XNYS:NRFPRB Northstar Realty Finance Corp Pref Share Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:NRFPRB Fair Value Estimate
Premium
XNYS:NRFPRB Consider Buying
Premium
XNYS:NRFPRB Consider Selling
Premium
XNYS:NRFPRB Fair Value Uncertainty
Premium
XNYS:NRFPRB Economic Moat
Premium
XNYS:NRFPRB Stewardship
Premium
 

Use these links to rapidly review the document
TABLE OF CONTENTS

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: 001-32330

NORTHSTAR REALTY FINANCE CORP.
(Exact Name of Registrant as Specified in its Charter)

Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
  11-3707493
(IRS Employer
Identification No.)

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

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

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

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

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

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

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

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

        The Company has one class of common stock, par value $0.01 per share, 134,675,417 shares outstanding as of August 6, 2012.

   


Table of Contents


NORTHSTAR REALTY FINANCE CORP.

FORM 10-Q

TABLE OF CONTENTS

Index
   
  Page  

Part I.

 

Financial Information

    5  

Item 1.

 

Financial Statements

    5  

 

Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

    5  

 

Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2012 and 2011

    6  

 

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2012 and 2011

    7  

 

Consolidated Statements of Equity as of June 30, 2012 (unaudited) and December 31, 2011

    8  

 

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011

    9  

 

Notes to the Consolidated Financial Statements (unaudited)

    10  

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    65  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    94  

Item 4.

 

Controls and Procedures

    97  

Part II.

 

Other Information

    97  

Item 1.

 

Legal Proceedings

    97  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    98  

Item 6.

 

Exhibits

    98  

Signatures

    103  

2


Table of Contents


FORWARD-LOOKING STATEMENTS

        This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "seek," "anticipate," "estimate," "believe," "could," "project," "predict," "continue," "future" or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to the operating performance of our investments, our financing needs, the effects of our current strategies, loan and securities activities, our ability to manage our collateralized debt obligations, or CDOs, and our ability to raise capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the economic environment. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward looking statements. These factors include, but are not limited to:

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

    access to debt and equity capital and our liquidity;

    our use of leverage;

    our ability to meet various coverage tests with respect to our CDOs;

    our ability to obtain mortgage financing on our net lease properties;

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

    our ability to source and close on attractive investment opportunities;

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

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

    credit rating downgrades;

    tenant or borrower defaults or bankruptcy;

    illiquidity of properties in our portfolio;

    environmental compliance costs and liabilities;

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

    competition for investment opportunities;

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

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

3


Table of Contents

    the ability to raise capital for the non-listed real estate investment trusts, or REITs, we sponsor;

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

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

    competition for qualified personnel and our ability to retain key personnel;

    the effectiveness of our risk management systems;

    failure to maintain effective internal controls;

    compliance with the rules governing REITs; and

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

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

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

4


Table of Contents


PART I. Financial Information

Item 1.    Financial Statements

        


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

 
  June 30, 2012
(Unaudited)
  December 31,
2011
 

Assets

             

VIE Financing Structures

             

Restricted cash

  $ 233,778   $ 261,295  

Operating real estate, net

    341,997     313,227  

Real estate securities, available for sale

    1,199,412     1,358,282  

Real estate debt investments, net

    1,554,868     1,631,856  

Investments in and advances to unconsolidated ventures

    62,152     60,352  

Receivables, net of allowance of $1,210 in 2012 and $1,179 in 2011

    19,359     22,530  

Derivative assets, at fair value

    28     61  

Deferred costs and intangible assets, net

    42,377     47,499  

Assets of properties held for sale

    1,597     3,198  

Other assets

    18,046     23,135  
           

    3,473,614     3,721,435  
           

Non-VIE Financing Structures

             

Cash and cash equivalents

    195,759     144,508  

Restricted cash

    48,983     37,069  

Operating real estate, net

    772,892     776,222  

Real estate securities, available for sale

    147,074     115,023  

Real estate debt investments, net

    225,212     78,726  

Investments in and advances to unconsolidated ventures

    40,077     33,205  

Receivables

    14,910     8,958  

Receivables, related parties

    7,275     5,979  

Unbilled rent receivable

    12,907     11,891  

Derivative assets, at fair value

    11,822     5,674  

Deferred costs and intangible assets, net

    49,036     50,885  

Other assets

    10,516     16,862  
           

    1,536,463     1,285,002  
           

Total assets

  $ 5,010,077   $ 5,006,437  
           

Liabilities

             

VIE Financing Structures

             

CDO bonds payable (see Note 9)

  $ 2,062,304   $ 2,273,907  

Mortgage notes payable

    228,446     228,525  

Secured term loan

    14,682     14,682  

Accounts payable and accrued expenses

    14,346     15,754  

Escrow deposits payable

    70,064     52,660  

Derivative liabilities, at fair value

    206,152     226,481  

Other liabilities

    48,733     55,007  
           

    2,644,727     2,867,016  
           

Non-VIE Financing Structures

             

Mortgage notes payable

    554,840     554,732  

Credit facilities

    132,318     64,259  

Exchangeable senior notes

    282,694     215,853  

Junior subordinated notes, at fair value

    161,374     157,168  

Accounts payable and accrued expenses

    37,486     50,868  

Escrow deposits payable

    12,345     196  

Derivative liabilities, at fair value

        8,193  

Other liabilities

    50,324     48,538  
           

    1,231,381     1,099,807  
           

Total liabilities

    3,876,108     3,966,823  
           

Commitments and contingencies (see Note 15)

             

Equity

             

NorthStar Realty Finance Corp. Stockholders' Equity

             

Preferred stock, 8.75% Series A, $0.01 par value, $60,525 and $60,000 liquidation preference as of June 30, 2012 and December 31, 2011, respectively

    58,357     57,867  

Preferred stock, 8.25% Series B, $0.01 par value, $233,350 and $190,000 liquidation preference as of June 30, 2012 and December 31, 2011, respectively

    221,643     183,505  

Common stock, $0.01 par value, 500,000,000 shares authorized, 133,425,417 and 96,044,383 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

    1,334     960  

Additional paid-in capital

    1,008,913     809,826  

Retained earnings (accumulated deficit)

    (155,057 )   (8,626 )

Accumulated other comprehensive income (loss)

    (26,229 )   (36,160 )
           

Total NorthStar Realty Finance Corp. stockholders' equity

    1,108,961     1,007,372  

Non-controlling interests

    25,008     32,242  
           

Total equity

    1,133,969     1,039,614  
           

Total liabilities and equity

  $ 5,010,077   $ 5,006,437  
           

   

See accompanying notes to consolidated financial statements.

