News Column

NORTHSTAR REALTY FINANCE CORP. - 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 consolidated financial statements and notes thereto included in Item 1. "Financial Statements" of this report. References to "N-Star," "we," "us" or "our" refer to NorthStar Realty Finance Corp. and its subsidiaries after the internal corporate restructuring and spin-off, as described further below, unless the context specifically requires otherwise. Introduction NorthStar Realty Finance Corp. is a diversified commercial real estate investment company. We invest in multiple asset classes across commercial real estate, or CRE, that we expect will generate attractive risk-adjusted returns and may take the form of acquiring real estate, originating or acquiring senior or subordinate loans, as well as pursuing opportunistic CRE investments, both in the United States and internationally. We seek to generate stable cash flow for distribution to our stockholders through our diversified portfolio of commercial real estate assets and in turn build long-term franchise value. Effective June 30, 2014, we are externally managed and advised by an affiliate of NorthStar Asset Management Group Inc. (NYSE: NSAM), or NSAM. We are a Maryland corporation and completed our initial public offering in October 2004. We conduct our operations so as to continue to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Spin-off of Asset Management Business On June 30, 2014, we completed our previously announced spin-off of our asset management business into a separate publicly-traded company, NSAM, in the form of a tax-free distribution, or the Distribution. In connection with the Distribution, each of our common stockholders received shares of NSAM common stock on a one-for-one basis, after giving effect to a one-for-two reverse stock split of our common stock, or Reverse Split. Upon completion of the spin-off, our asset management business is owned and operated by NSAM and we are externally managed by an affiliate of NSAM through a management contract with an initial term of 20 years. However, we will continue to operate our commercial real estate debt origination business. Most of our employees at the time of the spin-off became employees of NSAM and executive officers, employees engaged in our existing loan origination business and certain other employees became co-employees of both us and NSAM. Affiliates of NSAM also manage our previously sponsored non-traded REITs: NorthStar Real Estate Income Trust, Inc., or NorthStar Income, NorthStar Healthcare Income, Inc., or NorthStar Healthcare, and NorthStar Real Estate Income II, Inc., or NorthStar Income II, collectively referred to as the NSAM Sponsored Companies. In addition, NSAM owns NorthStar Realty Securities, LLC, or NorthStar Securities, our previously owned captive broker-dealer platform, and performs other asset management-related services. Prior to the Distribution, we completed an internal corporate reorganization, or the Reorganization, whereby we collapsed our three tier holding company structure into a single tier. We previously conducted substantially all of our operations and made our investments through NorthStar Realty Finance Limited Partnership, or the Operating Partnership. In addition, following the Reorganization but prior to the Distribution, we completed a Reverse Split where every two shares of our issued and outstanding common stock were combined into one issued and outstanding share of our common stock. Griffin-American On August 5, 2014, we and Griffin-American Healthcare REIT II, Inc., or Griffin-American, announced that the board of directors of both us and Griffin-American unanimously approved a definitive merger agreement under which we will acquire all of the outstanding shares of Griffin-American in a stock and cash transaction valued at $4 billion, including approximately $600 million of borrowings. Griffin-American is a non-traded REIT focused on medical office buildings, senior housing and other healthcare-related facilities and is co-sponsored by American Healthcare Investors and Griffin Capital Corporation. The merger with Griffin-American is expected to close in the fourth quarter of 2014. Refer to the Recent Developments sections below for further discussion of the merger with Griffin-American. Summary of Business Our primary business lines are as follows: Real Estate - Our real estate business concentrates on various types of



investments in commercial real estate located throughout the United States

that includes healthcare, manufactured housing communities, hotel, net lease

and multifamily properties. In addition, includes limited partnership interests in real estate private equity funds, or PE Investments, diversified by property type and geography. Healthcare - Our healthcare properties are typically leased under net

leases to healthcare operators and focus on mid-acuity facilities (i.e.,



skilled nursing and assisted living), with the highest concentration in

private-pay assisted living facilities which we believe have the most

advantageous underlying demographic trends and fundamentals. In addition,

we own healthcare properties that operate under the REIT Investment Diversification and Empowerment 62



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Act of 2007, or RIDEA, structure generating resident income from short-term residential agreements and incur customary related operating expenses. Manufactured Housing - Our manufactured housing communities portfolio

focuses on owning pad rental sites located throughout the United States.

