 8, 2012, the Company's board of directors approved the sale of 41,956 shares of the Company's common stock to the Sponsor, pursuant to the Distribution Support Agreement. In connection with this commitment and including the Sponsor's purchase of shares approved on August 8, 2012, the Sponsor will have purchased 507,980 shares in the aggregate for $4.6 million.

Share Repurchase Program

        The Company has adopted a share repurchase program that may enable stockholders to sell their shares to the Company in limited circumstances. However, the Company is not obligated to repurchase shares under this share repurchase program. On July 20, 2012, the Company repurchased 15,725 shares for a total of $156,428 or an average price of $9.95 per share.

Advisory Agreement

        On July 18, 2012, the advisory agreement, as amended (the "Advisory Agreement"), among the Company, the OP, the Advisor and the Sponsor was renewed through July 18, 2013 upon terms identical to those in effect through July 18, 2012. Pursuant to the Advisory Agreement, the Advisor will continue to perform day-to-day operational and administrative services for the Company, including services relating to its current public offering, asset management services, acquisition services and stockholder services.

        Then, on August 8, 2012, the Company's board of directors approved an amendment to the Advisory Agreement to change the calculation of asset management fees to prorate the asset management fees for each investment based on the number of days during the applicable period that the Company owns such investment.

Financing and Investing Activities

Citibank Facility

        On July 18, 2012, NSREIT CB Loan, LLC ("NSREIT CB"), an indirect wholly-owned subsidiary of the Company, entered into a Master Repurchase Agreement with Citibank, N.A. (the "Citi Facility"). The Citi Facility provides up to $50 million to finance first mortgage loans and senior loan participations secured by commercial real estate.

        Interest rates and advance rates will depend upon asset type and characteristics. The initial maturity date of the Citi Facility is July 18, 2014, with three, one-year extensions at the Company's option, which may be exercised upon the satisfaction of certain conditions set forth in the Citi Facility.

27

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. Subsequent Events (Continued)

During the initial term, the Citi Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments.

        In connection with the Citi Facility, the Company agreed to guarantee certain obligations of the Citi Facility if the Company or any of its affiliates engages in certain customary bad acts. The Citi Facility contains representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, NSREIT CB must maintain at least $3.75 million and a maximum of $7.5 million in unrestricted cash at all times during the term of the Citi Facility.

        Subsequent to quarter end, the Company borrowed $25.0 million under the Citi Facility.

Doral Facility

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

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

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

        Simultaneous with the closing, the Company borrowed $39.8 million under the Doral Facility.

New Investments

        Subsequent to quarter end, the Company originated two first mortgage loans with an aggregate principal balance of $50.8 million.

        As of the date hereof and inclusive of the two new first mortgage loans, the Company's weighted average leveraged current yield for its investments is 12.7% and the weighted average leveraged yield to maturity is 14.3%.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Item 1 of this report. References to "we," "us," or "our" refer to NorthStar Real Estate Income Trust, Inc. and its subsidiaries (collectively, our Company) unless context specifically requires otherwise.

Introduction

        We are an externally managed commercial real estate, or CRE, finance company that was formed in January 2009 to originate, acquire and asset manage a diversified portfolio of CRE debt, CRE securities and select CRE equity investments. We commenced our operations in October 2010. We conduct substantially all of our operations and make investments through NorthStar Real Estate Income Trust Operating Partnership, LP, or our OP, of which we are the sole general partner. NS Real Estate Income Trust Advisor, LLC, or our Advisor, is our external manager and is an affiliate of NorthStar Realty Finance Corp., or our Sponsor. Our primary business lines are as follows:

•

Commercial Real Estate Debt—Includes first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests.

•

Commercial Real Estate Securities—Primarily includes commercial mortgage-backed securities, or CMBS, and may include unsecured real estate investment trust debt, collateralized debt obligation notes and other securities.

•

Commercial Real Estate Equity Investments—Includes select CRE equity investments.

        We believe that these businesses are complementary to each other due to the overlapping sources of investment opportunities and common reliance on real estate fundamentals.

        We generate revenue from interest income on our CRE debt and security investments. Our income is primarily derived through the difference between revenues and the cost at which we are able to finance our investments.

        We conduct our operations so as to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

29

Our Investments

        The following is a summary of our investments as of June 30, 2012:

							Weighted Average
																			Floating Rate as % of Principal Amount
Asset Type:	Number		Principal Amount(1)		Carrying Value		Fixed Rate			Spread over LIBOR(2)			Current Yield			Yield to Maturity(3)
CRE Debt
First mortgage loans		13	$	274,006,806	$	274,103,229		13.25	%		5.97	%		8.93	%		12.12	%		85.2	%
Mezzanine loans(4)		2		56,557,289		32,368,584		11.50	%		10.00	%		12.23	%		15.93	%		14.1	%
Total CRE Debt		15	$	330,564,095		306,471,813		12.54	%		6.04	%		9.28	%		12.65	%		77.7	%
CRE Securities
CMBS		1		4,000,000		3,196,400		5.48	%		N/A			8.06	%		14.91	%		0.0	%
Total CRE Securities		1		4,000,000		3,196,400		5.48	%		N/A			8.06	%		14.91	%		0.0	%
Total/Weighted average		16	$	310,375,390	$	309,668,213		12.15	%		6.04	%		9.26	%		12.67	%		76.7	%

(1)

Principal amount includes interest accretion, to the extent applicable.

(2)

All floating-rate CRE debt investments are subject to a fixed minimum LIBOR rate, or floor, with a weighted average floor of 2.33% as of June 30, 2012.

(3)

For CRE debt investments, represents the leveraged yield, if applicable, to initial maturity and includes fees received or expected to be received from our borrowers and excludes any fees paid or expected to be paid to our Advisor. For CRE securities, represents the yield based on cash flows through expected repayment dates.

(4)

Includes future funding commitments of $24.2 million which will be funded over the next 15 months.

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

Real Estate Debt

        Our CRE debt business 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 in structuring and allows us to maintain a more direct relationship with our borrowers and provides us an opportunity to earn origination and other fees.