5


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2012   2011   2012   2011  

Revenues

                         

Interest income

  $ 79,988   $ 110,790   $ 160,700   $ 208,430  

Rental and escalation income

    29,226     25,956     57,659     58,883  

Commission income

    8,679     1,726     16,078     2,644  

Advisory and other fee income

    2,742     212     3,259     295  

Other revenue

    1,531     1,365     1,739     1,615  
                   

Total revenues

    122,166     140,049     239,435     271,867  

Expenses

                         

Interest expense

    34,665     34,206     69,963     67,626  

Real estate properties—operating expenses

    5,025     2,613     9,689     15,110  

Asset management expenses

    304     1,328     1,801     2,889  

Commission expense

    6,748     1,299     12,397     2,016  

Other costs, net

    200         392      

Provision for loan losses

    6,537     14,200     13,377     38,700  

Provision for loss on equity investment

                4,482  

General and administrative

                         

Salaries and equity-based compensation(1)

    16,014     19,528     30,144     32,269  

Other general and administrative

    5,570     7,361     12,501     14,062  
                   

Total general and administrative

    21,584     26,889     42,645     46,331  

Depreciation and amortization

    12,677     11,526     24,983     19,608  
                   

Total expenses

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

Income (loss) from operations

    34,426     47,988     64,188     75,105  

Equity in earnings (losses) of unconsolidated ventures

    (336 )   (1,555 )   (837 )   (3,783 )

Other income (loss)

            20,258     10,138  

Unrealized gain (loss) on investments and other

    (115,648 )   (130,607 )   (211,054 )   (282,825 )

Realized gain (loss) on investments and other

    5,195     36,839     20,547     47,573  
                   

Income (loss) from continuing operations

    (76,363 )   (47,335 )   (106,898 )   (153,792 )

Income (loss) from discontinued operations

    (43 )   (1,047 )   (65 )   (638 )

Gain (loss) on sale from discontinued operations

    285     9,416     285     14,447  
                   

Net income (loss)

    (76,121 )   (38,966 )   (106,678 )   (139,983 )

Less: net (income) loss allocated to non-controlling interests

    4,244     (5,813 )   6,207     (349 )

Preferred stock dividends

    (5,635 )   (5,231 )   (10,958 )   (10,463 )

Contingently redeemable non-controlling interest accretion

        (1,973 )       (4,982 )
                   

Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders

  $ (77,512 ) $ (51,983 ) $ (111,429 ) $ (155,777 )
                   

Net income (loss) per share from continuing operations (basic/diluted)

  $ (0.62 ) $ (0.69 ) $ (0.98 ) $ (2.05 )

Income (loss) per share from discontinued operations (basic/diluted)

        (0.01 )       (0.01 )

Gain per share on sale of discontinued operations (basic/diluted)

        0.10         0.17  
                   

Net income (loss) per common share attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)

  $ (0.62 ) $ (0.60 ) $ (0.98 ) $ (1.89 )
                   

Weighted average number of shares of common stock:

                         

Basic

    124,802,710     86,966,645     113,524,914     82,605,559  
                   

Diluted

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

Dividends declared per share of common stock

  $ 0.16   $ 0.10   $ 0.31   $ 0.20  
                   

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

   

See accompanying notes to consolidated financial statements.

6


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in Thousands)

(Unaudited)

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2012   2011   2012   2011  

Net income (loss)

  $ (76,121 ) $ (38,966 ) $ (106,678 ) $ (139,983 )

Other comprehensive income (loss):

                         

Unrealized gain (loss) on real estate securities, available for sale

    4,495         6,689      

Reclassification adjustment for gains (losses) included in net income (loss)

    1,873     1,873     3,746     3,746  
                   

Total other comprehensive income (loss)

    6,368     1,873     10,435     3,746  

Comprehensive income (loss)

    (69,753 )   (37,093 )   (96,243 )   (136,237 )

Less: Comprehensive (income) loss attributable to non-controlling interests

    3,935     (5,999 )   5,703     (633 )
                   

Comprehensive income (loss) attributable to NorthStar Realty Finance Corp

  $ (65,818 ) $ (43,092 ) $ (90,540 ) $ (136,870 )
                   

   

See accompanying notes to consolidated financial statements.

7


Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Amounts in Thousands)

 
  Preferred Stock    
   
   
   
   
   
   
   
 
 
  Series A   Series B   Common Stock    
  Retained
Earnings
(Accumulated
Deficit)
  Accumulated
Other
Comprehensive
Income (Loss)
  Total
NorthStar
Stockholders'
Equity
   
   
 
 
  Additional
Paid-in
Capital
  Non-controlling
Interests
  Total
Equity
 
 
  Shares   Amount   Shares   Amount   Shares   Amount  

Balance at December 31, 2010

    2,400   $ 57,867     7,600   $ 183,505     78,105   $ 781   $ 723,102   $ 293,382   $ (36,119 ) $ 1,222,518   $ 55,173   $ 1,277,691  

Net proceeds from offering of common stock

                    17,250     173     69,132             69,305         69,305  

Reclassification of equity compensation to liability

                                            (2,136 )   (2,136 )

Non-controlling interest contribution to joint venture

                                            144     144  

Non-controlling interest distributions

                                            (13,202 )   (13,202 )

Dividend reinvestment and stock purchase plan

                    62         264             264         264  

Amortization of equity-based compensation

                            17             17     11,665     11,682  

Contingently redeemable non-controlling interest accretion

                                (5,178 )       (5,178 )       (5,178 )

Equity component of exchangeable notes

                            10,971             10,971         10,971  

Other comprehensive income (loss)

                                    (41 )   (41 )   26     (15 )

Conversion of LTIP units

                    628     6     6,340             6,346     (6,346 )    

Dividends on common stock and LTIP Units

                                (38,994 )       (38,994 )   (1,809 )   (40,803 )

Dividends on preferred stock

                                (20,925 )       (20,925 )       (20,925 )

Net income (loss)

                                (236,911 )       (236,911 )   (11,273 )   (248,184 )
                                                   

Balance at December 31, 2011

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

Net proceeds from offering of common stock

      $       $     37,250   $ 372   $ 198,751   $   $   $ 199,123   $   $ 199,123  

Net proceeds from offering of preferred stock

    21     490     1,734     38,138                         38,628         38,628  

Redemptions of non-controlling interests

                            (2,358 )           (2,358 )   2,358      

Non-controlling interest distributions

                                            (7,051 )   (7,051 )

Dividend reinvestment plan

                    17     1     93             94         94  

Amortization of equity-based compensation

                                            7,158     7,158  

Equity component of exchangeable notes

                            1,986             1,986         1,986  

Other comprehensive income (loss)

                                    9,931     9,931     504     10,435  

Conversion of LTIP units

                    113     1     615             616     (616 )    

Dividends on common stock, LTIP Units and RSUs

                                (35,002 )       (35,002 )   (3,380 )   (38,382 )

Dividends on preferred stock

                                (10,958 )       (10,958 )       (10,958 )

Net income (loss)

                                (100,471 )       (100,471 )   (6,207 )   (106,678 )
                                                   

Balance at June 30, 2012 (unaudited)

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

See accompanying notes to consolidated financial statements.

