News Column

NORTHSTAR ASSET MANAGEMENT GROUP INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 11, 2014

The following discussion should be read in conjunction with the unaudited combined consolidated financial statements and notes thereto included in Item 1. "Financial Statements" of this report. References to "NSAM," "we," "us" or "our" refer to NorthStar Asset Management Group Inc. and its subsidiaries unless the context specifically requires otherwise. Introduction On June 30, 2014, NorthStar Realty Finance Corp. (NYSE: NRF), or NorthStar Realty, completed its previously announced spin-off of its asset management business into a separate publicly-traded company, NorthStar Asset Management Group Inc. (NYSE: NSAM), a Delaware corporation, in the form of a tax-free distribution, or the Distribution. In connection with the Distribution, each of NorthStar Realty's common stockholders received shares of our common stock on a one-for-one basis. Upon completion of the spin-off, the asset management business of NorthStar Realty is owned and operated by us and NorthStar Realty is externally managed by our affiliate through a management contract with an initial term of 20 years. NorthStar Realty will continue to operate its commercial real estate debt origination business. Most of NorthStar Realty's employees at the time of the spin-off became our employees except for executive officers, employees engaged in NorthStar Realty's existing loan origination business and certain other employees that became co-employees of both us and NorthStar Realty. Our affiliate also manages NorthStar Realty's previously sponsored non-traded real estate investment trusts, or REITs: NorthStar Real Estate Income Trust, Inc., or NorthStar Income; NorthStar Healthcare Income, Inc., or NorthStar Healthcare, and NorthStar Real Estate Income II, Inc., or NorthStar Income II, collectively referred to as the Sponsored Companies and together with NorthStar Realty, collectively referred to as the Managed Companies. We are organized to provide asset management and other services to the Managed Companies or any other companies we may sponsor in the future, both in the United States and internationally. We will earn management, incentive and other fees pursuant to management and other contracts. In addition, we own NorthStar Realty Securities, LLC, or NorthStar Securities, NorthStar Realty's previously owned captive broker-dealer platform registered with the Securities and Exchange Commission, or SEC, and perform other asset management-related services. As of August 8, 2014, we had $16.7 billion of assets under management. Summary of Business Our primary business lines are as follows: NorthStar Realty - Focused on providing asset management and other services on a fee basis by managing NorthStar Realty's day-to-day operations. We will begin earning fees from NorthStar Realty on July 1, 2014. Sponsored Companies - Focused on providing asset management and other



services on a fee basis by managing each Sponsored Company's respective

day-to-day operations.

Broker-dealer - Focused on selling equity in our Sponsored Companies.

In addition, we earn fees from special servicing in connection with certain securitization transactions. Our Business Our primary business objective is to provide asset management and other services by managing NorthStar Realty and our Sponsored Companies, both in the United States and internationally. We earn asset management, incentive and other fees pursuant to our management and other contracts. Our growth will be aligned with the ability of NorthStar Realty and our Sponsored Companies to grow by raising capital, which in turn will be driven by their investment activities and overall performance. We expect to expand our asset management business through organic growth by managing additional investment vehicles and potentially through the acquisition of third-party asset management contracts and businesses. In connection with our international strategy, we entered into a strategic alliance with a European asset manager, have opened offices and are hiring investment professionals overseas. Our Managed Companies have historically invested in the commercial real estate industry and have demonstrated the ability to invest and create value through multiple real estate cycles and changing market conditions. The term commercial real estate industry refers to all commercial property types, both in the United States and internationally, including but not limited to healthcare, manufactured housing communities, hotel, net lease and multifamily properties. Our management team has a proven track record in managing and growing NorthStar Realty and our Sponsored Companies. We believe our in-place, long-duration fees, substantial growth prospects and scalable operating platform, position us as an industry leading asset manager. We have the ability to maintain a competitive advantage through a combination of our deep industry relationships and access to market leading commercial real estate credit underwriting and capital markets expertise which enables us to manage credit risk as well as to structure and finance the assets of our Managed Companies efficiently. Following the spin-off, most of the 22



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existing employees of NorthStar Realty became our employees. Executive officers, employees engaged in NorthStar Realty's existing loan origination business and certain other employees are co-employees of us and NorthStar Realty. Our ability to identify opportunities across a broad spectrum of potential investments for our Managed Companies will continue to create complementary and overlapping sources of investment opportunities based on a common reliance on market fundamentals and application of similar underwriting and asset management skills as we seek to maximize stockholder value. Assets of our Managed Companies grew significantly over the past several years driven by our ability to raise capital for NorthStar Realty and our Sponsored Companies and in turn effectively deploy such capital. The following table presents the assets of our Managed Companies as of June 30, 2014, adjusted for the Griffin-American merger (refer below) and acquisitions and agreements to purchase through August 8, 2014, and December 31, 2013 (dollars in thousands): June 30, 2014 December 31, 2013 Amount Percentage Amount Percentage NorthStar Realty(1)(2) $ 14,122,839 84.80 % $ 8,660,375 81.50 % Sponsored Companies:(1) NorthStar Income 1,937,811 (3) 11.60 % 1,831,104 17.20 % NorthStar Healthcare 359,850 2.20 % 115,839 1.10 % NorthStar Income II 227,813 1.40 % 25,326 0.20 % Direct investments 4,000 - % - - % Total $ 16,652,313 100.0 % $ 10,632,644 100.0 % __________

(1) Based on total consolidated assets as reported by our respective Managed Companies. (2) Excludes a joint venture interest in a healthcare portfolio with NorthStar Healthcare.