Hotel - Our hotel portfolio is a geographically diverse portfolio

primarily comprised of extended stay hotels and premium branded select

service hotels located primarily in major metropolitan markets with the majority affiliated with top hotel brands.



Net Lease - Our net lease properties are primarily office, industrial and

retail properties typically under net leases to corporate tenants.

Multifamily - Our multifamily portfolio primarily focuses on owning

properties located in suburban markets that are best suited to capture

the formation of new households.

PE Investments - Our real estate business also includes investments

(directly or indirectly in joint ventures) owning PE Investments managed

by institutional quality sponsors and diversified by property type and geography. Commercial Real Estate Debt - Our CRE debt business is focused on



originating, structuring, acquiring and managing senior and subordinate debt

investments secured primarily by commercial real estate and includes first

mortgage loans, subordinate interests, mezzanine loans and preferred equity

interests. We may from time to time take title to collateral in connection

with a CRE debt investment as real estate owned, or REO, which would be included in our CRE debt business. Commercial Real Estate Securities - Our CRE securities business is predominately comprised of N-Star CDO bonds and N-Star CDO equity of



deconsolidated N-Star CDOs and includes other securities which are mostly

conduit commercial mortgage-backed securities, or CMBS, meaning each asset

is a pool backed by a large number of commercial real estate loans. We also

invest in opportunistic CRE securities such as an investment in a "B-piece"

CMBS.

We have the ability to invest in a broad spectrum of commercial real estate assets and seek to provide attractive risk-adjusted returns. Our ability to invest across the CRE market creates complementary and overlapping sources of investment opportunities based upon common reliance on real estate fundamentals and application of similar portfolio management skills to maximize value and to protect capital. Additionally, we may pursue opportunistic investments across all our business lines including CRE equity and debt investments. Examples of opportunistic investments include PE Investments, strategic joint ventures and repurchasing our collateralized debt obligations, or CDO, bonds at a discount to their principal amount. To date in 2014, we have issued aggregate net capital of $761 million, including $519 million from the issuance of common equity and $242 million from the issuance of preferred equity. In 2013, we issued aggregate net capital of $1.9 billion, including $1.4 billion from the issuance of common equity, $193 million from the issuance of preferred stock and $335 million from the issuance of exchangeable senior notes. Our financing strategy focuses on match funding our assets and liabilities by having similar maturities and like-kind interest rate benchmarks (fixed or floating) to manage refinancing and interest rate risk. In terms of our CRE debt and securities investments and our real estate portfolio, we pursue a variety of financing arrangements such as securitization financing transactions, credit facilities, mortgage notes and other term borrowings. The amount of our borrowings depends upon the nature and credit quality of our assets, the structure of our financings and where possible, we seek to limit our reliance on recourse borrowings. Our real estate portfolio is predominately financed with non-recourse, non-mark-to-market mortgage notes. In late 2011, we began using secured term credit facilities provided by major financial institutions to partially finance CRE debt which currently provide for an aggregate of up to $240 million to finance loan originations. In November 2012, we and NorthStar Income entered into a securitization financing transaction, or Securitization 2012-1. In August 2013, we, on behalf of NorthStar Income, entered into a securitization financing transaction, Securitization 2013-1. Securitization 2012-1 and Securitization 2013-1 are collectively referred to as the Securitization Financing Transactions. These Securitization Financing Transactions provide permanent, non-recourse, non-mark-to-market financing for newly-originated CRE debt investments. The CRE debt investments financed by Securitization 2012-1 were previously financed on our credit facilities. Borrowing levels may change for our CRE debt and real estate investments depending upon the nature of the assets and the related financing. We also historically originated or acquired CRE debt and securities investments that were predominantly financed through permanent, non-recourse CDOs. In addition, we acquired equity interests of two CRE debt focused CDOs, the CSE RE 2006-A CDO, or CSE CDO, and the CapLease 2005-1 CDO, or CapLease CDO. All of these CDOs are past their reinvestment period and given the nature of these transactions, these CDOs are amortizing over time as the underlying assets paydown or are sold. We have been winding down our legacy CDO business and investing in a broad and diverse range of CRE assets. As a result, 63