8


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

 
  Six Months Ended
June 30,
 
 
  2012   2011  

Cash flows from operating activities:

             

Net income (loss)

  $ (106,678 ) $ (139,983 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

             

Equity in (earnings) loss of unconsolidated ventures

    837     3,783  

Depreciation and amortization

    24,987     20,400  

Amortization of premium/discount on investments

    (38,841 )   (78,904 )

Interest accretion on investments

    (277 )   (7,571 )

Amortization of deferred financing costs

    1,660     2,897  

Equity-based compensation

    7,158     4,647  

Unrealized (gain) loss on investments and other

    168,441     227,869  

Realized gain on sale of investments and other / other income

    (20,805 )   (62,022 )

Reversal of accrued loss and other costs

    (22,041 )    

Distributions from unconsolidated ventures

    802     325  

Amortization of capitalized above/below market leases

    (565 )   (384 )

Unbilled rent receivable

    (1,501 )   (1,194 )

Provision for loss on equity investment

        4,482  

Provision for loan losses

    13,377     38,700  

Allowance for uncollectable accounts

    225     55  

Discount and loan fees received

    13,158     2,772  

Loan acquisition costs

    (835 )    

Changes in assets and liabilities:

             

Restricted cash

    (7,664 )   (13,899 )

Receivables

    (4,232 )   (1,636 )

Other assets

    6,729     11,821  

Receivables from related parties

    (1,254 )   (1,301 )

Accounts payable and accrued expenses

    (16,628 )   5,635  

Other liabilities

    17,680     (3,646 )
           

Net cash provided by (used in) operating activities

    33,733     12,846  

Cash flows from investing activities:

             

Acquisitions of operating real estate, net

    (6,858 )    

Improvements of operating real estate

    (1,614 )   (381 )

Deferred costs and intangible assets

    (732 )   (134 )

Net proceeds from disposition of operating real estate

    8,542     114,507  

Acquisitions of real estate securities, available for sale

    (82,865 )   (166,423 )

Proceeds from sales of real estate securities, available for sale

    200,285     126,381  

Repayments on real estate securities, available for sale

    77,974     71,534  

Originations/acquisitions of real estate debt investments

    (210,487 )   (174,852 )

Repayments on real estate debt investments

    94,651     163,966  

Proceeds from sales of real estate debt investments

    10,845     60,885  

Restricted cash provided by (used in) investment activities

    (5,417 )   (1,659 )

Other receivables

    10,776      

Investment in and advances to unconsolidated ventures

    (7,939 )   (1,218 )

Distributions from unconsolidated ventures

    175     676  
           

Net cash provided by (used in) investing activities

    87,336     193,282  

Cash flows from financing activities:

             

Purchase of derivative instruments

    (8,920 )    

Settlement of derivative instrument

    (8,163 )   (27,097 )

Collateral held by derivative counterparties

        23,280  

Borrowings of mortgage notes

    4,500     20,920  

Repayments of mortgage notes

    (4,471 )   (101,043 )

Borrowings under credit facilies

    84,161      

Repayments of credit facilities

    (16,102 )    

Proceeds from CDO bonds reissuance

    10,360      

Proceeds from CDO bonds

    10,000     23,000  

Repayments of CDO bonds

    (387,885 )   (97,962 )

Repurchases of CDO bonds

    (59,161 )   (70,687 )

Repayments of secured term loans

        (22,199 )

Payment of deferred financing costs

    (3,072 )   (9,748 )

Change in restricted cash

    58,415     (23,849 )

Proceeds from exchangeable senior notes

    75,000     172,500  

Repurchases and repayment of exchangeable senior notes

    (7,500 )   (50,787 )

Net proceeds from preferred stock offering

    38,628      

Net proceeds from common stock offering

    199,123     69,341  

Proceeds from dividend reinvestment and stock purchase plan

    94     153  

Dividends (common and preferred)

    (45,961 )   (27,860 )

Distributions / repayments to non-controlling interests

    (8,864 )   (18,336 )
           

Net cash provided by (used in) financing activities

    (69,818 )   (140,374 )

Net increase (decrease) in cash and cash equivalents

    51,251     65,754  

Cash and cash equivalents—beginning of period

    144,508     125,439  
           

Cash and cash equivalents—end of period

  $ 195,759   $ 191,193  
           

   

See accompanying notes to consolidated financial statements.

9


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts in Thousands, Except Per Share Data

(Unaudited)

1. Formation and Organization

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

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

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

Principles of Consolidation

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

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

        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

10


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

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

Estimates

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

Reclassifications

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

Comprehensive Income

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

Fair Value Option

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

Real Estate Debt Investments

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

11


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Real Estate Securities

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

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

Operating Real Estate

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

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

Revenue Recognition

Real Estate Debt Investments

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

12


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

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

Real Estate Securities

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

Operating Real Estate

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

Credit Losses and Impairment on Investments

Real Estate Debt Investments

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

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

13


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

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

Real Estate Securities

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

Operating Real Estate

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

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

Troubled Debt Restructuring

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

Other

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

14


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Recently Issued Pronouncements

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

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

3. Variable Interest Entities

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

Consolidated VIEs (the Company is the primary beneficiary)

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

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

15


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

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

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

 
  Consolidated Variable Interest Entities  
 
  N-Star I   N-Star II   N-Star III   N-Star IV   N-Star V   N-Star VI   N-Star VII   N-Star VIII   N-Star IX   CSE CDO   CapLease CDO   Total  

Assets of consolidated VIEs:

                                                                         

Restricted cash

  $ 2,397   $ 1,464   $ 2,327   $ 14,766   $ 270   $ 44,263   $ 718   $ 45,926   $ 28,043   $ 89,745   $ 3,859   $ 233,778  

Operating real estate, net

                71,648                 266,055         4,294         341,997  

Real estate securities, available for sale

    156,498     145,157     135,826     29,938     145,329     35,459     143,647     10,794     331,377     51,425     13,962     1,199,412  

Real estate debt investments, net

            16,666     215,355         302,244         481,095     50,553     367,129     121,826     1,554,868  

