XNYS:NRF Northstar Realty Finance Corp Quarterly Report 10-Q Filing - 3/31/2012

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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 March 31, 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, 113,357,448 shares outstanding as of May 1, 2012.

   


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NORTHSTAR REALTY FINANCE CORP.

QUARTERLY REPORT

For the Three Months Ended March 31, 2012

TABLE OF CONTENTS

Index
   
  Page  

Part I.

 

Financial Information

    5  

Item 1.

 

Financial Statements

       

 

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

    5  

 

Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2012 and 2011

    6  

 

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2012 and 2011

    7  

 

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

    8  

 

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 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

    55  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    81  

Item 4.

 

Controls and Procedures

    83  

Part II.

 

Other Information

    84  

Item 1.

 

Legal Proceedings

    84  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    84  

Item 6.

 

Exhibits

    84  

Signatures

    89  

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FORWARD LOOKING STATEMENTS

        This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "seek," "anticipate," "estimate," "believe," "could," "project," "predict," "continue," "future" or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to the operating performance of our investments, our financing needs, the effects of our current strategies, 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;

    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;

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

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    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;

    whether the decision issued by the Court of Appeal of the State of California, Second Appellate District in our favor associated with litigation involving net lease investments formerly leased to Washington Mutual Bank stands and is no longer subject to further appeal;

    compliance with the rules governing REITs; and

    the risk factors described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 under the heading "Risk Factors."

        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.

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PART I. Financial Information


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

 
  March 31, 2012
(Unaudited)
  December 31,
2011
 

Assets

             

VIE Financing Structures

             

Restricted cash

  $ 284,478   $ 261,295  

Operating real estate, net

    316,360     313,227  

Real estate securities, available for sale

    1,319,297     1,358,282  

Real estate debt investments, net

    1,597,915     1,631,856  

Investments in and advances to unconsolidated ventures

    59,930     60,352  

Receivables, net of allowance of $1,237 in 2012 and $1,179 in 2011

    22,306     22,530  

Derivative assets, at fair value

    25     61  

Deferred costs and intangible assets, net

    44,833     47,499  

Assets of properties held for sale

    897     3,198  

Other assets

    23,752     23,135  
           

    3,669,793     3,721,435  
           

Non-VIE Financing Structures

             

Cash and cash equivalents

    193,940     144,508  

Restricted cash

    36,851     37,069  

Operating real estate, net

    777,483     776,222  

Real estate securities, available for sale

    157,644     115,023  

Real estate debt investments, net

    88,316     78,726  

Investments in and advances to unconsolidated ventures

    33,865     33,205  

Receivables

    13,330     8,958  

Receivables, related parties

    5,370     5,979  

Unbilled rent receivable

    12,406     11,891  

Derivative assets, at fair value

    4,828     5,674  

Deferred costs and intangible assets, net

    48,189     50,885  

Other assets

    10,980     16,862  
           

    1,383,202     1,285,002  
           

Total assets

  $ 5,052,995   $ 5,006,437  
           

Liabilities

             

VIE Financing Structures

             

CDO bonds payable (see Note 9)

  $ 2,266,914   $ 2,273,907  

Mortgage notes payable

    228,525     228,525  

Secured term loan

    14,682     14,682  

Accounts payable and accrued expenses

    15,423     15,754  

Escrow deposits payable

    73,383     52,660  

Derivative liabilities, at fair value

    211,987     226,481  

Other liabilities

    49,534     55,007  
           

    2,860,448     2,867,016  
           

Non-VIE Financing Structures

             

Mortgage notes payable

    557,064     554,732  

Credit facility

    69,825     64,259  

Exchangeable senior notes

    216,546     215,853  

Junior subordinated notes, at fair value

    176,928     157,168  

Accounts payable and accrued expenses

    26,300     50,868  

Escrow deposits payable

    157     196  

Derivative liabilities, at fair value

        8,193  

Other liabilities

    33,932     48,538  
           

    1,080,752     1,099,807  
           

Total liabilities

    3,941,200     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, $60,000 liquidation preference as of March 31, 2012 and December 31, 2011

    57,867     57,867  

Preferred stock, 8.25% Series B, $0.01 par value, $230,000 and $190,000 liquidation preference as of March 31, 2012 and December 31, 2011, respectively

    218,703     183,505  

Common stock, $0.01 par value, 500,000,000 shares authorized, 113,357,448 and 96,044,383 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

    1,133     960  

Additional paid-in capital

    897,827     809,826  

Retained earnings (accumulated deficit)

    (57,542 )   (8,626 )

Accumulated other comprehensive income (loss)

    (32,287 )   (36,160 )
           

Total NorthStar Realty Finance Corp. stockholders' equity

    1,085,701     1,007,372  

Non-controlling interests

    26,094     32,242  
           

Total equity

    1,111,795     1,039,614  
           

Total liabilities and equity

  $ 5,052,995   $ 5,006,437  
           

   

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 
  Three Months Ended
March 31,
 
 
  2012   2011  

Revenues

             

Interest income

  $ 80,712   $ 97,640  

Rental and escalation income

    28,433     32,927  

Commission income

    7,399     918  

Other revenue

    725     333  
           

Total revenues

    117,269     131,818  

Expenses

             

Interest expense

    35,298     33,420  

Real estate properties—operating expenses

    4,686     12,497  

Asset management expenses

    1,497     2,171  

Commission expense

    5,649     717  

Other costs, net

    192      

Provision for loan losses

    6,840     24,500  

Provision for loss on equity investment

        4,482  

General and administrative

             

Salaries and equity-based compensation(1)

    14,130     12,741  

Auditing and professional fees

    1,782     2,419  

Other general and administrative

    5,149     3,672  
           

Total general and administrative

    21,061     18,832  

Depreciation and amortization

    12,306     8,082  
           

Total expenses

    87,529     104,701  
           

Income (loss) from operations

    29,740     27,117  

Equity in earnings (losses) of unconsolidated ventures

    (501 )   (2,228 )

Other income (loss)

    20,258     10,138  

Unrealized gain (loss) on investments and other

    (95,406 )   (152,218 )

Realized gain (loss) on investments and other

    15,352     10,734  
           

Income (loss) from continuing operations

    (30,557 )   (106,457 )

Income (loss) from discontinued operations

        409  

Gain (loss) on sale from discontinued operations

        5,031  
           

Net income (loss)

    (30,557 )   (101,017 )

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

    1,963     5,464  

Preferred stock dividends

    (5,323 )   (5,231 )

Contingently redeemable non-controlling interest accretion

        (3,009 )
           

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

  $ (33,917 ) $ (103,793 )
           

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

  $ (0.33 ) $ (1.40 )

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

        0.01  

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

        0.06  
           

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

  $ (0.33 ) $ (1.33 )
           

Weighted average number of shares of common stock:

             

Basic

    102,247,118     78,196,016  
           

Diluted

    107,393,827     82,534,563  
           

Dividends declared per share of common stock

  $ 0.15   $ 0.10  
           

(1)
The quarters ended March 31, 2012 and 2011 include $2.3 million and $2.0 million, respectively, of equity-based compensation expense.