Real Estate Securities

        Our CRE securities business is focused on investing in and asset managing a wide range of CRE securities, including CMBS and may include unsecured REIT debt, collateralized debt obligation notes, or CDO notes, primarily backed by CRE securities and debt and other securities. We would expect substantially all of our CRE securities to have explicit credit ratings assigned by at least one of the major rating agencies (Moody's Investors Service, Standard & Poor's, Fitch Ratings, Morningstar, DBRS and Kroll) and would typically be originally rated investment grade.

Profitability and Performance Metrics

        We calculate Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO (see "Non-GAAP Financial Measures—Funds from Operations and Modified Funds from Operations" for a description of these metrics), to evaluate the profitability and performance of our business.

30

Outlook and Recent Trends

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

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

        Virtually all commercial real estate property types were adversely impacted by the credit crisis, including core property types such as hotel, retail, office, industrial and multifamily properties. Land, condominium and other commercial property types were more severely impacted. Despite the difficult U.S. and global economic conditions, investor interest has been returning to commercial real estate especially in urban areas having high concentrations of institutional quality real estate, and especially in certain asset types such as apartments. In 2012 and going forward, companies such as ours, with no pre-recession asset issues, should have a competitive advantage in the market because we will not be otherwise distracted dealing with legacy portfolio issues and our originations and acquisitions of CRE debt, CRE securities and select CRE equity investments will reflect valuations that have already adjusted to post-recession pricing.

        Due to these market dynamics and our Advisor's expertise and industry relationships, we continue to see a robust pipeline of investment opportunities that have credit qualities and yield profiles that are consistent with our underwriting standards and that we believe offer the opportunity to meet or exceed our targeted returns. While we remain optimistic that we will continue to be able to generate and capitalize on an attractive pipeline, there is no assurance that will be the case.

Our Strategy

        Our primary business objectives are to originate and acquire real estate-related investments in order to produce attractive risk-adjusted returns and generate stable cash flows for distribution to our stockholders. We believe that our Advisor has a platform that derives a competitive advantage from the combination of best in class industry relationships and 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. We believe that our business lines are complementary to each other due to their overlapping sources of investment opportunities, common reliance on CRE fundamentals and ability to apply similar asset management skills to maximize value and to protect capital.

        We expect to use the net proceeds from our continuous, public offering of a minimum of 200,000 shares and a maximum of 110,526,315 shares of common stock, of which 100,000,000 shares can be offered pursuant to our primary offering, or our Primary Offering, and 10,526,315 shares can be offered pursuant to our distribution reinvestment plan, or our DRP, which are herein collectively referred to as our Offering, and proceeds from other financing sources to carry out our primary business objectives of originating and acquiring real estate-related investments.

31

Financing Strategy

        We employ leverage as a part of our investment strategy. Although we have a maximum leverage level for our portfolio, we do not have a targeted debt-to-equity ratio, as we believe the appropriate leverage for the particular assets we finance depends on the specific credit characteristics of those assets. We utilize leverage for the sole purpose of financing our assets and we do not employ leverage to speculate on changes in interest rates. When we employ leverage, we will generally seek to match-fund our assets and liabilities by having similar maturities and like-kind interest rate benchmarks (fixed or floating) to manage refinancing and interest rate risk. Our Advisor is responsible for managing such refinancing and interest rate risk on our behalf. We may pursue a variety of financing arrangements such as credit facilities, securitized arrangements and other term borrowings. In the first quarter 2012, we entered into a credit facility to finance up to $100 million of first mortgage loans secured by commercial real estate. As of June 30, 2012, we had $75,043,750 outstanding under our credit facility. Subsequent to quarter end, we entered into two credit facilities that provide up to an additional $90 million to finance first mortgage loans and senior loan participations secured by commercial real estate.

Risk Management

        Our Advisor uses many methods to actively manage our asset base to preserve our income and capital. These include frequent dialogue with borrowers and inspections of our collateral which are some of the key components of an effective process for identifying issues early. Some of our debt investments may require borrowers to replenish cash reserves for items such as taxes, insurance and future debt service costs. Late replenishments of cash reserves also may be an early indicator there could be a problem with the borrower or collateral property.

        Our Advisor conducts comprehensive credit reviews that generally include frequent oversight by the portfolio management team, weekly management meetings and a quarterly credit review process. These processes are designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis. Nevertheless, we cannot be certain that our Advisor's review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from assets that are not identified by these credit reviews. During the quarterly credit reviews, or more frequently if necessary, investments may be put on highly-monitored status and identified for possible impairment based upon several factors, including missed or late contractual payments, significant declines in collateral performance and other data which may indicate a potential issue in our ability to recover our capital from the investment.

        Each of our investments is unique and requires customized asset management strategies for dealing with potential credit situations. The complexity of each situation depends on many factors, including the number of collateral properties, the type of property, macro and local market conditions impacting the supply/demand, cash flow and collateral, and the financial condition of our borrowers and their willingness to support our collateral properties. Our Advisor utilizes an experienced asset management team that monitors those factors on our behalf.

Critical Accounting Policies

Real Estate Debt Investments

        CRE debt investments are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, discounts, premiums 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. As of June 30, 2012, we did not have any impaired CRE debt investments.

32

Real Estate Securities

        All of our CRE securities are classified as available for sale on the acquisition date, which are carried at fair value, with any unrealized gains (losses) reported as a component of accumulated other comprehensive income (loss) in our consolidated statements of equity. However, we may elect the fair value option for certain of our available for sale securities, and as a result, any unrealized gains (losses) on such securities are recorded in unrealized gains (losses) on investments and other in our consolidated statements of operations. As of June 30, 2012, we did not have any CRE securities for which we elected the fair value option.

Revenue Recognition

Real Estate Debt Investments

        Interest income is recognized on an accrual basis and any related discount, premium, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in our consolidated statements of operations.

Real Estate Securities

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

Credit Losses and Impairment on Investments

Real Estate Debt Investments

        Loans are considered impaired when based on current information and events it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment of ours 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 upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded with a corresponding charge to the provision for loan losses. The loan loss reserve for each loan is maintained at a level that is determined to be adequate by management to absorb probable losses. As of June 30, 2012, we did not have any impaired CRE debt investments.