Investments in and advances to unconsolidated ventures

                        2,586         59,566                 62,152  

Receivables, net of allowance

    1,521     987     1,168     1,181     1,500     876     1,583     2,849     3,658     3,208     828     19,359  

Derivative assets, at fair value

                            28                     28  

Deferred costs and intangible assets, net

                3,155         93         39,129                 42,377  

Assets of properties held for sale

                                        1,597         1,597  

Other assets

    13     16     50     746     11     92     3,159     2,367     307     11,265     20     18,046  
                                                   

Total assets of consolidated VIEs(1)

    160,429     147,624     156,037     336,789     147,110     385,613     149,135     907,781     413,938     528,663     140,495     3,473,614  

Liabilities of consolidated VIEs:

                                                                         

CDO bonds payable

    143,028     92,979     95,126     139,686     112,832     178,226     115,085     352,371     236,333     480,487     116,151     2,062,304  

Mortgage notes payable

                                228,446                 228,446  

Secured term loan

                        14,682                         14,682  

Accounts payable and accrued expenses

    868     72     681     1,564     446     389     359     4,719     1,432     2,646     1,170     14,346  

Escrow deposits payable

                5,236         26,755         20,636     339     16,544     554     70,064  

Derivative liabilities, at fair value

    3,322     8,254     14,691         36,057     7,651     48,911     25,543     48,173     13,550         206,152  

Other liabilities

                1,306             255     19,700     27,407     17     48     48,733  
                                                   

Total liabilities of consolidated VIEs(2)

    147,218     101,305     110,498     147,792     149,335     227,703     164,610     651,415     313,684     513,244     117,923     2,644,727  
                                                   

Net assets

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

(1)
Assets of each of the consolidated VIEs may only be used to settle obligations of the respective VIE.

(2)
Creditors of each of the consolidated VIEs have no recourse to the general credit of the Company.

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

16


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

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

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

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

Real Estate Debt Investments

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

Real Estate Securities

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

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

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

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

17


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

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

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

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

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

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

NorthStar Realty Finance Trusts

        The Company owns all of the common stock of NorthStar Realty Finance Trusts I through VIII (collectively, the "Trusts"). The Trusts were formed to issue trust preferred securities. The Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result, the Company did not consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting.

18


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

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

 
  Unconsolidated Variable Interest Entities    
   
 
 
  Junior Subordinated
Notes, at Fair Value
  Real Estate Debt
Investments
  Real Estate Securities,
Available for Sale
  Total   Maximum Exposure
to Loss(1)
 

Real estate debt investments

  $   $ 54,916   $   $ 54,916   $ 54,916  

Real estate securities, available for sale

            60,879     60,879     60,879  
                       

Total assets

        54,916     60,879     115,795     115,795  

Junior subordinated notes, at fair value

    161,374             161,374     NA  
                       

Total liabilities

    161,374             161,374     NA  
                       

Net asset (liability)

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

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

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

4. Fair Value

Fair Value Measurement

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

19


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

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

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

Level 2.

 

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

 

 

a)

 

Quoted prices for similar assets or liabilities in active markets.

 

 

b)

 

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

 

 

c)

 

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

 

 

d)

 

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

Level 3.

 

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

Determination of Fair Value

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

Real Estate Securities

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

Derivative Instruments

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

20


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

CDO Bonds Payable

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

Junior Subordinated Notes

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

Fair Value Measurement

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

 
  June 30, 2012  
 
  Level 1   Level 2   Level 3   Total  

Assets:

                         

Real estate securities, available for sale:

                         

CMBS

  $   $ 932,099   $ 226,747   $ 1,158,846  

Third-party CDO notes

            70,936     70,936  

Unsecured REIT debt

        82,868     136     83,004  

Trust preferred securities

            7,584     7,584  

Agency debentures

        26,116         26,116  
                   

Subtotal real estate securities, available for sale

        1,041,083     305,403     1,346,486  

Derivative assets

        11,850         11,850  
                   

Total assets

  $   $ 1,052,933   $ 305,403   $ 1,358,336  
                   

Liabilities:

                         

CDO bonds payable(1)

  $   $   $ 1,946,153   $ 1,946,153  

Junior subordinated notes

            161,374     161,374  

Derivative liabilities

        206,152         206,152  
                   

Total liabilities

  $   $ 206,152   $ 2,107,527   $ 2,313,679  
                   

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

21


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

 
  December 31, 2011  
 
  Level 1   Level 2   Level 3   Total  

Assets:

                         

Real estate securities, available for sale:

                         

CMBS

  $   $ 936,315   $ 336,421   $ 1,272,736  

Third-party CDO notes

            63,567     63,567  

Unsecured REIT debt

        90,824     3,474     94,298  

Trust preferred securities

            19,145     19,145  

Agency debentures

        23,559         23,559  
                   

Subtotal real estate securities, available for sale

        1,050,698     422,607     1,473,305  

Derivative assets

        5,735         5,735  
                   

Total assets

  $   $ 1,056,433   $ 422,607   $ 1,479,040  
                   

Liabilities:

                         

CDO bonds payable(1)

  $   $   $ 2,145,239   $ 2,145,239  

Junior subordinated notes

            157,168     157,168  

Derivative liabilities

        234,674         234,674  
                   

Total liabilities

  $   $ 234,674   $ 2,302,407   $ 2,537,081  
                   

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

22


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

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

 
  June 30, 2012   December 31, 2011  
 
  Real Estate
Securities
  CDO Bonds
Payable
  Junior
Subordinated
Notes
  Real Estate
Securities
  CDO Bonds
Payable
  Junior
Subordinated
Notes
 

Beginning balance(1)

  $ 422,607   $ 2,145,239   $ 157,168   $ 492,576   $ 2,258,805   $ 191,250  

Transfers into Level 3(2)

    58,288             469,209          

Transfers out of Level 3(2)

    (137,473 )           (434,036 )        

Purchases / borrowings / amortization

    38,286     20,444           146,152     65,199      

Sales

    (77,939 )           (111,437 )        

Paydowns

    (40,989 )   (373,708 )       (23,361 )   (325,989 )    

Repurchases

        (59,161 )           (75,316 )    

Losses (realized or unrealized)

                                     

Included in earnings

    (32,220 )   213,339     4,206     (216,939 )   225,972      

Included in other comprehensive income (loss)

                (7,676 )        

Gains (realized or unrealized)

                                     

Included in earnings

    68,024             108,109     (3,432 )   (34,082 )

Included in other comprehensive income (loss)

    6,819             10          
                           

Ending balance

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

Gains (losses) included in earnings attributable to the change in unrealized gains (losses) relating to assets or liabilities still held. 