   

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in Thousands)

(Unaudited)

 
  Three Months Ended
March 31,
 
 
  2012   2011  

Net income (loss)

  $ (30,557 ) $ (101,017 )

Other comprehensive income (loss):

             

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

    2,195      

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

    1,873     1,874  
           

Total other comprehensive income (loss)

    4,068     1,874  

Comprehensive income (loss)

    (26,489 )   (99,143 )

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

    (1,768 )   5,365  
           

Comprehensive income (loss) attributable to NorthStar Realty Finance Corp

  $ (28,257 ) $ (93,778 )
           

   

See accompanying notes to consolidated financial statements.

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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

                                (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

      $       $     17,250   $ 172   $ 90,140   $   $   $ 90,312   $   $ 90,312  

Net proceeds from offering of preferred stock

            1,600     35,198                         35,198         35,198  

Redemptions of non-controlling interests

                            (2,357 )           (2,357 )   2,357      

Non-controlling interest distributions

                                            (6,797 )   (6,797 )

Dividend reinvestment plan

                    8         43             43         43  

Amortization of equity-based compensation

                                            2,329     2,329  

Other comprehensive income (loss)

                                    3,873     3,873     195     4,068  

Conversion of LTIP units

                    54     1     175             176     (176 )    

Dividends on common stock

                                (14,999 )       (14,999 )   (2,093 )   (17,092 )

Dividends on preferred stock

                                (5,323 )       (5,323 )       (5,323 )

Net income (loss)

                                (28,594 )       (28,594 )   (1,963 )   (30,557 )
                                                   

Balance at March 31, 2012 (unaudited)

    2,400   $ 57,867     9,200   $ 218,703     113,357   $ 1,133   $ 897,827   $ (57,542 ) $ (32,287 ) $ 1,085,701   $ 26,094   $ 1,111,795  
                                                   

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

 
  Three Months Ended
March 31,
 
 
  2012   2011  

Cash flows from operating activities:

             

Net income (loss)

  $ (30,557 ) $ (101,017 )

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

             

Equity in (earnings) loss of unconsolidated ventures

    501     2,228  

Depreciation and amortization

    12,306     8,747  

Amortization of premium/discount on investments

    (19,957 )   (30,967 )

Interest accretion on investments

    (337 )   (708 )

Amortization of deferred financing costs

    860     1,307  

Equity-based compensation

    2,329     2,034  

Unrealized (gain) loss on investments and other

    73,864     124,564  

Realized gain on sale of investments and other

    (15,352 )   (15,765 )

Reversal of accrued loss and other costs

    (22,041 )    

Other income

    (258 )    

Distributions from unconsolidated ventures

    252     133  

Amortization of capitalized above/below market leases

    (284 )    

Unbilled rent receivable

    (686 )   (169 )

Provision for loss on equity investment

        4,482  

Provision for loan losses

    6,840     24,500  

Allowance for uncollectable accounts

    118     33  

Changes in assets and liabilities:

             

Restricted cash

    (3,002 )   (11,846 )

Receivables

    (5,340 )   (5,363 )

Other assets

    9,982     4,499  

Receivables from related parties

    2,489     (1,301 )

Accounts payable and accrued expenses

    (23,794 )   (5,953 )

Real estate debt investment origination fees

    888     2,333  

Other liabilities

    (216 )   (2,471 )
           

Net cash provided by (used in) operating activities

    (11,395 )   (700 )

Cash flows from investing activities:

             

Acquisitions of operating real estate, net

    (7,650 )    

Improvements of operating real estate

    (399 )   (16 )

Deferred costs and intangible assets

    (267 )   (73 )

Net proceeds from disposition of operating real estate

    5,068     14,939  

Acquisitions of real estate securities, available for sale

    (54,871 )   (93,070 )

Proceeds from sales of real estate securities, available for sale

    100,562     91,310  

Repayments on real estate securities, available for sale

    29,840     7,433  

Originations/acquisitions of real estate debt investments

    (47,781 )   (48,814 )

Repayments on real estate debt investments

    63,120     53,884  

Proceeds from sales of real estate debt investments

    5,343     11,941  

Other receivables

    3,303      

Investment in and advances to unconsolidated ventures

    (1,165 )   (392 )

Distributions from unconsolidated ventures

    169     163  
           

Net cash provided by (used in) investing activities

    95,272     37,305  

Cash flows from financing activities:

             

Settlement of derivative instrument

    (8,163 )    

Collateral held by derivative counterparties

        3,000  

Borrowings of mortgage notes

    4,500     20,920  

Repayments of mortgage notes

    (2,168 )   (21,458 )

Borrowings under credit facility

    9,607      

Repayments of credit facility

    (4,041 )    

Proceeds from CDO bonds reissuance

    7,558      

Proceeds from CDO bonds

    10,000     5,000  

Repayments of CDO bonds

    (141,295 )   (44,480 )

Repurchases of CDO bonds

    (7,450 )   (34,170 )

Repayments of secured term loans

        (22,199 )

Payment of deferred financing costs

    (88 )   (9,692 )

Change in restricted cash

    754     15,819  

Proceeds from exchangeable senior notes

        172,500  

Repurchases of exchangeable senior notes

        (37,698 )

Proceeds from preferred stock offering

    35,198      

Proceeds from common stock offering

    90,312      

Proceeds from dividend reinvestment and stock purchase plan

    43     76  

Dividends (common and preferred)

    (20,322 )   (13,039 )

Distributions / repayments to non-controlling interests

    (8,890 )   (3,685 )
           

Net cash provided by (used in) financing activities

    (34,445 )   30,894  

Net increase (decrease) in cash and cash equivalents

    49,432     67,499  

Cash and cash equivalents—beginning of period

    144,508     125,439  
           

Cash and cash equivalents—end of period

  $ 193,940   $ 192,938  
           

   

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts in Thousands, Except Per Share Data

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 by considering qualitative and quantitative factors, including, but not limited to: which activities most

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

2. Summary of Significant Accounting Policies (Continued)

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) 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.

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

2. Summary of Significant Accounting Policies (Continued)

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 a foreclosure) ("REO") constitutes a business and whether business combination accounting is relevant. Any excess upon foreclosure of 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.

        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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

2. Summary of Significant Accounting Policies (Continued)


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

Provision for Loan Losses

        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. Management 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 fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business. 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 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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

2. Summary of Significant Accounting Policies (Continued)

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 foreclosure, 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.