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

33

Real Estate Securities

        CRE securities for which the fair value option is not elected are periodically evaluated for other-than-temporary impairment, or OTTI. CRE securities for which the fair value option was elected are not evaluated for OTTI as changes in fair value are recorded in our consolidated statements of operations. Realized losses on such securities are reclassified to realized gains (losses) on investments and other as losses occur. As of June 30, 2012, we did not have any OTTI recorded on our CRE security investment.

Other

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

Results of Operations

Comparison of the Three Months Ended June 30, 2012 to June 30, 2011

	Three Months Ended June 30,					Increase (decrease)
	2012			2011		Amount			%
Revenues
Interest income	$	4,708,504		$	668,325	$	4,040,179			604.5	%
Total revenues		4,708,504			668,325		4,040,179			604.5	%
Expenses
Interest expense		363,382			224,929		138,453			61.6	%
Advisory fees—related party		511,343			62,663		448,680			716.0	%
General and administrative expenses		894,547			345,018		549,529			159.3	%
Total expenses		1,769,272			632,610		1,136,662			179.7	%
Income (loss) from operations		2,939,232			35,715		2,903,517			8129.7	%
Realized gains (losses) on investments and other		3,027,959			—		3,027,959			100.0	%
Unrealized gains (losses) on investments and other		(2,958,937	)		585,719		(3,544,656	)		(605.2	)%
Net income (loss)		3,008,254			621,434		2,386,820			384.1	%
Less: net income (loss) attributable to non-controlling interests		68			75		(7	)		(9.3	)%
Net income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	3,008,186		$	621,359	$	2,386,827			384.1	%

Revenues

Interest Income

        Interest income increased $4,040,179, primarily attributable to increased investments in 2012.

Expenses

Interest Expense

        Interest expense increased $138,453, primarily attributable to new borrowings on our credit facility entered into in the first quarter 2012.

Advisory Fees—Related Party

        Advisory fees—related party increased $448,680 related to increased capital raising and investment activity.

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General and Administrative Expenses

        General and administrative expenses include auditing and professional fees, director fees, organization and other costs associated with operating our Company. The increase was primarily attributable to an increase in capital raising and investment activity.

Realized Gains (Losses) on Investments and Other

        The realized gains recorded in the second quarter 2012 related to the sale of two CRE securities.

Unrealized Gains (Losses) on Investments and Other

        Unrealized (losses) is related to the reversal of unrealized gains that were previously recorded on the two CRE securities that were sold in the second quarter 2012.

Comparison of the Six Months Ended June 30, 2012 to June 30, 2011

	Six Months Ended June 30,						Increase (decrease)
	2012			2011			Amount			%
Revenues
Interest income	$	7,272,224		$	1,041,791		$	6,230,433			598.1	%
Total revenues		7,272,224			1,041,791			6,230,433			598.1	%
Expenses
Interest expense		613,749			447,498			166,251			37.2	%
Advisory fees—related party		818,018			80,245			737,773			919.4	%
General and administrative expenses		1,394,043			576,884			817,159			141.7	%
Total expenses		2,825,810			1,104,627			1,721,183			155.8	%
Income (loss) from operations		4,446,414			(62,836	)		4,509,250			7176.2	%
Realized gains (losses) on investments and other		3,027,959			—			3,027,959			100.0	%
Unrealized gains (losses) on investments and other		(2,456,869	)		581,312			(3,038,181	)		(522.6	)%
Net income (loss)		5,017,504			518,476			4,499,028			867.7	%
Less: net income (loss) attributable to non-controlling interests		132			59			73			123.0	%
Net income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	5,017,372		$	518,417		$	4,498,955			867.8	%

Revenues

Interest Income

        Interest income increased $6,230,433, primarily attributable to increased investments in 2012.

Expenses

Interest Expense

        Interest expense increased $166,251, primarily attributable to new borrowings on our credit facility entered into in the first quarter 2012.

Advisory Fees—Related Party

        Advisory fees—related party increased $737,773 related to increased capital raising and investment activity.

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General and Administrative Expenses

        General and administrative expenses include auditing and professional fees, director fees, organization and other costs associated with operating our Company. The increase was primarily attributable to an increase in capital raising and investment activity.

Realized Gains (Losses) on Investments and Other

        The realized gains recorded in 2012 related to the sale of two CRE securities.

Unrealized Gains (Losses) on Investments and Other

        Unrealized gains (losses) is related to the reversal of unrealized gains that were previously recorded on the two CRE securities that were sold in the second quarter 2012.

Liquidity and Capital Resources

        We are dependent upon the net proceeds from our Offering to conduct our operations. We obtain the capital required to originate and acquire CRE debt investments, CRE securities and select CRE equity investments and conduct our operations from the proceeds of our Offering and any future offerings we may conduct, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. For the six months ended June 30, 2012, we sold 17,015,140 shares in our Offering generating gross proceeds of $169 million. From inception through June 30, 2012, we have raised gross proceeds of $325 million from our Offering, including proceeds from the merger with NorthStar Income Opportunity REIT I, Inc., or the Merger Transaction. As of June 30, 2012, we held $48 million of unrestricted cash. Since quarter end, we have executed $51 million principal amount of CRE debt originations.

        On February 29, 2012, NSREIT WF Loan, LLC, or NSREIT WF, an indirect wholly-owned subsidiary of ours, entered into a Master Repurchase and Securities Contract with Wells Fargo Bank, National Association, or our Wells Facility. Our Wells Facility provides up to $100 million to finance first mortgage loans secured by commercial real estate and has an initial term of two years, with two one-year extensions at our option, subject to the satisfaction of certain conditions. During the initial term, our Wells Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments. Borrowings under our Wells Facility accrue interest at a range of one-month LIBOR plus 2.5% to 3.0%, with advance rates of up to 75%, depending on asset type, subject to adjustment. Beginning 90 days from the closing date of our Wells Facility, we were required to pay monthly in arrears a non-utilization fee equal to 0.25% on the unused portion of our Wells Facility, unless the unused portion is less than $30.0 million. Given our rapid deployment of capital and resulting borrowings under our Wells Facility, we incurred an immaterial amount of non-utilization fees for the period beginning 90 days after the closing of our Wells Facility to June 30, 2012.