  $ 29,676   $ (209,471 ) $ (4,206 ) $ (113,592 ) $ (202,276 ) $ 34,082  
                           

(1)
Reflects the balance at January 1, 2012 and 2011 for the periods ended June 30, 2012 and December 31, 2011, respectively.

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

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

23


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

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

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

Fair Value Option

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

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

 
  June 30,
2012
  December 31,
2011
 

Assets:

             

Real estate securities, available for sale:(1)

             

CMBS

  $ 1,063,592   $ 1,199,660  

Third-party CDO notes

    40,664     40,231  

Unsecured REIT debt

    83,004     94,298  

Trust preferred securities

    7,584     19,145  

Agency debentures

    26,116     23,559  
           

Total assets

  $ 1,220,960   $ 1,376,893  
           

Liabilities:

             

CDO bonds payable(2)

  $ 1,946,153   $ 2,145,239  

Junior subordinated notes

    161,374     157,168  
           

Total liabilities

  $ 2,107,527   $ 2,302,407  
           

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

24


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

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

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

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

CDO bonds payable(1)

  $ 1,946,153   $ 3,508,705   $ (1,562,552 )

Junior subordinated notes

    161,374     280,117     (118,743 )
               

Total liabilities

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

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

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

Changes in Fair Value Recorded in the Statements of Operations

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

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2012   2011   2012   2011  

Assets:

                         

Real estate securities, available for sale

  $ (29,639 ) $ (79,885 ) $ 24,939   $ 107,490  

Liabilities:

                         

CDO bonds payable

    (86,338 )   (22,690 )   (209,475 )   (324,802 )

Junior subordinated notes

    15,554     13,054     (4,206 )   (15,716 )
                   

Subtotal(1)

    (100,423 )   (89,521 )   (188,742 )   (233,028 )

Derivatives

    5,838     (13,486 )   20,295     5,159  
                   

Total

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

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

25


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

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

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

Fair Value of Financial Instruments

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

26


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

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

 
  June 30, 2012   December 31, 2011  
 
  Principal / Notional
Amount
  Carrying
Value
  Fair
Value
  Principal / Notional
Amount
  Carrying
Value
  Fair
Value
 

Financial assets:(1)

                                     

Real estate securities, available for sale(2)

  $ 2,949,701   $ 1,346,486   $ 1,346,486   $ 3,234,145   $ 1,473,305   $ 1,473,305  

Real estate debt investments, net

    2,409,660     1,780,080     1,693,175     2,354,932     1,710,582     1,609,517  

Derivative assets(2)(3)

    815,500     11,850     11,850     468,500     5,735     5,735  

Financial liabilities:(1)

                                     

CDO bonds payable(2)

  $ 3,645,120   $ 2,062,304   $ 2,059,989   $ 4,125,769   $ 2,273,907   $ 2,273,253  

Mortgage notes payable

    783,286     783,286     803,412     783,257     783,257     801,710  

Credit facilities

    132,318     132,318     132,318     64,259     64,259     64,259  

Secured term loan

    14,682     14,682     15,472     14,682     14,682     15,443  

Exchangeable senior notes

    296,165     282,694     298,874     228,665     215,853     221,948  

Junior subordinated notes(2)

    280,117     161,374     161,374     280,117     157,168     157,168  

Derivative liabilities(2)(3)

    1,687,212     206,152     206,152     1,836,972     234,674     234,674  

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

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

(3)
Derivative assets and liabilities exclude timing swaps with an aggregate notional amount of $75.3 million and $288.8 million as of June 30, 2012 and December 31, 2011, respectively.

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

Real Estate Debt Investments, Net

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

27


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

4. Fair Value (Continued)

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

Mortgage Notes Payable

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

Credit Facilities

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

Secured Term Loan

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

Exchangeable Senior Notes

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

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

 
  Principal
Amount
  Carrying
Value
  Fair
Value
 

11.50% Notes

  $ 35,710   $ 35,497   $ 38,063  

7.25% Notes

    12,955     12,955     12,842  

7.50% Notes(1)

    172,500     161,298     173,466  

8.875% Notes

    75,000     72,944     74,503  
               

Total

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

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

28


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

5. Operating Real Estate

Operating Real Estate and REO Held for Investment

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

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

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

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

Assets:

       

Restricted cash

  $ 2,015  

Operating real estate, net

    72,499  

Deferred costs and intangible assets

    666  

Other assets

    45  
       

Total assets

  $ 75,225  
       

Liabilities:

       

Mortgage notes payable

  $ 4,500  

Accounts payable and accrued expenses

    410  

Other liabilities

    104  
       

Total liabilities

    5,014  

Total equity

    70,211  
       

Total liabilities and equity

  $ 75,225  
       

Other REO

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

29


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

5. Operating Real Estate (Continued)

Operating Real Estate Sales

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

Date
  Type   Location   Sales
Proceeds
  Realized
Gain (Loss)
 

January 2012

  Land   Aventura, FL   $ 5,068   $ 2,011  

June 2012

  Land   Florence, AZ     1,356     1,001  
                   

            6,424     3,012 (1)

April 2012

  Office   Indianapolis, IN     2,118     285 (2)
                   

Total

          $ 8,542   $ 3,297  
                   

(1)
Included in realized gains (losses) on investments and other.

(2)
Included in gain (loss) from discontinued operations.

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

Discontinued Operations

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

30


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

5. Operating Real Estate (Continued)

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

 
  Three Months
Ended June 30,
  Six Months
Ended June 30,
 
 
  2012   2011   2012   2011  

Revenue:

                         

Rental and escalation income

  $   $ 932   $   $ 3,732  

Interest and other income

        55         123  
                   

Total revenue

        987         3,855  
                   

Expenses:

                         

Real estate properties—operating expenses

    31     163     46     670  

Interest expense

        1,330         2,177  

Auditing and professional fees

        3         61  

Other general and administrative expenses

    9     399     15     793  

Depreciation and amortization

    3     139     4     792  
                   

Total expenses

    43     2,034     65     4,493  
                   

Income (loss) from discontinued operations

    (43 )   (1,047 )   (65 )   (638 )

Gain (loss) on sale from discontinued operations

    285 (1)   9,416 (2)   285 (1)   14,447 (3)
                   

Total income from discontinued operations

  $ 242   $ 8,369   $ 220   $ 13,809  
                   

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

(2)
Represents the sale of 18 healthcare assisted living facilities.

(3)
Represents the sale of 18 healthcare assisted living facilities, an office property and a leasehold interest in retail space.