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

2. Summary of Significant Accounting Policies (Continued)

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 other comprehensive income on the statement of equity. In December 2011, the FASB issued an accounting update to defer the requirement to present the reclassification adjustments to OCI by component and are currently redeliberating this requirement. The remaining requirements of the accounting update are effective for the Company the first quarter of 2012 and should be applied retrospectively to all periods reported after the effective date. There is 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 ("CTLs") and other loans. 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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

3. Variable Interest Entities (Continued)

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 March 31, 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(1)

  $ 8,793   $ 211   $ 55,658   $ 12,132   $ 87   $ 45,627   $ 8,589   $ 48,848   $ 31,285   $ 69,040   $ 4,208   $ 284,478  

Operating real estate, net

                68,000                 243,010         5,350         316,360  

Real estate securities, available for sale

    169,313     149,550     152,911     30,894     168,793     35,625     197,843     9,022     334,125     57,721     13,500     1,319,297  

Real estate debt investments, net

            24,882     228,104         301,619         478,107     37,306     404,245     123,652     1,597,915  

Investments in and advances to unconsolidated ventures

                                59,930                 59,930  

Receivables, net of allowance

    1,587     1,312     1,600     1,426     1,687     1,018     2,426     3,148     3,875     3,493     734     22,306  

Derivative assets, at fair value

                            25                     25  

Deferred costs and intangible assets, net

                3,577         103         41,153                 44,833  

Assets of properties held for sale

                                        897         897  

Other assets

    388     19     7     877     27     2,675     3,351     2,506     153     13,580     169     23,752  
                                                   

Total assets of consolidated VIEs(2)

    180,081     151,092     235,058     345,010     170,594     386,667     212,234     885,724     406,744     554,326     142,263     3,669,793  

Liabilities of consolidated VIEs:

                                                                         

CDO bonds payable

    159,302     109,471     154,927     143,011     127,801     182,930     172,623     361,007     236,712     501,215     117,915     2,266,914  

Mortgage notes payable

                                228,525                 228,525  

Secured term loan

                        14,682                         14,682  

Accounts payable and accrued expenses

    918     81     775     1,507     458     563     341     4,832     1,598     3,151     1,199     15,423  

Escrow deposits payable

                4,731         27,129         23,907     339     16,572     705     73,383  

Derivative liabilities, at fair value

    4,743     9,664     15,910         37,620     8,103     49,859     25,011     48,180     12,897         211,987  

Other liabilities

                1,475             349     20,183     27,510     17         49,534  
                                                   

Total liabilities of consolidated VIEs(3)

    164,963     119,216     171,612     150,724     165,879     233,407     223,172     663,465     314,339     533,852     119,819     2,860,448  
                                                   

Net assets

  $ 15,118   $ 31,876   $ 63,446   $ 194,286   $ 4,715   $ 153,260   $ (10,938 ) $ 222,259   $ 92,405   $ 20,474   $ 22,444   $ 809,345  
                                                   

(1)
Includes $4.5 million available for re-investment in N-Star CDO IX.

(2)
Assets of each of the consolidated VIEs may only be used to settle obligations of the respective VIE.

(3)
Creditors of each of the consolidated VIEs have no recourse to the general credit of the Company.

        The Company did not provide financial support to any of its consolidated VIEs for the three months ended March 31, 2012. As of March 31, 2012, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its consolidated VIEs.

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

3. Variable Interest Entities (Continued)

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 March 31, 2012.

Real Estate Securities

        The Company has identified eight CRE securities with a fair value of $83.3 million as a variable interest in a VIE. The Company has determined that it is not the primary beneficiary, and as such, the VIE should not be consolidated in the Company's financial statements.

        In 2011, 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 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 fair value is $22.4 million as of March 31, 2012. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

3. Variable Interest Entities (Continued)

        In March 2012, the Company invested in a securitization collateralized by originally investment grade rated N-Star CDO bonds. The fair value is $23.4 million as of March 31, 2012. 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.

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.

        The following table displays the classification, carrying value and maximum exposure of unconsolidated VIEs as of March 31, 2012 (amounts in thousands):

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

Real estate securities, available for sale

  $   $ 83,333   $ 83,333   $ 83,333  
                   

Total assets

          83,333     83,333     83,333  

Junior subordinated notes, at fair value

    176,928         176,928     NA  
                   

Total liabilities

    176,928         176,928     NA  
                   

Net asset (liability)

  $ (176,928 ) $ 83,333   $ (93,595 )   NA  
                   

(1)
The Company's maximum exposure to loss as of March 31, 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 three months ended March 31, 2012. As of March 31, 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

4. Fair Value (Continued)

lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

        Financial assets and liabilities recorded 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

4. Fair Value (Continued)

CDO Bonds Payable

        CDO bonds payable are valued using quotations from nationally recognized financial institutions that 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

4. Fair Value (Continued)

        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 March 31, 2012 and December 31, 2011 by level within the fair value hierarchy (amounts in thousands):

 
  March 31, 2012  
 
  Level 1   Level 2   Level 3   Total  

Assets:

                         

Real estate securities, available for sale:

                         

CMBS

  $   $ 978,537   $ 273,014   $ 1,251,551  

Third-party CDO notes

            90,992     90,992  

Unsecured REIT debt

        85,195     338     85,533  

Trust preferred securities

            26,600     26,600  

Agency debentures

        22,265         22,265  
                   

Subtotal real estate securities, available for sale

        1,085,997     390,944     1,476,941  

Derivative assets

        4,853         4,853  
                   

Total assets

  $   $ 1,090,850   $ 390,944   $ 1,481,794  
                   

Liabilities:

                         

CDO bonds payable(1)

  $   $   $ 2,148,999   $ 2,148,999  

Junior subordinated notes

            176,928     176,928  

Derivative liabilities

        211,987         211,987  
                   

Total liabilities

  $   $ 211,987   $ 2,325,927   $ 2,537,914  
                   

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


 
  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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

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 March 31, 2012 and December 31, 2011, for which the Company has utilized Level 3 inputs to determine fair value (amounts in thousands):

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

Beginning balance

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

Transfers into Level 3(1)

    40,826             469,209          

Transfers out of Level 3(1)

    (102,874 )           (434,036 )        

Purchases / borrowings / amortization

    26,531     17,609         146,152     65,199      

Sales

    (18,052 )           (111,437 )        

Paydowns

    (10,236 )   (129,537 )       (23,361 )   (325,989 )    

Repurchases

        (7,450 )           (75,316 )    

Losses (realized or unrealized)

                                     

Included in earnings

    (12,682 )   125,579     19,760     (216,939 )   225,186      

Included in other comprehensive income (loss)

                (7,676 )        

Gains (realized or unrealized)

                                     

Included in earnings

    39,752     (2,441 )       108,109     (2,646 )   (34,082 )

Included in other comprehensive income (loss)

    5,072             10          
                           

Ending balance

  $ 390,944   $ 2,148,999   $ 176,928   $ 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. 