(3) Represents total assets as of June 30, 2014.

On August 5, 2014, NorthStar Realty and Griffin-American announced that the board of directors of both NorthStar Realty and Griffin-American unanimously approved a definitive merger agreement under which NorthStar Realty will acquire all of the outstanding shares of Griffin-American in a stock and cash transaction valued at $4 billion, including approximately $600 million of borrowings. Griffin-American is a non-traded REIT focused on medical office buildings, senior housing and other healthcare-related facilities and is co-sponsored by American Healthcare Investors and Griffin Capital Corporation. We made investments on behalf of our Managed Companies, including NorthStar Realty prior to the spin-off. The following table presents gross investment activity related to these Managed Companies in 2014 including commitments through August 8, 2014 (dollars in millions): NorthStar Realty NorthStar Income (2) NorthStar Healthcare NorthStar Income II



Asset Type: Number Principal/Purchase Price Number

Principal/Purchase Price Number Principal/Purchase Price

Number Principal/Purchase Price Real estate equity (3) 193 $ 2,984 (1) 2 $ 45 10 $ 204 - $ - Real estate debt 6 231 4 331 4 106 5 211 Real estate securities 2 11 - - - - - - Total 201 $ 3,226 6 $ 376 14 $ 310 5 $ 211 __________



(1) Excludes a joint venture interest in a healthcare portfolio with

NorthStar Healthcare.

(2) Represents the asset balance as of June 30, 2014.

(3) Represents the number of properties.

NorthStar RealtyNorthStar Realty has grown its business by raising capital and deploying such capital effectively. To date in 2014, NorthStar Realty issued aggregate net capital of $761 million from the issuance of common and preferred equity. In 2013, NorthStar Realty issued aggregate net capital of $1.9 billion, including $1.6 billion from the issuance of common and preferred equity, of which $650 million of common equity was issued in December 2013 subsequent to the announcement of the spin-off. The management agreement with NorthStar Realty is for an initial term of 20 years and provides for a base management fee and incentive fee. Base Management Fee: Effective June 30, 2014, NorthStar Realty will pay an annual base management fee to us of $148 million and the fee will increase subsequent to July 1, 2014 by 1.5% per annum of the sum of: 23



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cumulative net proceeds of all future common equity and preferred equity

issued by NorthStar Realty after July 1, 2014; equity issued by NorthStar Realty in exchange or conversion of exchangeable senior notes based on the stock price at the date of issuance;



any other issuances by NorthStar Realty of common equity, preferred equity

or other forms of equity, including but not limited to limited partnership

interest in an operating partnership, or LTIP units, (excluding equity-based compensation, but including issuances related to an acquisition, investment, joint venture or partnership); and



cumulative cash available for distribution, or CAD, of NorthStar Realty in

excess of cumulative distributions paid on common stock, LTIP units or other equity awards beginning the first full calendar quarter after completion of the spin-off. Additionally, NorthStar Realty's equity interest in RXR Realty LLC, or RXR Realty, and Aerium Group, or Aerium, is structured so that we are entitled to the portion of distributable cash flow from each investment in excess of the $10 million minimum annual base amount. Refer to below for further discussion of such transactions. For the three and six ended June 30, 2014, we did not earn any fees from NorthStar Realty. Incentive Fee: We are entitled to an incentive fee, calculated and payable quarterly in arrears in cash, equal to: the product of: (a) 15% and (b) CAD of NorthStar Realty before such



incentive fee, divided by the weighted average shares outstanding for the

calendar quarter, when such amount is in excess of $0.39 per share but less than $0.45 per share; plus the product of: (a) 25% and (b) CAD of NorthStar Realty before such



incentive fee, divided by the weighted average shares outstanding for the

calendar quarter, when such amount is equal to or in excess of $0.45 per share;



multiplied by the weighted average shares outstanding of NorthStar Realty

for the calendar quarter.

In addition, we may also earn an incentive fee from the Healthcare Strategic Partnership (refer to below). Weighted average shares represents the number of shares of NorthStar Realty's common stock, LTIP units or other equity-based awards (with some exclusions), outstanding on a daily weighted average basis. With respect to the base management fee, all issuances shall be allocated on a daily weighted average basis during the fiscal quarter of issuances. Additional NorthStar Realty Management Agreement Terms: 20-year initial term of management agreement, which will be automatically



renewed for additional 20-year terms each anniversary thereafter unless

earlier terminated for "cause."

If NorthStar Realty were to spin-off any asset or business in the future,

such entity would be managed by us on terms substantially similar to those

set forth in the management agreement between NorthStar Realty and us. The

management agreement further provides that the aggregate base management

fee in place immediately after the spin-off will not be less than the

aggregate base management fee in place at NorthStar Realty immediately

prior to the spin-off. Sponsored Companies We have been focusing on raising capital for our Sponsored Companies through NorthStar Securities. Our first commercial real estate debt-oriented non-traded REIT, NorthStar Income, successfully completed its public offering on July 1, 2013 by raising $1.1 billion in capital. We are currently raising capital for our second Sponsored Company, NorthStar Healthcare, a healthcare equity and debt focused non-traded REIT, which has a maximum offering amount of $1.1 billion, and for our third Sponsored Company, NorthStar Income II, our second commercial real estate debt-oriented non-traded REIT, which has a maximum offering amount of $1.65 billion. NorthStar Healthcare and NorthStar Income II picked up momentum in raising capital in 2013, following the execution of a number of selling agreements in June 2013 and October 2013, respectively. 24