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such legacy business is a significantly smaller portion of our business today than in the past. Refer to "Liquidity and Capital Resources" for a further discussion of our legacy CDO business. We believe that we maintain a competitive advantage through a combination of deep industry relationships and access to market leading CRE credit underwriting and capital markets expertise which enables us to manage credit risk across our business lines as well as to structure and finance our assets efficiently. Our ability to invest across the spectrum of commercial real estate investments allows us to take advantage of complementary and overlapping sources of investment opportunities based on a common reliance on CRE fundamentals and application of similar underwriting and asset management skills as we seek to maximize stockholder value and to protect our capital. Our Investments The following table presents our assets as of June 30, 2014, adjusted for the Griffin-American merger and acquisitions and agreements to purchase through August 8, 2014 (refer to Recent Developments) (dollars in thousands): Amount(1)(2) % Real Estate Healthcare $ 5,576,040 39.3 % Manufactured housing communities 1,543,419 10.9 % Hotel 1,308,048 9.2 % Net lease 781,386 5.5 % Multifamily 370,438 2.6 % Subtotal 9,579,331 67.5 % Private equity fund investments 845,452 6.0 % Investments in unconsolidated ventures(3) 155,802 1.1 % Total real estate 10,580,585 74.6 % CRE Debt First mortgage loans 538,762 3.8 % Mezzanine loans 155,840 1.1 % Subordinate interests 302,728 2.1 % Term loans 230,343 1.6 % Subtotal 1,227,673 8.6 % CRE debt of consolidated N-Star CDOs 41,310 0.3 % Other(4) 37,431 0.3 % Total CRE debt 1,306,414 9.2 % CRE Securities N-Star CDO bonds(5) 610,575 4.3 % N-Star CDO equity 152,284 1.1 % Other securities 109,411 0.8 % Total CRE securities 872,270 6.2 % Subtotal 12,759,269 90.0 %



Assets underlying deconsolidated CRE Debt CDOs(6) 1,423,387 10.0 % Grand total

$ 14,182,656 100.0 %



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(1) Based on cost for real estate investments which includes net purchase price

allocation related to net intangibles, deferred costs and other assets, if

any, fair value for our investments (directly or indirectly in joint

ventures) owning limited partnership interests in PE Investments and includes

the deferred purchase price for PE Investment II, principal amount for our

CRE debt and securities investments and amortized cost for N-Star CDO equity.

(2) Includes a $273 million hotel portfolio, limited partnership interests in

three real estate private equity funds purchased through a joint venture and

a commitment to purchase a $406 million industrial portfolio.

(3) Represents our investments in RXR Realty LLC, or RXR Realty, and Aerium

Group, or Aerium.

(4) Primarily relates to certain CRE debt investments accounted for as joint

ventures.

(5) Includes N-Star CDO bonds with a principal amount of $88 million related to

CRE securities CDOs that are eliminated in consolidation.

(6) Includes assets of deconsolidated CRE debt CDOs, referred to as N-Star CDOs.

Based on the respective remittance report issued on date nearest to June 30,

2014. This amount excludes $678 million of aggregate N-Star CDO equity and

N-Star CDO bonds included in CRE securities.

We have the ability to invest in a broad spectrum of commercial real estate assets and seek to provide attractive risk-adjusted returns. As a result, we pursue opportunistic investments across all our business lines including CRE equity and debt investments. Examples of opportunistic investments include PE Investments, strategic joint ventures and repurchasing our CDO bonds at a discount to their principal amount. For financial information regarding our reportable segments, refer to Note 18. "Segment Reporting" in our accompanying consolidated financial statements included in Item 1. "Financial Statements." 64