  $ (7,586 ) $ (123,138 ) $ (19,760 ) $ (121,258 ) $ (197,053 ) $ 34,082  
                           

(1)
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 period.

        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 broker quotes may be based on market transactions with comparable coupons and 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, 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. For the three months ended March 31, 2012, the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

4. Fair Value (Continued)

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 loss for the three months ended March 31, 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. As of March 31, 2012, the Company had 16 CRE securities with an aggregate carrying value of $137.5 million for which the fair value option was not elected and the CapLease CDO bonds payable with a carrying value of $117.9 million for which the fair value option was not elected.

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

 
  March 31,
2012
  December 31,
2011
 

Assets:

             

Real estate securities, available for sale:(1)

             

CMBS

  $ 1,172,900   $ 1,199,660  

Third-party CDO notes

    32,116     40,231  

Unsecured REIT debt

    85,533     94,298  

Trust preferred securities

    26,600     19,145  

Agency debentures

    22,265     23,559  
           

Total assets

  $ 1,339,414   $ 1,376,893  
           

Liabilities:

             

CDO bonds payable(2)

  $ 2,148,999   $ 2,145,239  

Junior subordinated notes

    176,928     157,168  
           

Total liabilities

  $ 2,325,927   $ 2,302,407  
           

(1)
March 31, 2012 excludes 16 CRE securities with an aggregate carrying value of $137.5 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.

(2)
March 31, 2012 and December 31, 2011 excludes CapLease CDO bonds payable with a carrying value of $117.9 million and $128.7 million for which the fair value option was not elected, respectively.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

4. Fair Value (Continued)

        The following table presents the difference between the fair value and the aggregate principal amount of assets and liabilities, for which the fair value option has been elected as of March 31, 2012 (amounts in thousands):

 
  Fair Value at
March 31,
2012
  Amount
Due Upon
Maturity
  Difference  

Assets:

                   

Real estate securities, available for sale:(1)

                   

CMBS(2)

  $ 1,172,900   $ 2,559,934   $ (1,387,034 )

Third-party CDO notes

    32,116     213,372     (181,256 )

Unsecured REIT debt

    85,533     85,613     (80 )

Trust preferred securities

    26,600     40,000     (13,400 )

Agency debentures

    22,265     63,000     (40,735 )
               

Total assets

  $ 1,339,414   $ 2,961,919   $ (1,622,505 )
               

Liabilities:

                   

CDO bonds payable(3)

  $ 2,148,999   $ 3,845,879   $ (1,696,880 )

Junior subordinated notes

    176,928     280,117     (103,189 )
               

Total liabilities

  $ 2,325,927   $ 4,125,996   $ (1,800,069 )
               

(1)
Excludes 16 securities for which the fair value option was not elected.

(2)
Includes interest-only CMBS with an aggregate carrying value of $4.2 million that have no amounts due upon maturity but have notional amounts upon which cash flows are paid and received as interest only.

(3)
Excludes the CapLease CDO bonds payable for which the fair value option was not elected.

        For the three months ended March 31, 2012 and 2011, the Company recognized a net loss of $88.3 million and $143.5 million, respectively, related to financial assets and liabilities for which the fair value option was elected. These amounts are recorded as unrealized gain (loss) on investments and other in the Company's consolidated statements of operations.

        The change in fair value of CDO bonds payable and junior subordinated notes for which the fair value option was elected was a net loss of $142.9 million and $330.9 million, for the three months ended March 31, 2012 and 2011, respectively, and is primarily due to the impact of changes to instrument-specific credit spreads. 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

4. Fair Value (Continued)

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.

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

 
  March 31, 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)

  $ 3,125,325   $ 1,476,941   $ 1,476,941   $ 3,234,145   $ 1,473,305   $ 1,473,305  

Real estate debt investments, net

    2,349,984     1,686,231     1,588,715     2,354,932     1,710,582     1,609,517  

Derivative assets(2)(3)

    468,500     4,853     4,853     468,500     5,735     5,735  

Financial liabilities:(1)

                                     

CDO bonds payable(2)

  $ 3,984,714   $ 2,266,914   $ 2,265,255   $ 4,125,769   $ 2,273,907   $ 2,273,253  

Mortgage notes payable

    785,589     785,589     801,520     783,257     783,257     801,710  

Credit facility

    69,825     69,825     69,825     64,259     64,259     64,259  

Secured term loan

    14,682     14,682     15,425     14,682     14,682     15,443  

Exchangeable senior notes

    228,665     216,546     230,001     228,665     215,853     221,948  

Junior subordinated notes(2)

    280,117     176,928     176,928     280,117     157,168     157,168  

Derivative liabilities(2)(3)

    1,706,580     211,987     211,987     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 $197.3 million.

        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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

4. Fair Value (Continued)

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 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 Facility

        The Company has amounts outstanding under a term credit facility entered into in the fourth quarter 2011 that bears 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

4. Fair Value (Continued)

        The following table summarizes the exchangeable senior notes as of March 31, 2012 (amounts in thousands):

 
  Principal
Amount
  Carrying
Value
  Fair
Value
 

7.25% Notes

  $ 20,455   $ 20,431   $ 20,523  

11.50% Notes

    35,710     35,443     38,013  

7.50% Notes(1)

    172,500     160,672     171,465  
               

Total

  $ 228,665   $ 216,546   $ 230,001  
               

(1)
As of March 31, 2012, the exchange rate adjusted based on the Company's prior two quarterly common stock dividends resulting in an exchange price of $6.36.

5. Operating Real Estate

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 January 2012, in connection with a foreclosure, the Company acquired a healthcare property located in Kenton, Kentucky. The Company's loan had a zero carrying value at the time of foreclosure. Contemporaneous with the foreclosure, 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 $0.2 million in other income (loss) in the consolidated statements of operations.

        The Company estimated the fair value of the assets and liabilities for all real estate acquired 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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

5. Operating Real Estate (Continued)

2012 acquisitions that continue to be subject to refinement upon receipt of all information (amounts in thousands):

Assets:

       

Restricted cash

  $ 9,175  

Operating real estate, net

    244,550  

Deferred costs and intangible assets

    48,345  

Other assets

    878  
       

Total assets

  $ 302,948  
       

Liabilities:

       

Mortgage notes payable

  $ 216,500  

Accounts payable and accrued expenses

    4,167  

Other liabilities

    22,870  
       

Total liabilities

    243,537  

Total equity

    59,411  
       

Total liabilities and equity

  $ 302,948  
       

Other REO Acquisitions

        For the three months ended March 31, 2012, the Company acquired other REO in connection with a foreclosure of a retail property located in Park City, Utah. The original loan balance on the property was $10.7 million and the initial REO value recorded was $4.0 million, which approximated fair value.