        As of June 30, 2012, we held $126 million principal amount of CRE debt investments financed with $75 million, resulting in a weighted average leveraged yield to maturity of 16.3%.

        In connection with our Wells Facility, we entered into a guaranty agreement under which we guarantee certain obligations under our Wells Facility. Additionally, our OP provided a pledge and security agreement over its interest in NSREIT WF. Our Wells 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. We have also agreed to guarantee certain obligations under our Wells Facility if we or an affiliate of ours engages in certain customary bad acts.

        Our Wells Facility contains a liquidity covenant that requires NSREIT WF to maintain at least $5 million and a maximum of $15 million in unrestricted cash or cash equivalents at all times during the term of our Wells Facility. As of June 30, 2012, we were in compliance with this covenant. Our

36

Wells Facility also requires the maintenance of a loan-to-collateral value ratio that may require us to provide additional collateral or make cash payments. As of June 30, 2012, we were not required to post additional collateral or make cash payments to maintain such ratio. As of June 30, 2012, we had $75 million outstanding under our Wells Facility.

        If we are unable to continue to raise funds in our Offering or from borrowings, we will be unable to make new investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we have certain fixed direct and indirect operating expenses, including certain expenses as a publicly-offered REIT, regardless of whether we are able to continue to raise funds in our Offering. Our inability to continue to raise funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions.

        Once we have fully invested the proceeds of our Offering, we expect that our financing will not exceed 50% of the greater of the cost or fair value of our investments, although it may exceed this level during our organization and offering stage. Our charter limits us from incurring borrowings that would exceed 75% of our tangible assets. We cannot exceed this limit unless any excess in borrowing over such level is approved by our stockholders. As of June 30, 2012, our leverage was 32%, which is well below the maximum allowed by our charter.

        In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our Advisor and NorthStar Realty Securities, LLC, or our Dealer Manager. During our organization and offering stage, these payments will include payments to our Dealer Manager for selling commissions and the dealer manager fee and payments to our Dealer Manager and our Advisor for reimbursement of certain organization and offering costs. However, our Advisor has agreed to reimburse us to the extent that selling commissions, the dealer manager fee and other organization and offering costs incurred by us exceed 15% of gross proceeds from our Primary Offering. During our acquisition and development stage, we expect to make payments to our Advisor in connection with the selection and origination or acquisition of investments, the management of our assets and costs incurred by our Advisor in providing services to us. The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our Advisor and our board of directors.

Cash Flows

Six months ended June 30, 2012 compared to June 30, 2011

        Net cash provided by operating activities for the six months ended June 30, 2012 was $3,666,067 compared to $108,147 for the six months ended June 30, 2011. The increase in net cash provided by operating activities related to an increase in net interest income generated from our investments due to increased investment activity offset by fees paid to our Advisor for the management of our investments.

        Net cash (used in) investing activities for the six months ended June 30, 2012 was $201,112,601 compared to $19,857,400 for the six months ended June 30, 2011. Net cash (used in) investing activities for the six months ended June 30, 2012 related to the origination of nine CRE debt investments offset by the sale of two CRE securities. Net cash (used in) investing activities for the six months ended June 30, 2011 related to the origination of two CRE debt investments.

        Net cash provided by financing activities for the six months ended June 30, 2012 was $191,190,318 compared to $23,382,403 for the six months ended June 30, 2011. Net cash provided by financing activities in 2012 related to the net proceeds from the issuance of common stock through our Offering and borrowings under our Wells Facility, offset by the repayment of secured term loans, distributions paid on our common stock and share repurchases. Net cash provided by financing activities in 2011

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related to the net proceeds from the issuance of common stock through our Offering offset by distributions paid on our common stock and share repurchases.

Off Balance Sheet Arrangements

        We have no off balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Related Party Transactions

        Our Advisor is responsible for managing our affairs on a day-to-day basis and for identifying, originating, acquiring and asset managing investments on behalf of us. For such services, our Advisor receives fees and compensation from us. Below is a summary of the fees due our Advisor.

        We are obligated to reimburse our Advisor for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs do not exceed 15% of gross offering proceeds from our Primary Offering.

        Our Advisor and certain affiliates of our Advisor are entitled to receive reimbursement for direct and indirect operating costs incurred by our Advisor in connection with administrative services provided to our Company. Indirect includes our allocable share of costs incurred by our Advisor for personnel and other overhead such as rent, technology and utilities. However, there is no reimbursement for personnel costs related to executive officers and other personnel involved in activities for which our Advisor receives an acquisition fee, asset management fee or disposition fee. We will reimburse our Advisor for operating costs (including the asset management fee) at the end of the four preceding fiscal quarters not to exceed the greater of: (i) 2.0% of our average invested assets; or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, loan losses or other similar non-cash reserves and excluding any gain from the sale of our assets for that period.

        Our Advisor receives a monthly asset management fee equal to one-twelfth of 1.25% of the sum of the principal amount of debt originated and the cost of all other investments made less any principal repaid on our debt and security investments (or our proportionate share thereof in the case of debt investments made through joint ventures).

        Our Advisor also receives an acquisition fee equal to 1.0% of the principal amount funded by us to originate CRE debt or the amount invested in the case of other real estate investments including acquisition expenses and any financings attributable to such investments.

        Pursuant to a dealer manager agreement, we pay our Dealer Manager selling commissions of up to 7.0% of gross offering proceeds from our Primary Offering, all of which are reallowed by our Dealer Manager to participating broker-dealers. In addition, we will pay our Dealer Manager a dealer manager fee of 3.0% of gross offering proceeds from our Primary Offering, a portion of which may be reallowed by our Dealer Manager to participating broker-dealers.