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The following table presents a summary of the fee arrangements with our current Sponsored Companies: NorthStar NorthStar NorthStar Income Healthcare Income II Offering amount(1) $1.1 billion$1.1 billion$1.65 billion Total raised through early August 2014 $1.2 billion$428 million$172 million Commercial Healthcare Commercial Primary strategy Real Estate Equity and Real Estate Debt Debt Debt Primary offering period Completed July Ends August Ends May 2015 2013 2015 Asset Management and Other Fees: Asset management fees(2) 1.25% of 1.00% of 1.25% of Assets Assets Assets 1.00% of 1.00% of Investment 1.00% of Acquisition fees(3) Investment (2.25% for Investment real estate properties) 1.0% of sales price for debt Disposition fees(4) 1.0% of sales investments 1.0% of sales price (2.00% for price real estate properties) 15% of net 15% of net 15% of net Incentive payments(5) cash flows cash flows cash flows after an 8% after a 6.75% after a 7% return return(6) return __________________



(1) Represents amount of shares initially registered to offer pursuant to each

Sponsored Company's public offering.

(2) Assets represent principal amount funded or allocated for debt investments

originated or acquired and the cost of all other investments, including

expenses and any financing attributable to such investments, less any

principal received on debt and securities investments (or our proportionate

share thereof in the case of an investment made in a joint venture).

(3) Calculated based on the amount funded or allocated by our Sponsored Companies

to originate or acquire investments, including acquisition expenses and any

financing attributable to such investments (or the proportionate share

thereof in the case of an equity investment made through a joint venture).

(4) Calculated based on contractual sales price of each investment sold.

(5) We are entitled to receive distributions equal to 15% of net cash flows of

the respective Sponsored Company, whether from continuing operations,

repayment of loans, disposition of assets or otherwise, but only after

stockholders have received, in the aggregate, cumulative distributions equal

to their invested capital plus the respective cumulative, non-compounded

annual pre-tax return (as noted in the table above) on such invested capital.

(6) The Healthcare Strategic Partnership will be entitled to the incentive fees

earned from managing NorthStar Healthcare, of which we will earn our

proportionate interest.

The following table presents a summary of our current Sponsored Companies and their capital raising activity for the six months ended June 30, 2014 and year ended December 31, 2013: Capital Raised (in thousands) Primary December 31, Strategy Offering Amount Offering Period June 30, 2014 2013 Commercial Real NorthStar Income Estate Debt $1.1 billion Completed July 2013 $ 1,166,442 (1) $ 545,423 NorthStar Healthcare Healthcare Equity and Debt $1.1 billion Ends August 2015 345,208 109,243 NorthStar Income Commercial Real II Estate Debt $1.65 billion Ends May 2015(2) 139,496 27,853 New York NorthStar/RXR New Commercial Real York Metro Estate $2.0 billion (3) (3) (3) __________



(1) Represents capital raised through NorthStar Income's dividend reinvestment

plan.

(2) Offering period subject to extension as determined by NorthStar Income II's

board of directors.

(3) Offering period will commence upon its registration statement being declared

effective by the Securities and Exchange Commission, or the SEC.

NorthStar Realty committed to invest up to $10 million in each of our Sponsored Companies that are in their offering stage. In addition, consistent with its past practice, NorthStar Realty will commit up to $10 million for distribution support in any future non-traded company that we sponsor, up to a total of five new companies per year. On June 26, 2014, NorthStar/RXR New York Metro Income, Inc., or NorthStar/RXR New York Metro, confidentially submitted Amendment 1 to its registration statement on Form S-11 to the SEC seeking to raise up to $2.0 billion in a public offering of common stock. NorthStar/RXR New York Metro will be structured as a public, non-traded corporation that intends to qualify as a REIT and is co-sponsored by us and RXR Realty, a leading real estate owner, developer and investment management company focused on high-quality real estate investments in the New York Tri-State area. Any asset management and other fees incurred by NorthStar/RXR New York Metro will be shared by us and RXR Realty as co-sponsors. NorthStar/RXR New York Metro intends to make commercial real estate investments in the New York metropolitan area. The distribution support agreement related to NorthStar/RXR New York Metro is an obligation of both NorthStar Realty and RXR Realty, 25



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where each agreed to purchase up to an aggregate of $10.0 million in Class A common stock during the two-year period following commencement of the offering, with NorthStar Realty and RXR Realty agreeing to purchase 75% and 25% of any shares purchased, respectively. Other In June 2014, we acquired a 50% interest in Fund Alliance Corporation, a crowd-funding technology platform company for $4 million. We account for this investment under the equity method. In addition to earning a proportionate share of net income, we will earn a net 0.50% fee on any syndicated investments, a minimum base management fee of 1% and an incentive fee of 15% on contractually defined excess cash flows. Sources of Operating Revenues and Cash Flows We primarily generate revenue from asset management, incentive and other fee income pursuant to contractual arrangements with our Sponsored Companies. We also generate revenue from commission income from selling equity in our Sponsored Companies. Effective July1, 2014, we began generating revenue from asset management, incentive and other fee income from NorthStar Realty in addition to our Sponsored Companies. Profitability and Performance Metrics We will calculate several metrics to evaluate the profitability and performance of our business. CAD is a non-GAAP measure that provides investors and management with a



meaningful indicator of operating performance (refer to "Non-GAAP

Financial Measures" for a description of this metric). We will provide the

calculation of CAD, including a reconciliation of CAD to net income (loss)

in the quarter beginning September 30, 2014; and Our ability to raise capital for our Managed Companies, which in turn