Operating Real Estate Sales

        For the three months ended March 31, 2012, the Company sold land in Aventura, Florida for total sale proceeds of $5.1 million, resulting in a gain of $2.0 million. In addition, for the three months ended March 31, 2012, the Company sold eight timeshare units for total sales proceeds of $3.4 million, including seller financing of $0.1 million, resulting in a realized gain of $3.0 million. The Company also recorded $2.1 million of prior gains no longer deferred related to timeshare units.

Discontinued Operations

        For the three months ended March 31, 2012, assets held for sale relate to land that is not deemed to be a discontinued operation. The following table summarizes income from discontinued operations

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

5. Operating Real Estate (Continued)

and related gain on sale of discontinued operations for the three months ended March 31, 2011 (amounts in thousands):

 
  Three Months
Ended
March 31, 2011
 

Revenue:

       

Rental and escalation income

  $ 2,801  

Interest and other income

    67  
       

Total revenue

    2,868  
       

Expenses:

       

Real estate properties—operating expenses

    507  

Interest expense

    847  

Auditing and professional fees

    57  

Other general and administrative expenses

    394  

Depreciation and amortization

    654  
       

Total expenses

    2,459  
       

Income (loss) from discontinued operations

    409  

Gain on disposition of discontinued operations

    5,031  
       

Total income from discontinued operations

  $ 5,440  
       

        For the three months ended March 31, 2011, the income from discontinued operations principally related to a multifamily property, an office property, a portfolio of 18 healthcare net lease assisted living facilities located in Wisconsin and a leasehold interest in retail space located in New York. Gain on sale from discontinued operations for the three months ended March 31, 2011 is primarily related to the sale of a leasehold interest in retail space located in New York.

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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

6. Real Estate Securities, Available for Sale

        As of March 31, 2012, the Company held the following CRE securities (amounts in thousands):

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

Asset Type:

                                                 

CMBS

    590   $ 2,637,500   $ 1,868,986   $ (617,435 ) $ 1,251,551     84.4 %   4.18 %   10.46 %

Third-party CDO notes

    41     299,212     230,042     (139,050 )   90,992     9.6 %   0.63 %   11.94 %

Unsecured REIT debt

    17     85,613     80,300     5,233     85,533     2.7 %   5.77 %   3.82 %

Trust preferred securities

    5     40,000     35,153     (8,553 )   26,600     1.3 %   2.45 %   9.40 %

Agency debentures

    4     63,000     16,875     5,390     22,265     2.0 %   NA     4.11 %
                                   

Total

    657   $ 3,125,325   $ 2,231,356   $ (754,415 ) $ 1,476,941     100.0 %   3.77 %   10.28 %
                                   

(1)
Includes 16 CRE securities for which the fair value option was not elected, representing $5.3 million net unrealized losses included in other comprehensive income (loss).

(2)
$1,319.3 million in fair value served as collateral for the Company's consolidated CDO financing transactions and $78.7 million served as collateral under the Company's CMBS Facility (refer to Note 9) as of March 31, 2012. The remainder is either financed under other borrowing arrangements or unleveraged.

(3)
Based on principal amount.

(4)
Based on expected maturity and for floating-rate securities, calculated using the applicable LIBOR as of March 31, 2012.

        The CMBS portfolio as of March 31, 2012 is comprised of 590 assets 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 March 31, 2012, contractual maturities of the CRE securities portfolio ranged from three months to 44 years with a weighted average expected maturity of 3.8 years.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

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

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

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

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)
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).

(2)
$1,358.3 million in fair value served as collateral for the Company's consolidated CDO financing transactions and $73.1 million 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.

(3)
Based on principal amount.

(4)
Based on expected maturity and for floating-rate securities, calculated using the applicable LIBOR as of December 31, 2011.

        For the three months ended March 31, 2012, proceeds from the sale of CRE securities were $100.6 million, resulting in a net realized gain of $5.9 million.

        The Company's CRE securities portfolio includes 16 securities for which the fair value option was not elected. As of March 31, 2012, the aggregate carrying value of these securities was $137.5 million, representing a $5.3 million net unrealized loss included in other comprehensive income (loss). For securities with an unrealized loss as of March 31, 2012, such unrealized loss was for a period of less than 12 months. Based on management's quarterly evaluation, no OTTI was identified related to these securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of its amortized cost basis, which may be at maturity.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

7. Real Estate Debt Investments

        As of March 31, 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

    75   $ 1,547,292   $ 1,088,951     65.8 %   4.92 %   2.77 %   3.29 %   7.73 %   93.8 %

Mezzanine loans

    18     472,504     334,053     20.1 %   6.42 %   1.41 %       3.33 %   65.9 %

Subordinate mortgage interests

    8     130,782     95,401     5.6 %   6.40 %   4.19 %       5.82 %   77.4 %

Credit tenant loans(6)

    52     135,433     128,595     5.8 %   6.57 %           7.06 %   0.0 %

Term loans

    5     63,973     39,231     2.7 %   7.75 %   3.75 %       7.53 %   8.4 %
                                       

Total/Weighted average

    158   $ 2,349,984   $ 1,686,231     100.0 %   6.33 %   2.61 %   3.29 %   6.70 %   79.5 %
                                       

(1)
$1,597.9 million in carrying value served as collateral for the Company's consolidated CDO financing transactions 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 $59.5 million. The Company expects that $57.5 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 13 loans with an aggregate carrying value of $117.5 million on non-accrual status, which were primarily first mortgage loans. One of these loans is classified as non-performing. Certain loans have an accrual of interest at a specified rate that may be in addition to a current rate generally as part of a loan restructure. Non-accrual excludes $137.3 million carrying value of loans where we do not recognize interest income on the accrual rate but do recognize interest income based on the current rate.

(3)
Based on principal amount.

(4)
$134.6 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 March 31, 2012, and for debt with a LIBOR floor, using such floor.

(6)
Includes 20 corporate credit notes with an aggregate principal amount of $11.9 million and aggregate carrying value of $11.8 million.

        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 %   2.72 %   3.30 %   5.27 %   92.4 %

Mezzanine loans

    17     426,709     334,317     18.1 %   6.43 %   2.21 %       3.96 %   62.6 %

Subordinate mortgage interests

    9     159,289     96,565     6.8 %   6.40 %   3.51 %       5.63 %   81.4 %

Credit tenant loans(6)

    55     147,426     140,342     6.3 %   6.49 %           6.95 %   0.0 %

Term loans

    6     69,442     44,401     2.9 %   7.75 %   3.50 %       5.05 %   15.4 %
                                       

Total/Weighted average

    162   $ 2,354,932   $ 1,710,582     100.0 %   6.21 %   2.70 %   3.30 %   5.17 %   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. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $55.7 million. The Company expected that $51.7 million of these commitments would 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 $4.0 million.