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        The following table summarizes the fees and reimbursements incurred to our Advisor for the three and six months ended June 30, 2012 and 2011 and the amounts payable at June 30, 2012 and December 31, 2011:

										Due to related party at
		Three Months Ended June 30,				Six Months Ended June 30,
	Financial Statement Location									June 30, 2012		December 31, 2011
Type of Fee or Reimbursement		2012		2011		2012		2011
Organization and offering costs
Organization	General and administrative expenses	$	118,074	$	175,545	$	269,875	$	261,907	$	—	$	23,514
Offering	Cost of capital		767,705		96,833		1,754,694		133,449		—		937,597
Operating costs(1)	General and administrative expenses		762,739		157,669		1,097,778		288,313		653,137		230,985
Advisory fees
Asset management	Advisory fees—related party		511,343		62,663		818,018		80,245		234,982		—
Acquisition(2)	Real estate debt investments, net		2,321,300		151,074		2,576,800		198,574		—		96,850
Disposition(3)	Real estate debt investments, net		—		—		—		—		—		—
Selling commissions/dealer manager fees	Cost of capital		8,678,430		1,726,575		16,077,518		2,644,340		—		—
Total										$	888,119	$	1,288,946

(1)

As of June 30, 2012, our Advisor has incurred unreimbursed operating costs of $4,548,725 on behalf of us, of which $3,895,588 has not yet been allocated per the 2%/25% Guidelines.

(2)

Acquisition fees are amortized to interest income over the life of the investment using the effective interest method and are included in real estate debt investments, net on the consolidated balance sheets.

(3)

Disposition fees are amortized to interest income over the life of the investment using the effective interest method and are included in real estate debt investments, net on the consolidated balance sheets. Disposition fees incurred to our Advisor are offset by exit fees expected to be received from our borrowers.

        We are party to a Second Amended and Restated Distribution Support Agreement, or the Distribution Support Agreement, with our Sponsor pursuant to which our Sponsor has committed to purchase up to $10 million of shares of our common stock if cash distributions exceed MFFO to provide additional funds to support distributions to stockholders. For the six months ended June 30, 2012 and 2011, our Sponsor purchased 212,822 and 102,004 shares, respectively, of our common stock at a price of $9.00 per share related to this arrangement for a price of $1,915,398 and $918,036, respectively.

Recent Developments

Offering Proceeds

        For the period from July 1, 2012 to August 9, 2012, we sold 5,321,657 shares of common stock pursuant to our Offering generating gross proceeds of $53.2 million.

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Distributions

        On August 8, 2012, our board of directors approved a daily cash distribution of $0.002185792 per share of common stock for each of the three months ended December 31, 2012. The distribution will be paid in cumulative amounts to the stockholders of record entitled to receive such distribution on October 1, 2012, November 1, 2012 and December 3, 2012.

Sponsor Purchase of Common Stock

        On August 8, 2012, our board of directors approved the sale of 41,956 shares of our common stock to our Sponsor, at a price of $9.00 per share. In connection with this commitment and including our Sponsor's purchase of shares approved on August 8, 2012, our Sponsor will have purchased 507,980 shares in the aggregate for $4.6 million.

Share Repurchase Program

        We have adopted a share repurchase program that may enable stockholders to sell their shares to us in limited circumstances. However, we are not obligated to repurchase shares under this share repurchase program. On July 20, 2012, we repurchased 15,725 shares for a total of $156,428 or $9.95 per share.

Advisory Agreement

        On July 18, 2012, the advisory agreement, as amended, or our Advisory Agreement, among us, our OP, our Advisor and our Sponsor was renewed through July 18, 2013 upon terms identical to those in effect through July 18, 2012. Pursuant to our Advisory Agreement, our Advisor will continue to perform day-to-day operational and administrative services for us, including services relating to our current public offering, asset management services, acquisition services and stockholder services.

        Then, on August 8, 2012, we amended our Advisory Agreement to change the calculation of asset management fees to prorate the asset management fees for each investment based on the number of days during the applicable period that we own such investment.

Citibank Facility

        On July 18, 2012, NSREIT CB Loan, LLC, or NSREIT CB, an indirect wholly-owned subsidiary of ours, entered into a Master Repurchase Agreement with Citibank, N.A., or our Citi Facility. Our Citi Facility provides up to $50 million to finance first mortgage loans and senior loan participations secured by commercial real estate.

        Interest rates and advance rates will depend upon asset type and characteristics. The initial maturity date of our Citi Facility is July 18, 2014, with three, one-year extensions at our option, which may be exercised upon the satisfaction of certain conditions set forth in our Citi Facility. During the initial term, our Citi Facility acts as a revolving credit facility that can be paid down as assets payoff and re-drawn upon for new investments.

        In connection with our Citi Facility, we agreed to guarantee certain obligations of our Citi Facility if we or any of our affiliates engages in certain customary bad acts. Our Citi Facility contains representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, NSREIT CB must maintain at least $3.75 million and a maximum of $7.5 million in unrestricted cash at all times during the term of our Citi Facility.

        Subsequent to quarter end, we borrowed $25.0 million under our Citi Facility.

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Doral Facility

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

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

        In connection with our Doral Facility, our OP agreed to guarantee interest payments and the obligations under our Doral Facility if either we or our affiliates engage in certain customary bad acts. In addition, our OP pledged its interests in NSREIT DOR as collateral. Our Doral Facility and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, our OP 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 our Doral Facility.

        Simultaneous with the closing, we borrowed $40 million under our Doral Facility.

Non-GAAP Financial Measures

Funds from Operations and Modified Funds from Operations

        We believe that FFO and MFFO, both of which are non-GAAP measures, are additional appropriate measures of the operating performance of a REIT and of our Company in particular. We compute funds from operations, or FFO, in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income (loss) (computed in accordance with generally accepted accounting principles, or U.S. GAAP), excluding gains (losses) from sales of depreciable properties, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, impairment on depreciable properties owned directly or indirectly and after adjustments for unconsolidated/uncombined partnerships and joint ventures. We believe FFO, a non-GAAP measure, is an appropriate measure of the operating performance of a REIT and of our company in particular.