grows the assets of our Managed Companies, is a driver of our ability to

grow our fee income. Outlook and Recent Trends Liquidity and capital started to become more available in the commercial real estate markets to stronger sponsors beginning in 2012 and Wall Street and commercial banks began to more actively provide credit to real estate borrowers accelerating the pace of investment in real estate. A proxy of the easing of credit and restarting of the capital markets for commercial real estate debt is the approximately $45 billion and $80 billion in non-agency CMBS issuance in 2012 and 2013, respectively, and industry experts are predicting approximately $90 billion of non-agency CMBS issuance in 2014. However, the pace of non-agency CMBS issuance is lower than initially expected with $41 billion issued in the first half of 2014 and industry experts have provided a revised estimate of $80 billion for 2014. To stimulate growth, several of the world's largest central banks acted in a coordinated effort through massive injections of stimulus in the financial markets in late 2012, which had the effect of keeping interest rates low. Since mid-2013, there has been a focus on the pace at which the U.S. Federal Reserve and other sovereign national banks will taper their respective stimulus efforts. This change in policy has led to and may continue in the future to result in an increase in interest rates on U.S. government and other sovereign government bonds as well as interest rates more generally. However, the U.S. Federal Reserve has indicated that it intends to keep short-term interest rates near zero while monitoring macroeconomic conditions, but there can be no assurance that these policies will remain unchanged. Partly as a result of this stimulus, the commercial real estate markets have improved, with valuations approaching, and in some cases exceeding, 2007 levels. However, a range of economic and political headwinds remain, including a moderate labor market recovery, legislative gridlock, potential conflict over budget deficits and the debt ceiling, the impact of the Affordable Care Act, uncertain U.S. Federal Reserve policy, concern with global market economies and strife, among other matters. We expect that this dynamic, along with global market instability and the risk of maturing commercial real estate debt that may have difficulties being refinanced, will continue to cause periodic volatility in the CRE market for some time. It is currently estimated that approximately $1.4 trillion of commercial real estate debt will mature through 2017. While there is an increased supply of liquidity in the commercial real estate market, we still anticipate that certain of these loans will not be able to be refinanced, potentially inhibiting growth and contracting credit. As the capital markets began opening up in 2012, NorthStar Realty began to again access the capital markets as evidenced by two securitization transactions it structured, securitizing $882 million of assets, one on behalf of NorthStar Income, with permanent, non-recourse, non-mark-to-market financing. The stimulus in the United States helped to increase demand for new CMBS, as described above, even though current new issue volume is still below historic levels which has contributed to relatively balanced real estate fundamentals. 26



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Virtually all commercial real estate property types were adversely impacted by the credit crisis and subsequent recession, while others such as land, condominium and other commercial property types were more severely impacted. The commercial real estate equity, debt and securities investments of our Managed Companies could be negatively impacted by weak real estate markets and economic conditions. Weak economic conditions could reduce a tenant's/operator's/resident's/guest's ability to make rent payments in accordance with the contractual terms of the lease and for companies to lease new space. To the extent that market rental and occupancy rates are reduced, property-level cash flow is negatively affected as existing leases renew at lower rates and over longer periods of time, the decreased cash flow impacts the value of underlying properties and the borrowers' ability to service their outstanding loans. Financing Strategy Our organizational documents do not limit our capacity to use leverage or the amount we may use. Our financing objective is to manage our capital structure effectively in order to provide sufficient capital to execute our business strategies and in turn add value to stockholders. We may borrow on a credit facility and from time to time use derivative instruments primarily to manage interest rate risk. We do not intend to use such derivatives to speculate. Portfolio Management Credit risk management is our ability to manage assets of our Managed Companies in a manner that preserves capital and income and minimizes losses that would decrease income and in turn may decrease certain of the fees we earn for managing these companies. Subsequent to the spin-off, the Company will perform portfolio management on behalf of NorthStar Realty and the Sponsored Companies. We maintain a comprehensive portfolio management process that generally includes day-to-day oversight, weekly management meetings and an exhaustive quarterly credit review process designed to enable management to evaluate and proactively identify asset-specific credit issues and trends on a portfolio-wide basis. We use many methods to actively manage the assets of our Managed Companies such as frequent re-underwriting and dialogue with borrowers, tenants, operators and partners as well as inspections of collateral, modification to debt terms, taking title to collateral or selling assets when we can obtain a price that is attractive relative to its risk. Critical Accounting Policies Principles of Consolidation Our combined consolidated financial statements include the accounts of NorthStar Asset Management Group Inc. and its consolidated subsidiaries. Variable Interest Entities A variable interest entity, or VIE, is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. We base the qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. We reassess the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events. A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE's economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. We determine whether we are the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE's economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for us or other interests to provide financial support; consideration of the VIE's purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to our business activities and the other interests. We reassess the determination of whether we are the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions. We evaluate our Managed Companies and investments in unconsolidated ventures to determine whether they are a VIE. Voting Interest Entities 27