(2)
Includes 12 loans with an aggregate carrying value of $73.8 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 we do not recognize interest income on the accrual rate but do 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%.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

7. Real Estate Debt Investments (Continued)

(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 three months ended March 31, 2012, the Company acquired six loans with a principal amount of $89.7 million for a purchase price of $33.2 million. For the three months ended March 31, 2011, the Company acquired four loans with a principal amount of $50.0 million for a purchase price of $39.3 million.

        For the three months ended March 31, 2012, the Company sold one loan for a realized gain of $0.4 million. For the three months ended March 31, 2011, the Company sold one loan for a realized gain of $1.6 million.

        Maturities of CRE debt investments based on principal amount as of March 31, 2012 are as follows (amounts in thousands):

 
  Initial
Maturity
  Maturity
Including
Extensions(1)
 

Delinquent(2)

  $ 39,072   $ 39,072  

April 1 - December 31, 2012

    290,525     173,558  

Years Ending December 31:

             

2013

    299,063     282,909  

2014

    569,320     208,588  

2015

    512,040     625,562  

2016

    226,911     431,481  

Thereafter

    413,053     588,814  
           

Total

  $ 2,349,984   $ 2,349,984  
           

(1)
Reflects modifications executed subsequent to March 31, 2012.

(2)
Excludes $88.5 million principal amount of a loan related to the John Hancock Tower ("Hancock Loan") which was in maturity default as of March 31, 2012, but was restructured on May 4, 2012 resulting in a final maturity of October 2013 including two six-month extensions. The Hancock Loan is comprised of the Company's original investment of $44.0 million principal amount with a $37.4 million carrying value and $44.5 million principal amount acquired in connection with the restructure in the first quarter 2012 for $3.6 million. The Company invested an additional $13.35 million in connection with the restructure.

        The aggregate carrying value of delinquent loans, excluding the Hancock Loan, all of which are due to a maturity default, was $28.7 million as of March 31, 2012. The weighted average maturity including extensions of the CRE debt investments is 4.1 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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

7. Real Estate Debt Investments (Continued)

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 March 31, 2012, the Company had $493.1 million of unamortized discounts ($392.6 million related to the CSE CDO) and $4.5 million of unamortized origination fees. 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 March 31, 2012, such debt had an aggregate principal amount of $375.4 million and an aggregate carrying value of $71.2 million, of which $51.4 million of the remaining discount will be accreted. The change in the accreted amount for the three months ended March 31, 2012 was due to loan sales and payoffs, foreclosures and changes to estimated recoverable amounts.

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

 
  Carrying Value as of March 31, 2012   Carrying Value as of December 31, 2011  
 
  Loan
Count
  All Other
Loans
  Loan
Count
  Non-
Performing
Loans
  Total(1)   Loan
Count
  All Other
Loans
  Loan
Count
  Non-
Performing
Loans
  Total(1)  

Real Estate Debt Investments:

                                                             

First mortgage loans

    74   $ 1,098,224     1   $ 12,500   $ 1,110,724     73   $ 1,103,839     2   $ 12,500   $ 1,116,339  

Mezzanine loans

    18     431,677             431,677     17     426,742             426,742  

Subordinate mortgage interests

    7     100,179     1     26,572     126,751     7     116,663     2     38,462     155,125  

Credit tenant loans

    52     128,595             128,595     55     140,342             140,342  

Term loans

    5     54,648             54,648     6     59,818             59,818  
                                           

Total real estate debt investments

    156     1,813,323     2     39,072     1,852,395     158     1,847,404     4     50,962     1,898,366  

Loan loss reserves

    18     (155,841 )   1     (10,323 )   (166,164 )   15     (139,001 )   3     (48,783 )   (187,784 )
                                                   

Total real estate debt investments, net

        $ 1,657,482         $ 28,749   $ 1,686,231         $ 1,708,403         $ 2,179   $ 1,710,582  
                                                   

        The Company's maximum additional exposure to loss related to the non-performing loans as of March 31, 2012 and December 31, 2011 is $28.7 million and $2.2 million, respectively. The March 31, 2012 amount excludes the Hancock Loan.

Provision for Loan Losses

        For the three months ended March 31, 2012, the Company recorded $6.8 million of provision for loan losses related to four loans. For the three months ended March 31, 2011, the Company recorded $24.5 million of provision for loan losses related to eight loans. Activity in loan loss reserves on CRE

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

7. Real Estate Debt Investments (Continued)

debt investments for the three months ended March 31, 2012 and 2011, is as follows (amounts in thousands):

 
  Three Months Ended
March 31,
 
 
  2012   2011  

Beginning balance

  $ 187,784   $ 197,200  

Provision for loan losses

    6,840     24,500  

Write-off and sales

    (28,460 )   (33,136 )
           

Ending balance

  $ 166,164   $ 188,564  
           

        The Company considers impaired loans to generally include non-performing loans ("NPLs"), loans with a loan loss reserve, loans on non-accrual status and TDRs. As of March 31, 2012 and December 31, 2011, impaired loans are comprised of the following (amounts in thousands):

 
  March 31, 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

    11   $ 240,300   $ 121,668   $ 21,773     11   $ 208,626   $ 97,655   $ 21,383  

Subordinate mortgage interests

    4     58,672     27,322     31,350     4     2,002     2,002     58,560  

Mezzanine loans

    10     315,482     176,987     97,624     9     270,982     178,530     92,424  

Term loans

    2     51,613     27,154     15,417     2     51,613     27,154     15,417  
                                   

Total

    27   $ 666,067   $ 353,131   $ 166,164     26   $ 533,223   $ 305,341   $ 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)
Excludes one NPL with a principal amount of $26.6 million, five non-accrual loans with a principal amount of $171.4 million (one of which is included in TDR) and three TDRs with a principal amount of $46.1 million that do not have loan loss reserves. These loans are primarily first mortgage loans.

(3)
Excludes one NPL with a principal amount of $0.9 million and eight non-accrual loans (inclusive of all TDRs) with a principal amount of $137.9 million that do not have loan loss reserves. These loans are all first mortgage loans.

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. 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/non-accrual status." 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." The Company's weakest

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

7. Real Estate Debt Investments (Continued)

credit quality debt investments are NPLs. 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 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):

 
  March 31,
2012
  December 31,
2011
 

Credit Quality Indicator:

             

Loans with no loan loss reserve:

             

First mortgage loans

  $ 1,007,222   $ 1,011,889  

Subordinate mortgage interests

    68,080     94,564  

Mezzanine loans

    157,067     155,787  

Credit tenant loans

    128,593     140,342  

Term loans

    12,076     17,247  
           

Subtotal

    1,373,038     1,419,829  

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

             

First mortgage loans

    79,553     80,889  

Subordinate mortgage interests

    750     2,000  

Mezzanine loans

    176,987     178,531  

Term loans

    27,154     27,154  
           

Subtotal

    284,444     288,574  

Non-performing loans:(2)

             

First mortgage loans

    2,177     2,177  

Subordinate mortgage interests

    26,572     2  
           

Subtotal

    28,749     2,179  
           

Total

  $ 1,686,231   $ 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.