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Real Estate Overview As part of our real estate strategy, we explore a variety of real estate investments. Opportunities to purchase real estate have been bolstered by attractive long-term, non-recourse, non mark-to-market financing available through CMBS and agency financing markets. Our portfolio is currently comprised of healthcare, manufactured housing communities, hotel, net lease and multifamily properties, other opportunistic real estate investments such as indirect interests in real estate through real estate private equity funds and strategic arrangements and partnerships, such as our recent strategic transaction with RXR Realty and Aerium. We also acquire healthcare and hotel property owned through structures permitted by RIDEA, where we participate directly in the operational cash flow of a property. Our real estate equity investments that operate under the RIDEA structure generate resident and hotel guest related income from short-term residential agreements and incur customary related operating expenses. Our Portfolio As of June 30, 2014, $10.6 billion, or 74.6%, of our assets were invested directly in real estate properties and indirectly through our PE Investments and our interests in RXR Realty and Aerium. The following table presents our direct investments in real estate properties as of June 30, 2014, adjusted for the Griffin-American merger and acquisitions and agreements to purchase through August 8, 2014 (refer to Recent Developments) (dollars in thousands): Type Number Amount(1)(2) % Net Cash Flow(3) Healthcare Assisted living facilities 103 $ 972,227 10.1 % $ 62,553 Skilled nursing facilities 63 660,015 6.9 % 61,066 Medical office building 1 4,898 0.1 % 397 Subtotal 167 1,637,140 17.1 % 124,016



Manufactured housing communities 123 1,543,419 16.1 %

106,557 Hotel 67 1,308,048 13.7 % 93,605 Net lease Industrial 39 406,266 4.2 % 31,532 Office(4) 15 310,617 3.2 % 24,967 Retail 10 64,503 0.7 % 5,124 Subtotal 64 781,386 8.1 % 61,623 Multifamily(5) 12 370,438 3.9 % 21,711 Subtotal 433 5,640,431 58.9 % $ 407,512 Griffin-American 295 3,938,900 41.1 % Total 728 $ 9,579,331 100.0 %



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(1) Represents cost, which includes net purchase price allocation of $152

million related to net intangibles and other assets and liabilities.

Additionally, includes $70 million of manufactured homes, $39 million

of notes receivable and $137 million of escrows and other assets.

(2) Includes a $273 million hotel portfolio and a commitment to acquire a

$406 million industrial portfolio.

(3) For healthcare net lease and all other net lease properties, represents

contractual rent less operating expenses, excluding the effects of straight-line rent, annualized based on second quarter 2014 amounts. For healthcare RIDEA properties, represents annualized actual net operating income from acquisition date through June 30, 2014. For manufactured housing and multifamily properties, represents trailing twelve month actual rent less operating expenses for properties owned for trailing twelve months ended June 30, 2014 and annualized actual from acquisition date through June 30, 2014 for properties owned for less than twelve months. Manufactured housing also includes rent from pad sites and homes and interest from seller financing. For hotel properties, represents trailing twelve month net operating income. (4) Includes our interest in a joint venture that owns a net lease property



of $27 million, which generated $2 million of net cash flow annualized

based on second quarter 2014 amounts. (5) The multifamily portfolio represents the entire property in joint ventures that are consolidated, which includes an aggregate $26 million of joint venture partner interests. Also includes our interest in an unconsolidated joint venture that owns a multifamily property of $37 million, which generated $2 million of net cash flow. Healthcare Properties Our healthcare properties are typically net leased to third-party healthcare operators, with a focus on the mid-acuity senior housing sector which includes assisted living, skilled nursing and independent living facilities, which we believe have the most advantageous underlying demographic trends and fundamentals. In May 2014, we acquired a $1.1 billion healthcare real estate portfolio comprised of over 8,500 beds diversified across assisted living and skilled nursing facilities, located primarily in Florida, Illinois, Oregon and Texas. We acquired the portfolio through a joint venture with NorthStar Healthcare and an affiliate of Formation Capital, LLC, or the Formation Portfolio. 65