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A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If we have a majority voting interest in a voting interest entity, the entity will generally be consolidated. We do not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party. We perform on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework. Investments in Unconsolidated Ventures Non-controlling, unconsolidated ownership interests in an entity may be accounted for using the equity method, at fair value or the cost method. Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity's net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity as a result of preferred returns and allocation formulas, if any, as described in such governing documents. We may account for an investment in an unconsolidated entity at fair value by electing the fair value option. We record the change in fair value for our share of the projected future cash flow of such investments from one period to another in equity in earnings (losses) from unconsolidated ventures in the consolidated statements of operations. Any change in fair value attributed to market related assumptions is considered unrealized gain (loss). We may account for an investment that does not qualify for equity method accounting or for which the fair value option was not elected using the cost method if we determine the investment in the unconsolidated entity is insignificant. Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment. Estimates The preparation of combined consolidated financial statements in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, requires management to make estimates and assumptions that could affect the amounts reported in the combined consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions. Revenue Recognition Asset Management and Other Fees Asset management and other fees include asset management, incentive and other fees, such as acquisition and disposition fees, earned from our Managed Companies. Base asset management and other fees are recognized based on contractual terms specified in the underlying governing documents in the periods during which the related services are performed and the amounts have been contractually earned. Incentive fees and payments are recognized subject to the achievement of return hurdles in accordance with the respective terms set forth in the governing documents of our Managed Company. Selling Commission and Dealer Manager Fees and Commission Expense Selling commission and dealer manager fees represents income earned by us for selling equity in our Sponsored Companies through NorthStar Securities. Selling commission and dealer manager fees and commission expense is accrued on a trade date basis. Equity-Based Compensation We account for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award at the time of grant. Awards may be based on a variety of measures such as time, performance, market or a combination thereof. For service-based awards, we recognize compensation expense over the vesting period on a straight-line basis. For awards with performance or market measures, we recognize compensation expense over the requisite service period, using the accelerated attribution expense method. For performance-based measures, we recognize compensation expense, net of estimated forfeitures, based on an estimate of the probable achievement of such measures. For market-based measures, we recognize compensation expense based on the initial estimate of the fair value of the award using a binomial model. 28



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For awards with a combination of performance or market measures, we estimate the fair value as if it were two separate awards. First, we estimate the probability of achieving the performance measure. If it is not probable the performance condition will be met, we recognize the compensation expense based on the fair value of the market measure. This expense is recorded even if the market-based measure is never met. If the performance-based measure is subsequently estimated to be achieved, we record compensation expense based on the performance-based measure. We would then record a cumulative catch-up adjustment for any additional compensation expense. Equity-based compensation issued to non-employees is accounted for using the fair value of the award at the earlier of the performance commitment date or performance completion date. The awards are remeasured every quarter based on the stock price as of the end of the reporting period until such awards vest, if any. Income Taxes Certain subsidiaries of the Company were subject to taxation by federal and state authorities for the periods presented. The amount of income tax included was determined to be immaterial for the periods presented. Income taxes are accounted for by the asset/liability approach in accordance with U.S. GAAP. Deferred taxes represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. Such amounts arise from differences between the financial reporting and tax bases of assets and liabilities and are adjusted for changes in tax laws and tax rates in the period which such changes are enacted. A provision for income taxes would represent the total of income taxes paid or payable for the current year, plus the change in deferred taxes during the year. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board, or FASB, issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers. When it becomes effective on January 1, 2017, the accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP. We are in the process of evaluating the impact, if any, of the update on our combined consolidated financial statements and related disclosures. Results of Operations Our results of operations discussed below do not reflect our management agreement with NorthStar Realty and therefore do not include all of the revenues and expenses that would have been incurred by us had we been an independent entity. The combined consolidated statements of operations include an allocation of indirect expenses of NorthStar Realty related to managing our Sponsored Companies, owning NorthStar Securities and operating its special servicing business including salaries, equity-based compensation and other general and administrative expenses (primarily occupancy and other costs) based on an estimate had our asset management business been run as an independent entity. As previously noted, the management agreement with NorthStar Realty commenced on June 30, 2014, upon spin-off. Therefore, there was no allocation of indirect expenses for work performed by NorthStar Realty employees related to its other (non asset management) businesses and we did not earn any management fees from NorthStar Realty. Further, there was no allocation of indirect expenses for work performed by NorthStar Realty's employees that is unrelated to NorthStar Realty's asset management business. This allocation method is principally based on relative head count and management's knowledge of our operations. Actual results may differ from these allocations, assumptions and estimates. We believe the assumptions underlying our allocation of indirect expenses are reasonable. Following the spin-off, the most of the existing employees of NorthStar Realty became our employees. Additionally, following the spin-off, executive officers, employees engaged in NorthStar Realty's existing loan origination business and certain other employees became co-employees of us and NorthStar Realty. Accordingly, the historical financial information presented may not be indicative of the results of operations, financial position or cash flows that would have been achieved if we had been an independent entity during the periods presented. Comparison of the Three Months Ended June 30, 2014 to June 30, 2013 (Dollars in Thousands): Three Months Ended June 30, Increase (Decrease) 2014 2013 Amount % Revenues Asset management and other fees, related parties $ 13,110$ 5,787$ 7,323 126.5 % Selling commission and dealer manager fees, related parties 19,313 32,635 (13,322 ) (40.8 )% Other income 260 169 91 53.8 % Total revenues 32,683 38,591 (5,908 ) (15.3 )% Expenses Commission expense 18,138 29,506 (11,368 ) (38.5 )% Transaction costs 21,926 - 21,926 100.0 % Other expense 26 36 (10 ) (27.8 )% General and administrative expenses Salaries and related expense 4,394 6,877 (2,483 ) (36.1 )% Equity-based compensation expense 8,045 2,207 5,838 264.5 % Other general and administrative expenses 2,401 2,313 88 3.8 % Total general and administrative expenses 14,840 11,397 3,443 30.2 % Total expenses 54,930 40,939 13,991 34.2 % Net income (loss) $ (22,247 )$ (2,348 )$ (19,899 ) 847.5 % Revenues



We began earning fees from NorthStar Realty on July 1, 2014. Asset Management and Other Fees Asset management and other fees are comprised of fees from our Sponsored Companies summarized as follows (dollars in thousands):

Three Months Ended June 30, 2014 2013 Asset management fees $ 6,349 $ 2,766 (1) Acquisition fees 6,129 3,006 (2) Disposition fees 632 15 Total $ 13,110$ 5,787 __________________

(1) The increase was driven by the growth in assets of our Sponsored Companies. As of June 30, 2014 and 2013, our Sponsored Companies held aggregate assets of $2.5 billion and $1.5 billion, respectively.