(2)
Excludes the Hancock Loan.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

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 impairment for the three months ended March 31, 2012 and 2011 (amounts in thousands):

 
  March 31, 2012   March 31, 2011  
 
  Number
of Loans
  Average
Carrying Value
  For the Quarter
Ended Income
  Number
of Loans
  Average
Carrying Value
  For the Quarter
Ended Income
 

Class of Debt:

                                     

First mortgage loans

    11   $ 117,296   $ 330     14   $ 95,344   $ 507  

Subordinate mortgage interests

    4     27,947     338     4     12,150     227  

Mezzanine loans

    10     177,818     2,375     12     166,463     2,687  

Term loans

    2     27,154     1,026     2     27,154     1,015  
                           

Total/weighted average

    27   $ 350,215   $ 4,069     32   $ 301,111   $ 4,436  
                           

        As of March 31, 2012, the Company's loan portfolio interest aging was $0.5 million for receivables past due 1 to 90 days and an immaterial amount relating to receivables past due greater than 90 days (inclusive of its NPLs).

        As of March 31, 2012, the Company had one subordinated mortgage interest with a principal amount of $26.6 million past due less than 30 days and 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, one first mortgage loan with a principal amount of $12.5 million past due greater than 90 days 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 modified that are considered a TDR for the three months ended March 31, 2012 (amounts in thousands):

 
  Number
of
Loans
  Principal
Amount
  Carrying
Value
  Loan Loss
Reserves
  Original
WA Interest
Rate
  Modified
WA Interest
Rate
 

Class of Debt:

                                     

First mortgage loans

    3   $ 46,120   $ 31,220   $     3.04 %   2.62 %

Subordinate mortgage interests

    1     12,100         12,100     3.35 %   0.03 %

REO(1)

    2     NA     3,976     NA     NA     NA  
                           

Total/weighted average

    6   $ 58,220   $ 35,196   $ 12,100     3.10 %   2.08 %
                           

(1)
Represents the carrying value of the loans at the time of foreclosure. Refer to Note 5 for more details.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

7. Real Estate Debt Investments (Continued)

        The following table summarizes CRE debt investments modified that are considered a TDR for the three months ended March 31, 2011 (amounts in thousands):

 
  Number
of
Loans
  Principal
Amount
  Carrying
Value
  Loan Loss
Reserves
  Original
WA Interest
Rate
  Modified
WA Interest
Rate
 

Class of Debt:

                                     

First mortgage loans(1)

    3   $ 53,717   $ 32,174   $     7.10 %   2.10 %

Mezzanine loans(1)(2)

    2     101,156     45,478     55,950     4.04 %   0.21 %

REO(3)

    1     NA     56,552     NA     NA     NA  
                           

Total/weighted average

    6   $ 154,873   $ 134,204   $ 55,950     5.10 %   0.87 %
                           

(1)
Includes multiple loans to a single borrower related to mostly contiguous collateral.

(2)
One loan with a principal amount of $88.1 million experienced an interest payment default prior to modification in 2011.

(3)
Represents the carrying value of the loans at the time of foreclosure.

        For the three months ended March 31, 2012 and 2011, all loans modified in a TDR generally provided interest rate concessions and/or deferral of principal repayments.

8. Investment in and Advances to Unconsolidated Ventures

        The Company has non-controlling, unconsolidated ownership interests in entities that are 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.

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 March 31, 2012 and December 31, 2011, the carrying value of the Company's investment in the NJ Property was $65.0 million and $65.5 million, respectively. For the three months ended March 31, 2012, the Company recognized equity in losses of $0.5 million. For the three months ended March 31, 2011, the Company recognized a provision for loss on equity investment of $4.5 million and equity in losses of $2.1 million.

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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

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

(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 March 31, 2012 and December 31, 2011, the Company's 49% interest in LandCap was $14.3 million and $14.4 million, respectively. As of March 31, 2012 and December 31, 2011, LandCap had investments totaling $33.8 million and $34.0 million, respectively. For the three months ended March 31, 2012 and 2011, the Company recognized equity in losses of $0.1 million and $0.4 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 March 31, 2012 and December 31, 2011, the Company had an investment in CS/Federal of $5.6 million and $5.7 million, respectively. For the three months ended March 31, 2012 and 2011, the Company recognized equity in earnings of $0.2 million and $0.1 million, respectively.

NorthStar Real Estate Income Trust, Inc.

        As of March 31, 2012, the Company owns 2.2% 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 12, 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 has purchased 117,055 shares for $1.1 million for the three months ended March 31, 2012 resulting in aggregate 370,257 shares acquired for $3.3 million since inception. As of March 31, 2012 and December 31, 2011, the Company had an investment in NorthStar Income of $5.0 million and $4.0 million, respectively. For the three months ended March 31, 2012 and 2011, the Company recognized immaterial amounts in equity in earnings.

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 months ended March 31, 2011, the Company recognized an immaterial amount of equity in losses.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

9. Borrowings

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

 
   
   
   
  March 31, 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)
 

CDO bonds payable:

                                     

N-Star I

  Non-recourse   Aug-38   LIBOR + 2.09%(3)   $ 170,341   $ 159,302   $ 171,178   $ 154,110  

N-Star II

  Non-recourse   Jun-39   LIBOR + 1.46%(3)     147,613     109,471     149,438     103,475  

N-Star III

  Non-recourse   Jun-40   LIBOR + 0.61%(3)     278,618     154,927     274,454     129,537  

N-Star IV

  Non-recourse   Jul-40   LIBOR + 0.59%(3)     203,375     143,011     232,749     157,862  

N-Star V

  Non-recourse   Sep-45   LIBOR + 0.64%(3)     314,495     127,801     327,463     126,251  

N-Star VI

  Non-recourse   Jun-41   LIBOR + 0.50%(3)     273,886     182,930     278,049     184,552  

N-Star VII

  Non-recourse   Jun-51   LIBOR + 0.36%(3)     373,734     172,623     425,580     180,155  

N-Star VIII

  Non-recourse   Feb-41   LIBOR + 0.44%(3)     592,813     361,006     583,050     353,684  

N-Star IX

  Non-recourse   Aug-52   LIBOR + 0.40%(3)     682,980     236,712     682,980     228,704  

CSE CDO

  Non-recourse   Jan-37   LIBOR + 0.38%(3)     808,024     501,216     850,235     526,909  

CapLease CDO

  Non-recourse   Jan-40   4.94%(4)     138,835     117,915     150,593     128,668  
                               

Subtotal CDO bonds payable

                3,984,714     2,266,914     4,125,769     2,273,907  
                               

Mortgage notes payable:(5)

                                     