        Changes in the accounting and reporting rules under U.S. GAAP that have been put into effect since the establishment of NAREIT's definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. For instance, the accounting treatment for acquisition fees related to business combinations has changed from being capitalized to being expensed. Additionally, publicly registered, non-traded REITs are typically different from traded REITs because they generally have a limited life followed by a liquidity event or other targeted exit strategy. Non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation as compared to later years when the proceeds from their initial public offering have been fully invested and when the company is seeking to implement a liquidity event or other exit strategy. However, it is likely that we will make investments past the acquisition and development stage, albeit at a substantially lower pace.

        Acquisition fees paid to our Advisor in connection with the origination and acquisition of debt investments are amortized over the life of the investment as an adjustment to interest income under U.S. GAAP and are therefore, included in the computation of net income (loss) and income (loss) from operations, both of which are performance measures under U.S. GAAP. Such acquisition fees are

41

paid in cash that would otherwise be available to distribute to our stockholders. In the event that proceeds from our Offering are not sufficient to fund the payment or reimbursement of acquisition fees and expenses to our Advisor, such fees would be paid from other sources, including new financing, operating cash flow, net proceeds from the sale of investments or from other cash flows. We believe that acquisition fees incurred by us negatively impact our operating performance during the period in which such investments are originated or acquired by reducing cash flows and therefore the potential distributions to stockholders. However, almost always, we earn origination fees from our borrowers in an amount equal to the acquisition fees paid to our Advisor, and as a result, the impact of acquisition fees to our operating performance and cash flows would be minimal.

        Due to certain of the unique features of publicly-registered, non-traded REITs, the Investment Program Association, or the IPA, an industry trade group, standardized a performance measure known as modified funds from operations, or MFFO, and recommends the use of MFFO for such REITs. Management believes MFFO is a useful performance measure to evaluate our business and further believes it is important to disclose MFFO in order to be consistent with the IPA recommendation and other non-traded REITs. MFFO that adjusts for items such as acquisition fees would only be comparable to non-traded REITs that have completed the majority of their acquisition activity and have other similar operating characteristics as us.

        The origination and acquisition of debt investments and the corresponding acquisition fees paid to our Advisor (and any offsetting origination fees received from our borrowers) associated with such activity is a key operating feature of our business plan that results in generating income and cash flow in order to make distributions to stockholders. Therefore, the exclusion for acquisition fees may be of limited value in calculating operating performance because acquisition fees affect our overall long-term operating performance and may be recurring in nature as part of net income (loss) and income (loss) from operations over the life of our company.

        MFFO is a metric used by management to evaluate our future operating performance once our organization and offering and acquisition and development stages are complete and is not intended to be used as a liquidity measure. Although management uses the MFFO metric to evaluate future operating performance, this metric excludes certain key operating items and other adjustments that may affect our overall operating performance. MFFO is not equivalent to net income (loss) as determined under U.S. GAAP.

        We compute MFFO in accordance with the definition established by the IPA. Our computation of MFFO may not be comparable to other REITs that do not calculate MFFO using the current IPA definition. MFFO excludes from FFO the following items:

•

acquisition fees and expenses;

•

non-cash amounts related to straight-line rent and the amortization of above or below market and in-place intangible lease assets and liabilities (which are adjusted in order to reflect such payments from an accrual basis of accounting under U.S. GAAP to a cash basis of accounting);

•

amortization of discounts and premiums on debt investments;

•

non-recurring impairment of real estate-related investments;

•

realized gains (losses) from the early extinguishment of debt;

•

realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business;

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•

unrealized gains (losses) from fair value adjustments on real estate securities, including commercial mortgage-backed securities and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings;

•

unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting;

•

adjustments related to contingent purchase price obligations; and

•

adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above.

        Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the accretion of a discount and amortization of a premium on debt and security investments, amortization of fees, any unrealized gains (losses) on derivatives, security investments or other, as well as other adjustments.

        MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment 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 prospects for the borrower and the competitive situation of the region where the borrower does business. Fair value is typically estimated based upon discounting the expected future cash flows of the underlying collateral taking into consideration the discount rate, capitalization rate, occupancy, creditworthiness of major tenants and many other factors. This requires significant judgment and because it is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded. Due to our limited life, any loan loss reserves recorded may be difficult to recover.

        We believe that MFFO is a useful non-GAAP measure for non-traded REITs. It is helpful to management and investors in assessing our future operating performance once our organization and offering, and acquisition and development stages are complete, because it eliminates from net income non-cash fair value adjustments on our real estate securities and acquisition fees and expenses that are incurred as part of our investment activities. However, MFFO may not be a useful measure of our operating performance or as a comparable measure to other typical non-traded REITs if we do not continue to operate in a similar manner to other non-traded REITs, including if we were to extend our acquisition and development stage or if we determined not to pursue an exit strategy.

        However, MFFO does have certain limitations. For instance, the effect of any accretion or amortization on investments originated or acquired at a discount or premium, respectively, are not reported in MFFO. In addition, realized gains (losses) from acquisition to dispositions are not reported in MFFO, even though such realized gains (losses) could affect our operating performance and cash available for distribution. Investors should note that any cash gains generated from the sale of investments would generally be used to fund new investments.

        Neither FFO nor MFFO is equivalent to net income (loss) or cash from operating activities determined in accordance with U.S. GAAP and should not be construed to be more relevant or accurate than the U.S. GAAP methodology in evaluating our operating performance. Neither FFO nor MFFO are necessarily indicative of cash flow available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Furthermore, neither FFO nor MFFO should be considered as an alternative to net income (loss) as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

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        Set forth below is a reconciliation of FFO and MFFO to net income (loss) attributable to our common stockholders:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Funds from Operations:
Net income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	3,008,186		$	621,359		$	5,017,372		$	518,417
Funds from Operations	$	3,008,186		$	621,359		$	5,017,372		$	518,417
Modified Funds from Operations:
Funds from Operations	$	3,008,186		$	621,359		$	5,017,372		$	518,417
Amortization of premiums, discounts and fees on investments		(10,197	)		37,981			(1,237	)		69,906
Realized (gains) losses on investments and other(1)		(3,027,959	)		—			(3,027,959	)		—
Unrealized (gains) losses from fair value adjustments		2,958,937			(585,719	)		2,456,869			(581,312	)
Modified Funds from Operations	$	2,928,967		$	73,621		$	4,445,045		$	7,011

(1)

On June 14, 2012, we sold two CRE securities generating gross sales proceeds of $32.4 million, representing a realized gain of $3.0 million that is excluded from MFFO.