(2) The increase was driven by increased investment activity of our Sponsored

Companies. Also contributing to the increase are the higher fees we

earned from NorthStar Healthcare's real estate equity investments made in

2014. Selling Commission and Dealer Manager Fees We earn net commission income through NorthStar Securities for selling equity in our Sponsored Companies, which is expected to cover the costs incurred in connection with our broker-dealer business. Currently, net commission income covers the majority of such costs. Selling commission and dealer manager fees represent fees earned for selling equity in our Sponsored Companies through NorthStar Securities. Pursuant to dealer manager agreements between NorthStar Securities and our Sponsored Companies, we generally receive selling commissions of up to 7% of gross offering proceeds raised, which we reallow to participating broker-dealers. In addition, we also generally receive a dealer manager fee of up to 3% of gross offering proceeds raised, a portion of which may be reallowed to participating broker-dealers and to employees of NorthStar Securities. Selling commission decreased due to less capital raising activity for the three months ended June 30, 2014 as compared to the same period in 2013. 29



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The following table presents equity raised by our Sponsored Companies for the periods presented (dollars in thousands):

Three Months Ended June 30, 2014 2013 NorthStar Income $ 10,727$ 346,524 (1) NorthStar Healthcare 134,229 587 NorthStar Income II 63,395 - Total $ 208,351$ 347,111 _________________



(1) The decrease was due to NorthStar Income, successfully completing its public offering on July 1, 2013.

Other Income Other income primarily represents special servicing fees related to certain securitization transactions. We are a rated special servicer by Standard & Poor's and Fitch Ratings and we receive special servicing fees for services related to certain securitization transactions. The increase is primarily the result of additional services performed in 2014. Expenses Commission Expense Commission expense represents fees to participating broker-dealers with whom we have selling agreements to raise capital for our Sponsored Companies and commissions to employees of NorthStar Securities. Commission income and expense both decreased due to less capital raising activity for the three months ended June 30, 2014 as compared to the same period in 2013. Transaction Costs Transaction costs represent costs such as legal, accounting, tax and other professional fees associated with the Distribution. Other Expense Other expense primarily represents depreciation expense, legal and other expenses associated with our broker-dealer and special servicing businesses. General and Administrative Expenses General and administrative expenses are principally incurred at the corporate level except as it relates to direct compensation expense and other costs incurred at our broker-dealer, which is part of our broker-dealer segment. General and administrative expenses increased $3.4 million primarily attributable to the following: Salaries and related expense decreased $2.5 million primarily due to the allocation related to managing our Sponsored Companies, offset by higher staffing to accommodate increased business activities of our historical asset management business. Equity-based compensation expense increased $5.8 million primarily due to higher staffing to accommodate increased business activities through the issuance of Deferred LTIP Units, equity compensation for the 2013 long-term incentive plan and certain restricted stock units issued in connection with transactions, offset by an allocation related to managing our Sponsored Companies. Other general and administrative expenses increased $0.1 million primarily due to increased legal and other expenses related to our broker-dealer business, offset by an allocation related to managing our Sponsored Companies. 30



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Comparison of the Six Months Ended June 30, 2014 to June 30, 2013 (Dollars in Thousands): Six Months Ended June 30, Increase (Decrease) 2014 2013 Amount % Revenues Asset management and other fees, related parties $ 21,779$ 10,295$ 11,484 111.5 % Selling commission and dealer manager fees, related parties 33,861 49,575 (15,714 ) (31.7 )% Other income 381 276 105 38.0 % Total revenues 56,021 60,146 (4,125 ) (6.9 )% Expenses Commission expense 31,698 44,875 (13,177 ) (29.4 )% Transaction costs 24,476 - 24,476 100.0 % Other expense 56 54 2 3.7 % General and administrative expenses Salaries and related expense 12,324 12,370 (46 ) (0.4 )% Equity-based compensation expense 13,745 3,507 10,238 291.9 % Other general and administrative expenses 4,274 3,817 457 12.0 % Total general and administrative expenses 30,343 19,694 10,649 54.1 % Total expenses 86,573 64,623 21,950 34.0 % Net income (loss) $ (30,552 )$ (4,477 )$ (26,075 ) 582.4 % Revenues



We began earning fees from NorthStar Realty on July 1, 2014. Asset Management and Other Fees Asset management and other fees are comprised of fees from our Sponsored Companies summarized as follows (dollars in thousands):

Six Months Ended June 30, 2014 2013 Asset management fees $ 11,559$ 4,908 (1) Acquisition fees 9,413 5,348 (2) Disposition fees 807 39 Total $ 21,779$ 10,295 __________________

(1) The increase was driven by the growth in assets of our Sponsored Companies. As of June 30, 2014 and 2013, our Sponsored Companies held aggregate assets of $2.5 billion and $1.5 billion, respectively.



(2) The increase was driven by increased investment activity of our Sponsored

Companies. Also contributing to the increase are the higher fees we

earned from NorthStar Healthcare's real estate equity investments made in

2014.