Midwest Holdings

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

31


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

6. Real Estate Securities, Available for Sale

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

 
  Number(1)   Principal
Amount
  Amortized
Cost
  Cumulative
Unrealized
(Loss) Gain on
Investments(2)
  Fair
Value(3)
  Allocation by
Investment
Type(4)
  Weighted
Average
Coupon
  Weighted
Average
Yield(5)
 

Asset Type:

                                                 

CMBS

    559   $ 2,527,232   $ 1,793,777   $ (634,931 ) $ 1,158,846     85.7 %   4.12 %   11.17 %

Third-party CDO notes

    40     261,131     199,457     (128,521 )   70,936     8.9 %   0.57 %   3.86 %

Unsecured REIT debt

    16     83,613     79,064     3,940     83,004     2.8 %   5.73 %   5.28 %

Trust preferred securities

    3     14,725     10,843     (3,259 )   7,584     0.5 %   2.41 %   6.21 %

Agency debentures

    4     63,000     17,093     9,023     26,116     2.1 %   NA     4.11 %
                                   

Total

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

(1)
Investments in the same securitization tranche held in separate Company CDOs are reported as separate investments in the table above.

(2)
Includes 22 CRE securities for which the fair value option was not elected, representing $0.8 million net unrealized losses included in other comprehensive income (loss).

(3)
$1,199.4 million in carrying value served as collateral for the Company's consolidated CDO financing transactions and $65.2 million in carrying value served as collateral under the Company's CMBS Facility (refer to Note 9) as of June 30, 2012. The remainder is either financed under other borrowing arrangements or unleveraged.

(4)
Based on principal amount.

(5)
Based on expected maturity and for floating-rate securities, calculated using the applicable LIBOR as of June 30, 2012.

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

32


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

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

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

 
  Number(1)   Principal
Amount
  Amortized
Cost
  Cumulative
Unrealized
(Loss) Gain on
Investment(2)
  Fair
Value(3)
  Allocation by
Investment
Type(4)
  Weighted
Average
Coupon
  Weighted
Average
Yield(5)
 

Asset Type:

                                                 

CMBS

    618   $ 2,767,828   $ 1,964,843   $ (692,107 ) $ 1,272,736     85.6 %   4.42 %   9.72 %

Third-party CDO notes

    44     269,081     210,080     (146,513 )   63,567     8.3 %   0.86 %   10.80 %

Unsecured REIT debt

    22     94,236     88,870     5,428     94,298     2.9 %   5.99 %   2.75 %

Trust preferred securities

    5     40,000     35,105     (15,960 )   19,145     1.2 %   2.47 %   10.06 %

Agency debentures

    4     63,000     16,659     6,900     23,559     2.0 %   NA     3.84 %
                                   

Total

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

(1)
Investments in the same securitization tranche held in separate Company CDOs are reported as separate investments in the table above.

(2)
Includes ten CRE securities for which the fair value option was not elected, representing $7.5 million net unrealized losses included in other comprehensive income (loss).

(3)
$1,358.3 million in carrying value served as collateral for the Company's consolidated CDO financing transactions and $73.1 million in carrying value served as collateral under the Company's CMBS Facility (refer to Note 9) as of December 31, 2011. The remainder is either financed under other borrowing arrangements or unleveraged.

(4)
Based on principal amount.

(5)
Based on expected maturity and for floating-rate securities, calculated using the applicable LIBOR as of December 31, 2011.

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

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

33


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

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

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

7. Real Estate Debt Investments

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

 
   
   
   
   
  Weighted Average    
 
 
  Number   Principal
Amount
  Carrying
Value(1)(2)
  Allocation by
Investment
Type(3)
  Fixed
Rate
  Spread
Over
LIBOR(4)
  Spread
Over
Prime
  Yield(5)   Floating Rate as
% of Principal
Amount
 

Asset Type:

                                                       

First mortgage loans

    77   $ 1,640,343   $ 1,179,938     68.1 %   5.18 %   3.45 %   6.82 %   7.59 %   93.9 %

Mezzanine loans

    18     447,559     343,999     18.6 %   8.16 %   1.86 %       4.53 %   58.2 %

Subordinate mortgage interests

    8     130,737     95,867     5.4 %   6.40 %   3.68 %       5.34 %   77.4 %

Credit tenant loans(6)

    52     133,289     126,608     5.5 %   6.58 %           6.99 %   0.0 %

Term loans

    4     57,732     33,668     2.4 %   7.73 %   5.00 %       9.05 %   9.2 %
                                       

Total/Weighted average

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

(1)
$1,554.9 million in carrying value served as collateral for the Company's consolidated CDO financing transactions, $128.3 million in carrying value served as collateral under the Loan Facility (refer to Note 9) and the remainder is unleveraged. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $56.1 million. The Company expects that $54.1 million of these commitments will be funded from the Company's CDO financing transactions and require no additional capital from the Company. Assuming that all loans that have future fundings meet the terms to qualify for such funding, the Company's cash requirement on future fundings would be $2.0 million.

(2)
Includes 12 loans with an aggregate carrying value of $135.7 million on non-accrual status, which were primarily first mortgage loans. Two of these loans are classified as non-performing. Certain loans have an accrual of interest at a specified rate that may be in addition to a current rate. Non-accrual excludes $107.3 million carrying value of loans where the Company does not recognize interest income on the accrual rate but does recognize interest income based on the current rate.

(3)
Based on principal amount.

(4)
$209.1 million principal amount of the Company's CRE debt investments have a weighted average LIBOR floor of 3.23%.

(5)
Based on initial maturity and for floating-rate debt, calculated using one-month LIBOR as of June 30, 2012, and for debt with a LIBOR floor, using such floor.

(6)
Includes 20 corporate credit notes with an aggregate principal and carrying value of $10.9 million.

34


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

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

 
   
   
   
   
  Weighted Average    
 
 
  Number   Principal
Amount
  Carrying
Value(1)(2)
  Allocation by
Investment
Type(3)
  Fixed
Rate
  Spread
Over
LIBOR(4)
  Spread
Over
Prime
  Yield(5)   Floating Rate as
% of Principal
Amount
 

Asset Type:

                                                       

First mortgage loans

    75   $ 1,552,066   $ 1,094,957     65.9 %   4.77 %   3.06 %   6.94 %   5.23 %   92.4 %

Mezzanine loans

    17     426,709     334,317     18.1 %   6.43 %   2.21 %       3.97 %   62.6 %

Subordinate mortgage interests

    9     159,289     96,565     6.8 %   6.40 %   3.51 %       4.61 %   81.4 %

Credit tenant loans(6)

    55     147,426     140,342     6.3 %   6.49 %           6.87 %   0.0 %

Term loans

    6     69,442     44,401     2.9 %   7.75 %   5.00 %       8.80 %   15.4 %
                                       

Total/Weighted average

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

(1)
$1,627.0 million in carrying value served as collateral for the Company's consolidated CDO financing transactions and the remainder is unleveraged.