Distributions Declared and Paid

        We generally pay distributions on a monthly basis based on daily record dates. Since the commencement of our operations on October 18, 2010 through June 30, 2012, we have paid distributions at an annualized distribution rate of 8% based on a purchase price of $10.00 per share of our common stock.

        The following summarizes distributions declared for the six months ended June 30, 2012, the year ended December 31, 2011 and from inception through June 30, 2012:

	Distributions(1)
							Cash Flow from Operations(2)		Funds from Operations(2)
Period	Cash		DRP		Total
Six months ended June 30, 2012	$	5,684,555	$	3,795,000	$	9,479,555	$	3,666,067	$	5,017,372
Year ended December 31, 2011		3,885,336		1,770,350		5,655,686		1,175,030		1,598,017
Inception through June 30, 2012(3)		10,961,771		5,743,045		16,704,816		4,788,820		8,925,511

(1)

Represents distributions declared for such period, even though such distributions are actually paid to stockholders the month following such period.

(2)

Contains reclassifications to conform with our consolidated financial statements on Form 10-K for the year ended December 31, 2011.

(3)

Includes the results of NorthStar Income Opportunity REIT I, Inc. prior to the Merger Transaction.

        The distributions in excess of our cash flow from operations were paid using Offering proceeds, including from the purchase of additional shares by our Sponsor. Over the long-term, however, we expect that our distributions will be paid entirely from cash flow from operations. However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial

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performance of our investments in the current real estate and financial environment, the type and mix of our investments and accounting of our investments in accordance with U.S. GAAP. As a result, future distributions declared and paid may exceed cash flow from operations.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        We may be exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate investment portfolio and operations. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on income and cash flows and to lower overall borrowing costs. We may utilize a variety of financial instruments, including interest rate caps, floors and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments. We will not enter into derivative or interest rate transactions for speculative purposes.

Interest Rate Risk

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

        Our CRE debt and security investments bear interest at either a floating or fixed-rate. The interest rates on our floating-rate assets typically float at a fixed spread over an index such as LIBOR, and typically reprice every 30 days based on LIBOR in effect at the time. Currently, all of our floating-rate CRE debt investments have a fixed minimum LIBOR rate. 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 our investments.

        Changes in interest rates could affect the value of our fixed-rate CRE debt and security investments. For example, increasing interest rates would result in a higher required yield on investments, which would decrease the value on existing fixed-rate assets in order to adjust their yields to current market levels.

        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. In addition, we seek to match interest rates on our assets with like-kind borrowings, so fixed-rate assets are financed with fixed-rate borrowings and floating-rate assets are financed with floating-rate borrowings, directly or indirectly, through the use of interest rate swaps, caps and other financial instruments or through a combination of these strategies. We are subject to interest rate risk because on certain investments, we maintain a net floating-rate asset position, and, therefore, our income will increase with increases in interest rates and decrease with declines in interest rates. As of June 30, 2012, all of our floating-rate investments had LIBOR floors in excess of the current LIBOR rate and our one CRE security was fixed rate, so a hypothetical 100 basis point increase in interest rates would decrease net income by $385,000.

Credit Spread Risk

        The value of our fixed and floating-rate investments also change with market credit spreads. This means that when market-demanded risk premiums, or credit spreads, increase, the value of our fixed

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and floating-rate assets decrease and vice versa. The fixed-rate securities 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 debt investments are valued based on a market credit spread over LIBOR. Excessive supply of these investments combined with reduced demand will generally cause the market to require a higher yield on these investments, resulting in the use of a higher or "wider" spread over the benchmark rate (usually the applicable U.S. Treasury yield) to value these assets. Under these conditions, the value of our portfolio should decrease. Conversely, if the spread used to value these assets were to decrease or "tighten," the value of these assets should increase.

Credit Risk

        Credit risk in our CRE debt and security investments relates to each individual borrower's ability to make required interest and principal payments on scheduled due dates. We seek to manage credit risk through a comprehensive credit analysis prior to making an investment, actively monitoring our asset portfolio and the underlying credit quality of our holdings and subordination and diversification of our portfolio. Our analysis is based on a broad range of real estate, financial, economic and borrower-related factors which we believe are critical to the evaluation of credit risk inherent in a transaction. For the six months ended June 30, 2012, one CRE debt investment contributed more than 10% of total revenue.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

        As of the end of the period covered by this report, the Company's management conducted an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's 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 within the Company to disclose material information otherwise required to be set forth in the Company's periodic reports.

Internal Control over Financial Reporting

Changes in internal control over financial reporting

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

Part II. Other Information

Item 1A.    Risk Factors

        There are no other material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 2, 2012, except as noted below.

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If we pay distributions from sources other than our cash flow from operations, we will have less cash available for investments and your overall return may be reduced.

        Our organizational documents permit us to pay distributions from any source, including Offering proceeds, borrowings or sales of assets. We have not established a limit on the amount of proceeds we may use to fund distributions. While we anticipate over the long-term being able to generate sufficient cash flow from operations to fully cover our distributions until the proceeds from our Offering are fully invested and otherwise during the course of our existence, we may not generate sufficient cash flow from operations to fund distributions. For the six months ended June 30, 2012, we declared distributions of $9,479,555 as compared to cash flow from operations of $3,666,067. The remaining $5,813,488, or 61%, was paid using proceeds from our Offering, including from the purchase of shares by our Sponsor. In addition, for the year ended December 31, 2011, we declared distributions of $5,655,686 as compared to cash flow from operations of $1,175,030. The remaining $4,480,656, or 79%, was paid using proceeds from our Offering, including from the purchase of shares by our Sponsor. Pursuant to a Distribution Support Agreement, in certain circumstances where our cash distributions exceed our MFFO, our Sponsor has agreed to purchase up to $10,000,000 of shares of our common stock at $9.00 per share to provide additional cash to support distributions to our stockholders and has, in fact, purchased $4.2 million of shares of our common stock as of June 30, 2012. The sale of these shares results in the dilution of the ownership interests of our public stockholders. Upon termination or expiration of the Distribution Support Agreement, we may not have sufficient cash available to pay distributions at the rate we had paid during preceding periods or at all. If we pay distributions from sources other than our cash flow from operations, we will have less cash available for investments and your overall return may be reduced.