Selling Commission and Dealer Manager Fees We earn net commission income through NorthStar Securities for selling equity in our Sponsored Companies, which is expected to cover the costs incurred in connection with our broker-dealer business. Currently, net commission income covers the majority of such costs. Selling commission and dealer manager fees represent fees earned for selling equity in our Sponsored Companies through NorthStar Securities. Pursuant to dealer manager agreements between NorthStar Securities and our Sponsored Companies, we generally receive selling commissions of up to 7% of gross offering proceeds raised, which we reallow to participating broker-dealers. In addition, we also generally receive a dealer manager fee of up to 3% of gross offering proceeds raised, a portion of which may be reallowed to participating broker-dealers and to employees of NorthStar Securities. Selling commission decreased due to less capital raising activity for the six months ended June 30, 2014 as compared to the same period in 2013. 31



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The following table presents equity raised by our Sponsored Companies for the periods presented (dollars in thousands):

Six Months Ended June 30, 2014 2013 NorthStar Income $ 20,962$ 525,285 (1) NorthStar Healthcare 235,961 2,637 NorthStar Income II 111,643 - Total $ 368,566$ 527,922



_________________

(1) The decrease was due to NorthStar Income, successfully completing its public offering on July 1, 2013. Other Income Other income primarily represents special servicing fees related to certain securitization transactions. We are a rated special servicer by Standard & Poor's and Fitch Ratings and we receive special servicing fees for services related to certain securitization transactions. The increase is primarily the result of additional services performed in 2014. Expenses Commission Expense Commission expense represents fees to participating broker-dealers with whom we have selling agreements to raise capital for our Sponsored Companies and commissions to employees of NorthStar Securities. Commission income and expense both decreased due to less capital raising activity for the three months ended June 30, 2014 as compared to the same period in 2013. Transaction Costs Transaction costs represent costs such as legal, accounting, tax and other professional fees associated with the Distribution. Other Expense Other expense primarily represents depreciation expense, legal and other expenses associated with our broker-dealer and special servicing businesses. General and Administrative Expenses General and administrative expenses are principally incurred at the corporate level except as it relates to direct compensation expense and other costs incurred at our broker-dealer, which is part of our broker-dealer segment. General and administrative expenses increased $10.6 million primarily attributable to the following: Salaries and related expense decreased an immaterial amount primarily due to higher staffing to accommodate increased business activities of our historical asset management business. Equity-based compensation expense increased $10.2 million primarily due to higher staffing to accommodate increased business activities through the issuance of Deferred LTIP Units, equity compensation for the 2013 long-term incentive plan and certain restricted stock units issued in connection with transactions, offset by an allocation related to managing our Sponsored Companies. Other general and administrative expenses increased $0.5 million primarily due to increased legal and other expenses related to our broker-dealer business, offset by an allocation related to managing our Sponsored Companies. Liquidity and Capital Resources Our capital sources may include cash flows provided from operating activities, primarily from management fees and incentive income paid to us from our Managed Companies, borrowings and the issuance of common stock. Our primary uses of liquidity include operating expenses and distributions. We expect that our cash flows from operating activities and available financing will be sufficient to satisfy our liquidity needs. We currently believe that our existing sources of funds should be adequate for the purposes of meeting our short-term liquidity needs. Unrestricted cash as of August 8, 2014, was approximately $111.5 million. 32



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Cash Flows The following summarizes our combined statements of cash flows for the six months ended June 30, 2014 and 2013 (dollars in thousands):

Six Months Ended June 30, Cash flow provided by (used in): 2014 2013 Operating activities $ (1,207 )$ (148 ) Investing activities (4,000 ) - Financing activities 116,398 1,046



Net increase (decrease) in cash $ 111,191$ 898

Six Months Ended June 30, 2014 Compared to June 30, 2013 Net cash used in operating activities primarily represents asset management and other fees from our Sponsored Companies, offset by operating expenses incurred to grow our business. Net cash used in investing activities primarily represents the investment in crowd funding. Net cash provided by financing activities represents transactions with NorthStar Realty including the operating activities between us and NorthStar Realty and the initial capital contribution upon the Distribution. Off-Balance Sheet Arrangements We currently do not have any off-balance sheet arrangements. Related Party Arrangements NorthStar Realty Investment Opportunities Under the management agreement, NorthStar Realty agreed to make available to us for the benefit of our Managed Companies, including NorthStar Realty, all investment opportunities sourced by NorthStar Realty. We agreed to fairly allocate such opportunities among our Managed Companies, including NorthStar Realty, in accordance with an investment allocation policy. Pursuant to the management agreement, NorthStar Realty will be entitled to fair and reasonable compensation for its services in connection with any loan origination opportunities sourced by it, which may include first mortgage loans, subordinate mortgage interests, mezzanine loans and preferred equity interests, in each case relating to commercial real estate. We will provide services with regard to such areas as payroll, human resources and employee benefits, financial systems management, treasury and cash management, accounts payable services, telecommunications services, information technology services, property management services, legal and accounting services and various other corporate services to NorthStar Realty as it relates to its loan origination business for commercial real estate debt. Credit Agreement In connection with the Distribution, we entered into a revolving credit agreement with NorthStar Realty pursuant to which NorthStar Realty will make available to us, on an "as available basis," up to $250 million of financing for a five year term at LIBOR plus 3.50%. The revolving credit facility is unsecured. We expect to use the proceeds for general corporate purposes, including potential future acquisitions. In addition, we may also use the proceeds to acquire assets on behalf of our Managed Companies that it intends to allocate to such managed company but for which such managed company may not then have immediately available funds. The terms of the revolving credit facility contain various representations, warranties, covenants and conditions, including the condition that NorthStar Realty's obligation to advance proceeds to us is dependent upon NorthStar Realty and its affiliates having at least $100 million of either unrestricted cash and cash equivalents or amounts available under committed lines of credit, after taking into account the amount we seeks to draw under the facility. As of June 30, 2014, we had no borrowings outstanding under the credit agreement. 33