(2)
Includes ten loans with an aggregate carrying value of $67.8 million on non-accrual status, which were primarily first mortgage loans. Three of these loans are classified as non-performing. Non-accrual excludes $138.2 million carrying value of loans where the Company does not recognize interest income on the accrual rate but does recognize interest income based on the current rate.

(3)
Based on principal amount.

(4)
$139.8 million principal amount of the Company's CRE debt investments have a weighted average LIBOR floor of 3.79%.

(5)
Based on initial maturity and for floating-rate debt, calculated using one-month LIBOR as of December 31, 2011, and for debt with a LIBOR floor, using such floor.

(6)
Includes 23 corporate credit notes with an aggregate principal amount of $12.8 million and an aggregate carrying value of $12.7 million.

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

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

35


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

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

 
  Initial
Maturity
  Maturity
Including
Extensions(1)
 

Delinquent

  $ 12,500   $ 12,500  

July 1 - December 31, 2012

    270,783     133,104  

Years Ending December 31:

             

2013

    249,085     253,797  

2014

    663,260     295,394  

2015

    573,273     597,005  

2016

    232,302     433,636  

Thereafter

    408,457     684,224  
           

Total

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

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

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

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

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

36


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

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

 
  Carrying Value as of June 30, 2012   Carrying Value as of December 31, 2011  
 
  Loan
Count
  All Other
Loans
  Loan
Count
  Non-
Performing
Loans
  Total   Loan
Count
  All Other
Loans
  Loan
Count
  Non-
Performing
Loans
  Total  

Real Estate Debt Investments:

                                                             

First mortgage loans

    75   $ 1,186,856     2   $ 15,034   $ 1,201,890     73   $ 1,103,839     2   $ 12,500   $ 1,116,339  

Mezzanine loans

    18     447,981             447,981     17     426,742             426,742  

Subordinate mortgage interests

    8     127,217             127,217     7     116,663     2     38,462     155,125  

Credit tenant loans

    52     126,608             126,608     55     140,342             140,342  

Term loans

    4     48,418             48,418     6     59,818             59,818  
                                           

Total real estate debt investments

    157     1,937,080     2     15,034     1,952,114     158     1,847,404     4     50,962     1,898,366  

Loan loss reserves

    16     (160,711 )   2     (11,323 )   (172,034 )   15     (139,001 )   3     (48,783 )   (187,784 )
                                                   

Total real estate debt investments, net

        $ 1,776,369         $ 3,711   $ 1,780,080         $ 1,708,403         $ 2,179   $ 1,710,582  
                                                   

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

Provision for Loan Losses

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

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2012   2011   2012   2011  

Beginning balance

  $ 166,164   $ 188,564   $ 187,784   $ 197,200  

Provision for loan losses

    6,537     14,200     13,377     38,700  

Transfers to REO

        (20,920 )       (20,920 )

Sales

    (667 )       (667 )    

Write-offs

            (28,460 )   (33,136 )
                   

Ending balance

  $ 172,034   $ 181,844   $ 172,034   $ 181,844  
                   

37


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

Credit Quality Monitoring

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

38


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

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

 
  June 30,
2012
  December 31,
2011
 

Credit Quality Indicator:

             

Loans with no loan loss reserve:

             

First mortgage loans

  $ 1,092,980   $ 1,021,841  

Subordinate mortgage interests

    95,117     94,564  

Mezzanine loans

    176,942     155,787  

Credit tenant loans

    126,608     140,342  

Term loans

    11,910     17,247  
           

Subtotal

    1,503,557     1,429,781  

Other loans with a loan loss reserve/non-accrual status:(1)

             

First mortgage loans

    83,246     70,938  

Subordinate mortgage interests

    750     2,000  

Mezzanine loans

    167,058     178,530  

Term loans

    21,758     27,154  
           

Subtotal

    272,812     278,622  

Non-performing loans:

             

First mortgage loans

    3,711     2,177  

Subordinate mortgage interests

        2  
           

Subtotal

    3,711     2,179  
           

Total

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

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

Impaired Loans

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

39


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

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

 
  June 30, 2012(2)   December 31, 2011(3)  
 
  Number
of Loans
  Principal
Amount(1)
  Carrying
Value(1)
  Loan Loss
Reserve
  Number
of Loans
  Principal
Amount(1)
  Carrying
Value(1)
  Loan Loss
Reserve
 

Class of Debt:

                                                 

First mortgage loans

    9   $ 149,254   $ 112,202   $ 21,953     6   $ 94,697   $ 73,116   $ 21,383  

Subordinate mortgage interests

    3     32,100     750     31,350     4     60,562     2,001     58,560  

Mezzanine loans

    9     271,059     167,058     103,981     9     270,982     178,530     92,424  

Term loans

    1     45,550     21,758     14,750     2     51,613     27,154     15,417  
                                   

Total

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

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

(2)
Includes two non-accrual loans with an aggregate carrying value of $24.1 million and two loans considered TDRs with an aggregate carrying value of $25.2 million, all of which do not have loan loss reserves. Excludes one loan acquired with deteriorated credit quality with a carrying value of $14.3 million that is on non-accrual status and does not have a loan loss reserve. These are all first mortgage loans.

(3)
Includes three non-accrual loans with an aggregate carrying value of $24.0 million that do not have loan loss reserves. Excludes two loans acquired with deteriorated credit quality with an aggregate carrying value of $18.6 million that are on non-accrual status and do not have loan loss reserves. These are all first mortgage loans.