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

Use of Proceeds from Registered Securities

        On July 19, 2010, our registration statement on Form S-11 (File No. 333-157688), covering our Offering of up to 110,526,315 shares of common stock, of which 100,000,000 shares of common stock would be offered pursuant to our Primary Offering and 10,526,315 shares of common stock would be offered pursuant to our DRP, was declared effective under the Securities Act. We commenced our Offering on the same date and retained our Dealer Manager to serve as our dealer manager of our Offering. We are offering up to 100,000,000 shares of common stock at an aggregate offering price of up to $1.0 billion, or $10.00 per share with discounts available to certain categories of purchasers, and 10,526,315 shares of common stock pursuant to our DRP at an aggregate offering price of $100 million, or $9.50 per share.

        As of June 30, 2012, excluding proceeds raised from the Merger Transaction, we issued the following common shares and raised the following proceeds in connection with our Offering:

	Shares		Proceeds
Primary Offering		29,425,346	$	293,171,419
DRP		507,201		4,818,415
Total		29,932,547	$	297,989,834

        As of June 30, 2012, we repurchased 103,750 shares for an average price of $9.62 per share and no share repurchase requests have been unfulfilled.

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        As of June 30, 2012, we incurred the following costs in connection with the issuance and distribution of the registered securities:

Type of Cost	Amount
Offering costs to related parties(1)	$	31,716,860

(1)

Comprised of $19.6 million in selling commissions, $8.7 million in dealer manager fees and $3.4 million in other offering costs. $21.8 million of these costs have been reallowed to third parties.

        From the commencement of our Offering through June 30, 2012, the net proceeds to us from our Primary Offering, after deducting the total expenses incurred described above, were $265,274,875. From the commencement of our Offering through June 30, 2012, we used proceeds of $231,254,945 principal amount to originate CRE debt investments net of financing, $2,720,000 to purchase a CRE security and $3,304,874 to pay our Advisor acquisition fees.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

        For the three months ended June 30, 2012, we repurchased shares of our common stock as follows:

Period	Number of Shares Purchased		Average Price Paid Per Share		Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program
April 1 to April 30		71,075	$	9.63		(1	)
May 1 to May 31		—		—		(1	)
June 1 to June 30		—		—		(1	)
Total		71,075	$	9.63

(1)

We adopted a share repurchase program effective July 19, 2010 which may enable stockholders to sell their shares to us in limited circumstances. We may not repurchase shares unless a stockholder has held shares for one year. However, we may repurchase shares held less than one year in connection with a stockholder's death or qualifying disability, if the disability is deemed qualifying by our board of directors, in its sole discretion, and after receiving written notice from the stockholder. We are not obligated to repurchase shares under this share repurchase program. We fund repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from our DRP. However, to the extent that the aggregate DRP proceeds are not sufficient to fund repurchase requests, our board of directors may, in its sole discretion, choose to use other sources of funds. Subject to funds being available, we will limit the number of shares redeemed pursuant to our share repurchase program to: (i) 5% of the weighted average number of shares of our common stock outstanding during the prior calendar year; and (ii) those that could be funded from the net DRP proceeds in the prior calendar year plus such additional funds as may be reserved for that purpose by our board of directors; provided, however, that the above volume limitations shall not apply to repurchases requested within two years after the death or disability of a stockholder. Our board of directors may, in its sole discretion, amend, suspend or terminate our share repurchase program at any time upon ten days' notice except that changes in the number of shares that can be repurchased during any calendar year will take effect only upon ten business days' prior written notice. In addition, our share repurchase program will terminate in the event a secondary market develops for our shares or until our shares are listed on a national exchange or included for quotation in a national securities market.

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Exhibit Number			Description
	3.1		Second Articles of Amendment and Restatement of NorthStar Real Estate Income Trust, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on August 26, 2010)
	3.2		Bylaws of NorthStar Real Estate Income Trust, Inc. (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-11 (File No. 333-157688))
	10.1		Master Repurchase Agreement, dated as of July 18, 2012, between NS REIT CB Loan, LLC and Citibank, N.A. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 19, 2012 and incorporated herein by reference)
	10.2		Limited Guaranty, made as of July 18, 2012, by NorthStar Real Estate Income Trust, Inc., for the benefit of Citibank, N.A. (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on July 19, 2012 and incorporated herein by reference)
	10.3		Credit and Security Agreement, dated as of July 31, 2012, by and between NS REIT DOR Loan, LLC and Doral Bank (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 2, 2012 and incorporated herein by reference)
	10.4		Guaranty, made as of July 31, 2012, by NorthStar Real Estate Income Operating Partnership, LP, in favor of Doral Bank (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on August 2, 2012 and incorporated herein by reference)
	10.5	��	Amendment No. 1 to the Second Amended and Restated Distribution Support Agreement, dated as of April 11, 2012, by and between NorthStar Realty Finance Corp. and NorthStar Real Estate Income Trust, Inc. (filed as Exhibit 10.14 to Post-Effective Amendment No. 10 to the Company's Registration Statement on Form S-11 (File No. 333-157688) and incorporated herein by reference)
	10.6	*	Amendment No. 3 to the Advisory Agreement, dated as of August 8, 2012, by and among NorthStar Real Estate Income Trust, Inc., NorthStar Real Estate Income Trust Operating Partnership, LP, NS Real Estate Income Trust Advisor, LLC and NorthStar Realty Finance Corp.
	31.1	*	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	*	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	*	Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	*	Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

*

Filed herewith.

**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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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 REAL ESTATE INCOME TRUST, INC.
Date: August 13, 2012	By:	/s/ DAVID T. HAMAMOTO
		Name:	David T. Hamamoto
		Title:	Chairman and Chief Executive Officer
	By:	/s/ DEBRA A. HESS
		Name:	Debra A. Hess
		Title:	Chief Financial Officer

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