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In addition, in August 2014 we agreed to acquire Griffin-American, a non-traded REIT focused on medical office buildings, senior housing and other healthcare-related facilities. Griffin-American's diversified portfolio is comprised of 295 healthcare-related real estate properties which are predominantly medical office buildings (43%) and senior housing facilities (30%) in the United States and the United Kingdom. We believe our combined healthcare portfolio creates a best in class healthcare real estate portfolio with substantial size, stability and diversification. The merger with Griffin-American is expected to close in the fourth quarter of 2014. As of June 30, 2014, $5.6 billion, or 39.3%, of our assets were invested in healthcare properties, comprised of 194 assisted living facilities (ALF), 146 medical office buildings (MOB), 108 skilled nursing facilities (SNF) and 14 hospitals including the pending merger with Griffin-American. As of June 30, 2014, the healthcare portfolio including the Griffin-American assets was 97% leased to third-party operators, with a weighted average lease coverage of 1.6x and a 9.1 year weighted average remaining lease term. The following presents our healthcare portfolio's diversity across property type, geographic location and type of net cash flow (dollars in millions): Total Portfolio Healthcare by Property Type(3) Number of facilities 462 Number of units/beds(1) 24,154 Net cash flow(2) $ 124 Net cash flow related to: Weighted average occupancy 97 % Weighted average lease coverage 1.6x Weighted average lease term 9.1 years [[Image Removed]]



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

SNF property types.

(2) For net lease properties, represents contractual rent less operating

expenses, excluding the effects of straight-line rent, annualized based on

second quarter 2014 amounts. For RIDEA properties, represents annualized

actual net operating income from acquisition date through June 30, 2014. This

amount excludes net cash flow for the Griffin-American portfolio.

(3) Based on net cash flow.

Manufactured Housing Communities Our manufactured housing portfolio consists of communities that lease pad rental sites for placement of factory built homes and includes an inventory of manufactured homes. As of June 30, 2014, $1.5 billion, or 10.9%, of our assets were invested in manufactured housing communities. Our aggregate portfolio includes 123 communities in 12 states totaling approximately 29,000 pad rental sites. The aggregate portfolio also consists of approximately 3,400 homes on the sites with the remaining homes owned by the respective tenants. As of June 30, 2014, our manufactured housing communities were 87% occupied. The manufactured housing industry has traditionally demonstrated low cash flow volatility and steady annual rent increases, although there is no assurance that will continue to be the case. 66



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The following presents a summary of our manufactured housing communities portfolio (dollars in millions):

Total Portfolio Net Cash Flow by Geographic Location Number of communities 123 Number of pad rental sites 29,038 Net cash flow(1) $ 107 Net cash flow related to: Pad rental sites 89.0 % Other 11.0 % Weighted average occupancy 87 % [[Image Removed]]



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(1) Based on trailing twelve month actual rent less operating expenses for

communities owned for the twelve months ended June 30, 2014 and annualized

actual from acquisition date through June 30, 2014 for communities owned for

less than twelve months. Also includes rent from pad sites and homes and

interest from seller financing.

Hotel Portfolio As of June 30, 2014, including our acquisition of a hotel portfolio in August 2014, $1.3 billion, or 9.2%, of our assets were invested in hotel properties. Our hotel portfolio is a geographically diverse portfolio primarily comprised of extended stay hotels and premium branded select service hotels located primarily in major metropolitan markets with the majority affiliated with top hotel brands. In June 2014, we acquired a $1.1 billion hotel portfolio consisting of 47 upscale extended stay hotels and premium branded select service hotels with approximately 6,100 rooms, or the Innkeepers Portfolio. The Innkeepers Portfolio is a geographically diverse, bi-coastal portfolio located primarily in top metropolitan markets, with the largest concentration of net operating income from hotels in California. 83% of the Innkeepers Portfolio is affiliated with Marriott International Inc. or Hilton Worldwide Holdings Inc. We acquired the Innkeepers Portfolio through a joint venture with Chatham Lodging Trust (NYSE: CLDT) by contributing $193 million for an approximate 90% ownership interest. In August 2014, we completed the purchase of a 20-hotel portfolio of select service hotels totaling approximately 1,900 rooms located in Texas, California, Louisiana and Oklahoma, or the Hotel Portfolio. We acquired the Hotel Portfolio through a joint venture with a third party for $273 million and contributed $52.5 million for a 97.5% ownership interest. The following presents a summary of our hotel portfolio by brand and diversity across geographic location based on number of rooms: Hotel by Brand Hotel by Geographic Region [[Image Removed]] [[Image Removed]] PE Investments Our PE Investments own limited partnership interests in real estate private equity funds managed by institutional-quality sponsors, which we refer to as fund interests. As of June 30, 2014, including our acquisition of private equity fund investments in July 2014 (PE Investment V), $845 million, or 6.0%, of our assets were invested in PE Investments. We elected the fair value option for PE Investments. As a result, we record equity in earnings that approximates a level yield based on the change in fair value for our share of the projected future cash flow from one period to another. 67