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

 
  June 30, 2012   June 30, 2011  
 
  Number
of Loans
  Average
Carrying Value
  Quarter Ended
Income
  Number
of Loans
  Average
Carrying Value
  Quarter Ended
Income
 

Class of Debt:

                                     

First mortgage loans

    9   $ 109,589   $ 340     5   $ 69,434   $ 104  

Subordinate mortgage interests

    3     14,036     383     3     7,290     153  

Mezzanine loans

    9     172,022     2,049     12     177,992     2,815  

Term loans

    1     24,456     1,005     2     27,154     1,026  
                           

Total/weighted average

    22   $ 320,103   $ 3,777     22   $ 281,870   $ 4,098  
                           

40


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

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

 
  June 30, 2012   June 30, 2011  
 
  Number
of Loans
  Average
Carrying Value
  Six Months
Ended
Income
  Number
of Loans
  Average
Carrying Value
  Six Months
Ended
Income
 

Class of Debt:

                                     

First mortgage loans

    9   $ 92,659   $ 667     5   $ 58,497   $ 208  

Subordinate mortgage interests

    3     1,376     734     3     11,629     274  

Mezzanine loans

    9     172,793     4,174     12     139,191     5,647  

Term loans

    1     24,456     2,031     2     27,154     2,041  
                           

Total/weighted average

    22   $ 291,284   $ 7,606     22   $ 236,471   $ 8,170  
                           

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

Troubled Debt Restructurings

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

 
  June 30, 2012   June 30, 2011  
 
  Number
of Loans(1)
  Carrying
Value
  Original
WA Interest
Rate
  Modified
WA Interest
Rate
  Number
of Loans
  Carrying
Value
  Original
WA Interest
Rate
  Modified
WA Interest
Rate
 

Class of Debt:

                                                 

First mortgage loans

    4   $ 31,410 (1)   2.68 %   2.60 %   2   $ 62,794 (2)   4.93 %   0.33 %

Mezzanine loans

                    2     45,847     2.60 %   0.24 %
                                   

Total/weighted average

    4   $ 31,410     2.68 %   2.60 %   4   $ 108,641     3.95 %   0.29 %
                                   

(1)
In the second quarter 2012, the Company took title to a property associated with a loan with a carrying value of $6.1 million that was considered a TDR in the first quarter 2012.

(2)
One loan with a carrying value of $44.7 million experienced an interest payment default prior to modification in 2011.

41


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

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

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

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

8. Investment in and Advances to Unconsolidated Ventures

        The Company has non-controlling, unconsolidated ownership interests in entities that are generally accounted for using the equity method. Capital contributions, distributions and profits and losses of such entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated percentage interests, if any, in such entities as a result of preferred returns and allocation formulas as described in such agreements. The Company may account for such investments using the cost method if the Company does not maintain significant influence over the unconsolidated entity.

Meadowlands

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

LandCap Partners

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

42


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

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

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

CS Federal Drive, LLC

        In February 2006, the Company, through a joint venture with an institutional investor, CS Federal Drive, LLC ("CS/Federal"), acquired a portfolio of three adjacent class A office/flex buildings located in Colorado Springs, Colorado for $54.3 million. The joint venture financed the transaction with two non-recourse, mortgage notes totaling $38.0 million and the remainder in cash. The borrowings mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%, respectively. The Company contributed $8.4 million for a 50% interest in the joint venture and incurred $0.3 million in costs related to its acquisition, which are capitalized to the investment. These costs are amortized over the useful lives of the assets held by the joint venture. As of June 30, 2012 and December 31, 2011, the Company had an investment in CS/Federal of $5.5 million and $5.7 million, respectively. For the three months ended June 30, 2012 and 2011, the Company recognized equity in earnings of $0.2 million and $0.2 million, respectively. For the six months ended June 30, 2012 and 2011, the Company recognized equity in earnings of $0.4 million and $0.3 million, respectively.

NorthStar Real Estate Income Trust, Inc.

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

NorthStar Real Estate Securities Opportunity Fund

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

43


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

(Unaudited)

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

Other

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

9. Borrowings

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

 
   
   
   
  June 30, 2012   December 31, 2011  
 
  Recourse vs. Non-
Recourse
  Final
Stated
Maturity
  Contractual
Interest
Rate(1)
  Principal
Amount
  Carrying
Value(2)
  Principal
Amount
  Carrying
Value(2)
 

VIE Financing Structures:

                                     

CDO bonds payable:

                                     

N-Star I

  Non-recourse   Aug-38   LIBOR + 2.27%(3)   $ 153,822   $ 143,028   $ 171,178   $ 154,110  

N-Star II

  Non-recourse   Jun-39   LIBOR + 1.51%(3)     112,562     92,979     149,438     103,475  

N-Star III

  Non-recourse   Jun-40   LIBOR + 0.74%(3)     194,798     95,126     274,454     129,537  

N-Star IV

  Non-recourse   Jul-40   LIBOR + 0.59%(3)     195,988     139,686     232,749     157,862  

N-Star V

  Non-recourse   Sep-45   LIBOR + 0.67%(3)     286,598     112,832     327,463     126,251  

N-Star VI

  Non-recourse   Jun-41   LIBOR + 0.51%(3)     266,442     178,226     278,049     184,552  

N-Star VII

  Non-recourse   Jun-51   LIBOR + 0.39%(3)     285,023     115,085     425,580     180,155  

N-Star VIII

  Non-recourse   Feb-41   LIBOR + 0.43%(3)     561,390     352,371     583,050     353,684  

N-Star IX

  Non-recourse   Aug-52   LIBOR + 0.40%(3)     682,980     236,333     682,980     228,704  

CSE CDO

  Non-recourse   Jan-37   LIBOR + 0.39%(3)     769,102     480,487     850,235     526,909  

CapLease CDO

  Non-recourse   Jan-40   4.94%(4)     136,415     116,151     150,593     128,668  
                               

Subtotal CDO bonds payable

                3,645,120     2,062,304     4,125,769     2,273,907  
                               

Mortgage notes payable:(5)

                                     

Phoenix, AZ

  Non-recourse   May-17   4.25%     211,921     211,921     212,000     212,000  

San Antonio, TX(6)

  Non-recourse   Jan-19   4.44%     16,525     16,525     16,525     16,525  
                               

Subtotal Mortgage notes payable

                228,446     228,446     228,525     228,525  
                               

Secured term loans:

                                     

TALF

  Non-recourse   Oct-14   2.64%     14,682     14,682     14,682     14,682  
                               

Subtotal Secured term loans

                14,682     14,682     14,682     14,682  
                               

Total VIE financing structures

                3,888,248     2,305,432     4,368,976     2,517,114  
                               

Non-VIE Financing Structures:

                                     

Mortgage notes payable:(5)

                                     

Core net lease

                                     

Salt Lake City, UT

  Non-recourse   Sep-12   5.16%     14,401     14,401     14,625     14,625  

South Portland, ME

  Non-recourse   Jun-14   7.34%     4,160     4,160     4,266     4,266  

Fort Wayne, IN

  Non-recourse   Jan-15   6.41%     3,173     3,173     3,221     3,221  

Reading, PA

  Non-recourse   Jan-15   5.58%     13,221     13,221     13,366     13,366  

Reading, PA

  Non-recourse   Jan-15   6.00%     5,000     5,000     5,000     5,000  

EDS Portfolio

  Non-recourse   Oct-15   5.37%     45,002     45,002     45,416     45,416  

Keene, NH

  Non-recourse   Feb-16   5.85%     6,420