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Healthcare Strategic Joint Venture In January 2014, we entered into a long-term strategic partnership with James F. Flaherty III, former Chief Executive Officer of HCP, Inc. focused on expanding our healthcare business into a preeminent healthcare platform, or the Healthcare Strategic Partnership. In connection with the partnership, Mr. Flaherty oversees and seeks to grow both NorthStar Realty's healthcare real estate portfolio and the portfolio of NorthStar Healthcare. In connection with entering into the partnership, NorthStar Realty granted Mr. Flaherty certain RSUs. The Healthcare Strategic Partnership is entitled to incentive fees ranging from 20% to 25% above certain hurdles for new and existing healthcare real estate investments held by NorthStar Realty and NorthStar Healthcare. The partnership will also be entitled to any incentive fees earned from NorthStar Healthcare or any future healthcare non-traded REITs sponsored by us, NorthStar Realty or any affiliates. Recent Developments Independent Directors' Share Grants



On July 1, 2014, pursuant to the appointment of the board of directors, we granted 6,250 shares of restricted stock at $19.20 per share to each of our six independent directors. The stock will generally vest over three years.

Non-GAAP Financial Measure Management views CAD as a performance measure as it provides investors and management with a meaningful indicator of operating performance. Management also uses CAD, among other measures, to evaluate profitability. In addition, the incentive fees to which we may be entitled pursuant to our management agreement with NorthStar Realty will be determined using NorthStar Realty's CAD as a performance metric. We believe that CAD will be useful because it adjusts net income (loss) for a variety of non-cash, one-time and certain non-recurring items. We will calculate CAD by subtracting from or adding to net income (loss): equity-based compensation, depreciation related items and straight-line rent and transaction and other costs. In future periods, such adjustments may include amortization of deferred financing costs, foreign currency gains (losses), impairment on goodwill and other intangibles and other one-time events pursuant to changes in U.S. GAAP and certain other non-recurring items. These items, if applicable, include any adjustments for unconsolidated ventures. Management also believes that quarterly distributions will be determined principally based on operating performance and we expect our board of directors will use CAD as one of several metrics it reviews to determine quarterly distributions to stockholders. CAD should not be considered as an alternative to net income (loss), determined in accordance with U.S. GAAP, as an indicator of operating performance. In addition, our methodology for calculating CAD may differ from the methodologies used by other comparable companies when calculating the same or similar supplemental financial measures and may not be comparable with these companies. We will provide the calculation of CAD, including a reconciliation of CAD to net income (loss) in the quarter beginning September 30, 2014. 34



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Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk is related to our role as asset manager to our Managed Companies and its effect on the asset management, incentive and other fees we earn. Our asset management, incentive and other fees are primarily driven by the ability of our existing and potential new Managed Companies to grow by raising capital, which will in turn be driven by their investment activities, overall performance and various factors beyond our control, including but not limited to, monetary and fiscal policies, domestic and international economic conditions and political considerations. The effect of such risks on our asset management, incentive and other fee agreements vary based on the management contract with the respective Managed Company (refer to the Note 3 for a summary of our management contracts with our current Managed Companies). The NorthStar Realty management agreement consists of a base management fee which increases as equity is raised and an incentive fee which is based on the performance of NorthStar Realty using CAD as a performance metric. The base management fee currently represents the majority of the fee. The ability of NorthStar Realty to grow is dependent on access to the capital markets to raise equity and/or debt. To the extent that general capital markets activity slows down or comes to a halt (as was the case during the recession that began in 2008), NorthStar Realty may have difficulty growing. This risk is based on micro and macro-economic market factors including but not limited to disruptions in the debt and equity capital markets and institutional lending market, including the lack of access to capital or prohibitively high costs of obtaining or replacing capital. Despite recent improvements, the markets could suffer another severe downturn and another liquidity crisis could emerge. Our Sponsored Companies' ability to sell equity is highly dependent upon the market and the efforts of our broker-dealer, NorthStar Securities. The non-traded industry has experienced rapid growth, is highly competitive and has faced increased scrutiny in recent years. The number of entrants in the non-traded market space has grown significantly over the last several years and as a result, we are subject to significant competition from these and other companies seeking to raise capital in this market. Additionally, as a result of increased scrutiny and accompanying media attention, our non-traded companies may face increased difficulties in raising capital in their offerings due to market perception. This market perception may affect our ability to raise capital for our non-traded companies and make investments on their behalf, both of which could materially adversely affect our asset management, incentive and other fee income and the net commission income generated by our broker-dealer. To a lesser extent, we are indirectly exposed to credit risk through the performance of our Managed Companies. Credit risk relates to the ability of the individual investments to perform, for example the ability for the borrowers' underlying debt or securities investments to make required interest and principal payments on scheduled due dates. We seek to manage credit risk through a comprehensive credit analysis prior to making an investment, actively monitoring our portfolio and the underlying credit quality, including subordination and diversification of our portfolio. Our analysis is based on a broad range of real estate, financial, economic and borrower-related factors which we believe are critical to the evaluation of credit risk inherent in a transaction. Item 4. Controls and Procedures Disclosure Controls and Procedures As of the end of the period covered by this report, our management conducted an evaluation as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended, or Exchange Act, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in our periodic reports.


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