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The following table presents our indirect investment in real estate through PE Investments as of June 30, 2014, including our acquisition of PE Investment V in July 2014 (dollars in thousands): Portfolios Amount(1) % PE Investment I 1 $ 207,411 24.5 % PE Investment II 1 557,004 65.9 % Other PE Investments 3 81,037 9.6 % Total 5 $ 845,452 100.0 %



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(1) Represents fair value and includes the deferred purchase price for PE Investment II. PE Investment I On February 15, 2013, we completed the initial closing of our first joint venture that owns limited partnership interests in real estate funds, or PE Investment I. We, together with NorthStar Income, entered into an agreement to acquire limited partnership interests in real estate private equity funds with an aggregate reported net asset value, or NAV, of approximately $802 million as of June 30, 2012. We, together with NorthStar Income, have an ownership interest in PE Investment I of 51%, of which we own 70.5% and NorthStar Income owns 29.5%. PE Investment I received all cash distributions from June 30, 2012 through the closing of each fund interest and was obligated to fund all capital contributions from June 30, 2012. PE Investment II On July 3, 2013, we completed the initial closing of our second joint venture that owns limited partnership interests in real estate private equity funds, or PE Investment II. We, NorthStar Income and the funds managed by Goldman Sachs Asset Management, or the Vintage Funds, entered into an agreement to acquire limited partnership interests in real estate private equity funds with an aggregate reported NAV of approximately $910 million as of September 30, 2012. We, NorthStar Income and the Vintage Funds each have an ownership interest in PE Investment II of 70%, 15% and 15%, respectively. PE Investment II paid $505 million to the seller for all of the fund interests, or 55% of the September 30, 2012 NAV, or the Initial Amount, and will pay the remaining $411 million, or 45% of the September 30, 2012 NAV, or the Deferred Amount, by the last day of the fiscal quarter after the four year anniversary of the applicable closing date of each fund interest. We funded all of our proportionate share of the Initial Amount at the initial closing. For the six months ended June 30, 2014, PE Investment II paid $2.4 million of the Deferred Amount, of which our share was $1.7 million. As of June 30, 2014, our share of the Deferred Amount was $286 million. PE Investment II received all cash distributions from September 30, 2012 through the closing of each fund interest and is obligated to fund all capital contributions from September 30, 2012. Other PE Investments On December 31, 2013, we acquired our third portfolio of limited partnership interests in real estate private equity funds, or PE Investment III, with an aggregate reported NAV of approximately $80 million as of June 30, 2013. On May 30, 2014, we purchased an interest in a real estate private equity fund for $8 million, or PE Investment IV, which represented a purchase price equal to 90.5% of the NAV as of December 31, 2013. We own an additional interest in the same real estate private equity fund through PE Investment I. On July 1, 2014, we, through a joint venture, purchased a fund interest in three real estate private equity funds for $12 million, or PE Investment V, which represented a purchase price equal to 85% of the NAV as of September 30, 2013, prior to adjusting for distributions and contributions from such date. We own an additional fund interest in one fund in PE Investment II. 68



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Summary of PE Investments The following tables present a summary of our PE Investments (dollars in millions): Closing Number NAV as a Reported Number of Percentage NAV Implied of General of Cost Growth Underlying Leverage Expected Future PE Investment(1) Funds Partners Initial NAV (2) (3) Assets, at Cost (4) Contributions (5) PE Investment I 49 26 $ 802.4 66.2% 20.6% $ 24,200 49.0% $ 14 PE Investment II 24 15 $ 910.0 73.5% 12.7% $ 23,200 32.4% $ 10 Other: PE Investment III 8 4 $ 80.3 119.0% 6.6% $ 3,200 51.1% $ 1 PE Investment IV 1 1 $ 8.9 113.4% (4.8)% $ 500 46.6% $ - PE Investment V 3 1 $ 23.0 57.8% 23.9% $ 1,100 10.4% $ -



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(1) Based on financial data reported by the underlying funds as of March 31, 2014, except as otherwise noted.