Core net lease

                                     

Salt Lake City, UT

  Non-recourse   Sep-12   5.16%     14,513     14,513     14,625     14,625  

South Portland, ME

  Non-recourse   Jun-14   7.34%     4,213     4,213     4,266     4,266  

Fort Wayne, IN

  Non-recourse   Jan-15   6.41%     3,197     3,197     3,221     3,221  

Reading, PA

  Non-recourse   Jan-15   5.58%     13,294     13,294     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%     45,207     45,207     45,416     45,416  

Keene, NH

  Non-recourse   Feb-16   5.85%     6,449     6,449     6,478     6,478  

Green Pond, NJ

  Non-recourse   Apr-16   5.68%     16,570     16,570     16,635     16,635  

Aurora, CO

  Non-recourse   Jul-16   6.22%     32,048     32,048     32,159     32,159  

DSG Portfolio

  Non-recourse   Oct-16   6.17%     32,692     32,692     32,823     32,823  

Indianapolis, IN

  Non-recourse   Feb-17   6.06%     27,317     27,317     27,416     27,416  

Milpitas, CA

  Non-recourse   Mar-17   5.95%     21,011     21,011     21,141     21,141  

Fort Mill, SC

  Non-recourse   Apr-17   5.63%     27,700     27,700     27,700     27,700  

Fort Mill, SC

  Non-recourse   Apr-17   6.21%     2,078     2,078     2,162     2,162  

Columbus, OH

  Non-recourse   Dec-17   6.48%     22,857     22,857     22,937     22,937  
                               

Subtotal Core net lease

                274,146     274,146     275,345     275,345  
                               

Healthcare net lease

                                     

Hillsboro, OR

  Non-recourse   Jan-14   5.94%     31,991     31,991     32,104     32,104  

WF Portfolio

  Non-recourse   May-15   LIBOR + 5.95%(6)     57,371     57,371     57,589     57,589  

Ohio Portfolio

  Non-recourse   Mar-16   6.00%     20,921     20,921     20,921     20,921  

Wilkinson Portfolio

  Non-recourse   Jan-17   6.99%     157,099     157,099     157,688     157,688  

Tuscola/Harrisburg

  Non-recourse   Jan-17   7.09%     7,753     7,753     7,781     7,781  

East Arlington, TX

  Non-recourse   May-17   5.89%     3,292     3,292     3,304     3,304  

Lancaster, OH

  Non-recourse   Mar-16   LIBOR + 5.00%(7)     4,491     4,491          
                               

Subtotal Healthcare net lease

                282,918     282,918     279,387     279,387  
                               

Real estate owned

                                     

Phoenix, AZ

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

San Antonio, TX(8)

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

Subtotal Real estate owned

                228,525     228,525     228,525     228,525  
                               

Subtotal Mortgage notes payable

                785,589     785,589     783,257     783,257  
                               

Credit facility:

                                     

CMBS Facility

  Recourse   Oct-14(9)   1.65%     69,825     69,825     64,259     64,259  
                               

Subtotal Credit facility

                69,825     69,825     64,259     64,259  
                               

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  
                               

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

9. Borrowings (Continued)

 
   
   
   
  March 31, 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)
 

Exchangeable senior notes:(10)

                                     

7.25% Notes

  Recourse   Jun-27(11)   7.25%     20,455     20,431     20,455     20,396  

11.50% Notes

  Recourse   Jun-13   11.50%     35,710     35,443     35,710     35,389  

7.50% Notes

  Recourse   Mar-31(12)   7.50%     172,500     160,672     172,500     160,068  
                               

Subtotal Exchangeable senior notes

                228,665     216,546     228,665     215,853  
                               

Junior subordinated notes:(13)

                                     

Trust I

  Recourse   Mar-35   8.15%     41,240     28,868     41,240     25,569  

Trust II

  Recourse   Jun-35   7.74%     25,780     18,046     25,780     15,984  

Trust III

  Recourse   Jan-36   7.81%     41,238     28,454     41,238     25,155  

Trust IV

  Recourse   Jun-36   7.95%     50,100     34,569     50,100     30,561  

Trust V

  Recourse   Sep-36   LIBOR + 2.70%     30,100     16,706     30,100     14,749  

Trust VI

  Recourse   Dec-36   LIBOR + 2.90%     25,100     14,307     25,100     12,676  

Trust VII

  Recourse   Apr-37   LIBOR + 2.50%     31,459     16,673     31,459     15,100  

Trust VIII

  Recourse   Jul-37   LIBOR + 2.70%     35,100     19,305     35,100     17,374  
                               

Subtotal Junior subordinated notes

                280,117     176,928     280,117     157,168  
                               

Grand Total

              $ 5,363,592   $ 3,530,484   $ 5,496,749   $ 3,509,126  
                               

(1)
Refer to Note 14 regarding the Company's derivative instruments which are used to manage interest rate exposure.

(2)
Carrying value represents fair value with respect to the CDO bonds payable (excluding CapLease CDO bonds payable for which the fair value option was not elected) and junior subordinated notes due to the election of the fair value option (see Note 4) and amortized cost with regards to the other borrowings.

(3)
Represents a weighted average spread. N-Star CDOs I and VI and CSE CDO are based on three-month LIBOR whereas all others are based on one-month LIBOR.

(4)
Represents a weighted average coupon.

(5)
Mortgage notes payable are subject to customary non-recourse carveouts.

(6)
Contractual interest rate is based on three-month LIBOR with a 1.0% LIBOR floor.

(7)
Contractual interest rate is based on one-month LIBOR with a 1.0% LIBOR floor.

(8)
In connection with this borrowing, the borrower is a special purpose entity separate from the Company and its affiliates, and as a result, the borrower's assets and credit are not available to satisfy the liabilities and the obligations of the Company or any of its other affiliates.

(9)
The initial maturity date is October 28, 2013, subject to a one-year extension at the option of the Company, which may be exercised upon the satisfaction of certain conditions set forth in the agreement.

(10)
Principal amount differs from carrying value on the consolidated balance sheets due to the equity component of the notes.

(11)
The holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2012.

(12)
The holders have repurchase rights which may require the Company to repurchase the notes on March 15, 2016.

(13)
Junior subordinate notes Trusts I, II, III and IV have a fixed interest rate for the first ten years after which the interest rate will float and reset quarterly at rates ranging from three-month LIBOR plus 2.70% to 2.90%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts in Thousands, Except Per Share Data

9. Borrowings (Continued)

        Scheduled principal on the Company's borrowings, based on final stated maturity, is as follows as of March 31, 2012 (amounts in thousands):

 
  Total   CDO Bonds
Payable
  Mortgage
Notes Payable
  Credit
Facility
  Secured Term
Loan
  Exchangeable
Senior Notes(1)
  Junior
Subordinated
Notes
 

2012

  $ 41,321