(2) Net cost represents total funded capital less distributions received. For

PE Investment I, excludes any distributions in excess of contributions for

funds, which represented 4% of reported NAV.

(3) The reported NAV growth is measured from the agreed upon reported NAV at

date of acquisition, or Initial NAV. The reported NAV growth for PE Investments owned for less than twelve months is annualized based on actual reported income from the Initial NAV through March 31, 2014.



(4) Represents implied leverage for funds with investment-level financing,

calculated as the underlying borrowing divided by assets at fair value.

(5) Represents the estimated amount of expected future contributions to funds as of June 30, 2014. Our Proportionate Share of PE Investments Total Income Return of Capital Distributions (2) Contributions Net PE Investment I Quarter ended June 30, 2014 $ 14.1 $ 13.6 $ 27.7 $ - $ 27.7 February 15, 2013 to June 30, 2014 (1) $ 81.4 $ 95.5 $ 176.9 $ 20.9 $ 156.0 PE Investment II Quarter ended June 30, 2014 $ 13.3 $ 12.5 $ 25.8 $ 3.2 $ 22.6July 3, 2013 to June 30, 2014 (1) $ 55.3 $ 99.1 $ 154.4 $ 16.5 $ 137.9 Other PE Investments Quarter ended June 30, 2014 $ 1.8 $ 6.9 $ 8.7 $ 0.1 $ 8.6 Various to June 30, 2014 (1) $ 3.2 $ 15.9 $ 19.1 $ 0.5 $ 18.6



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(1) Represents activity from the respective initial closing date through June 30, 2014. (2) Net of a $12 million reserve for taxes in the aggregate for all PE Investments.



The following presents the underlying fund interests in our PE Investments by investment type and geographic location based on NAV as of March 31, 2014: PE Investments by Underlying Investment PE Investments by Underlying Geographic

Type(1) Location(1) [[Image Removed]] [[Image Removed]]



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(1) Based on individual fund financial statements.

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Net Lease Properties Our real estate that is net leased to corporate tenants is primarily comprised of office, industrial and retail properties. These net lease properties are typically leased to a single tenant who agrees to pay basic rent, plus all taxes, insurance, capital and operating expenses arising from the use of the leased property generally leaving us, as owner, with minimal ongoing operational or expense obligations. We may also invest in properties that are leased to tenants for which we are responsible for some of the operating expenses and capital costs. At the end of the lease term, the tenant typically has a right to renew the lease at market rates or to vacate the property with no further ongoing obligation. In May 2014, we committed to purchase an investment in an approximately $406 million, 6.3 million square foot industrial portfolio that is 100% net leased with a remaining weighted average lease term of over 12 years. This portfolio consists of 39 properties across 17 states with the largest concentration of net operating income from properties in California. As part of this investment, we expect to have an approximate 50% ownership interest. We expect to close on this investment in the third quarter of 2014. As of June 30, 2014, including our commitment to acquire an industrial portfolio in August 2014, $781 million, or 5.5%, of our assets were invested in 64 net lease properties, including one property with three buildings owned through an unconsolidated joint venture. As of June 30, 2014, our net lease properties total 8.8 million square feet and were 99% leased with a 8.4 year weighted average remaining lease term. The following presents our net lease portfolio's diversity across property type and geographic location based on net cash flow: Net Lease by Property Type(1) Net Lease by Geographic Location(1) [[Image Removed]] [[Image Removed]]



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(1) Based on contractual rent less operating expenses, excluding the effects of

straight-line rent, annualized based on second quarter 2014 amounts.

Multifamily Properties Our multifamily portfolio primarily focuses on properties located in suburban markets that we believe are best suited to capture the formation of new households. As of June 30, 2014, $370 million, or 2.6%, of our assets were invested in multifamily properties, including one property owned through an unconsolidated joint venture. As of June 30, 2014, our portfolio includes 12 properties in six states totaling approximately 4,500 rental units that were 93% occupied. 70



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The following presents our multifamily portfolio's diversity across geographic location based on net cash flow: Multifamily by Geographic Location(1)



[[Image Removed]]

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(1) Based on trailing twelve month actual rent less operating expenses for

properties owned for the twelve months ended June 30, 2014 and annualized

actual from acquisition date through June 30, 2014 for properties owned for

less than twelve months.

Other Indirect Investments in Real Estate RXR Realty In December 2013, we entered into a strategic transaction with RXR Realty, a leading real estate owner, developer and investment management company focused on high-quality real estate investments in the New York Tri-State area. The investment includes an approximate 30% equity interest in RXR Realty. Aerium In June 2014, we acquired a 15% interest in Aerium, a pan-European real estate investment manager specializing in commercial real estate properties and is headquartered in Luxembourg with additional offices in London, Paris, Istanbul, Geneva, DÜsseldorf and Bahrain. As of June 30, 2014, Aerium managed approximately 6.1 billion of real estate assets across 12 countries and employed over 180 professionals, some of whom provide services to NSAM following the spin-off. Commercial Real Estate Debt Overview Our CRE debt investment strategy is focused on originating, acquiring and asset managing CRE debt investments, including first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests. We emphasize direct origination of our debt investments as this allows us a greater degree of control over how they are underwritten and structured and it provides us the opportunity to syndicate senior or subordinate interests in the loan, if desired. Further, it facilitates a more direct relationship with our borrowers which helps us maintain a robust pipeline, provides an opportunity for us to earn origination and other fees and offers us an important advantage when considering any potential future modifications or restructurings. We believe the supply/demand imbalance driven by the large amount of maturing CRE loans creates an opportunity for us. Even with some increased supply by lenders, demand for debt capital is allowing investors with capital and real estate expertise, such as us, the opportunity to make investments with attractive risk/return profiles. We believe we have built a franchise with a reputation for providing capital to high-quality real estate owners who want a responsive and flexible balance sheet lender. Given that we are a lender who generally retains control of the loans we originate, we are able to maintain flexibility in how we structure loans to meet the needs of our borrowers. Typical CMBS and other capital markets driven lenders generally cannot provide these types of loans due to constraints within their funding structures and because of their requirement to sell the entire loan to third parties and relinquish all control. Even when we finance our investments through securitizations, we maintain a significant capital investment in our loans and as a result, continue to maintain control and influence over such loans. Our centralized investment organization has enabled senior management to review potential new loans early in the origination process which, unlike many large institutional lenders with several levels of approval required to commit to a loan, allows us to respond quickly and provide a high degree of certainty to our borrowers that we would close a loan on terms substantially similar to those initially proposed. We believe that this level of service has enhanced our reputation in the marketplace. In addition, we believe the early and active role of senior management in our 71



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portfolio management process has been key to maximizing recoveries of invested capital from our investments and our ability to be responsive to changing market conditions. Our Portfolio As of June 30, 2014, $1.2 billion, or 8.6%, of assets were invested in CRE debt, excluding CRE debt financed in consolidated N-Star CDOs and other CRE debt accounted for as joint ventures. This portfolio consists of 39 loans with an average investment size of $31 million and weighted average extended maturity of 4.2 years. We directly originated approximately 94% of our current portfolio of CRE debt investments. The following table presents a summary of our CRE debt investments as of June 30, 2014 (dollars in thousands): Weighted Average(5) Floating Rate Allocation by Spread as % of Principal Carrying Investment Fixed Over Principal Number(2) Amount Value(3) Type(4) Rate LIBOR Yield Amount(5) Asset Type: First mortgage loans 18 $ 538,762$ 505,690 43.8 % 13.21 % 7.49 % 11.26 % 82.0 % Mezzanine loans 8 155,840 155,958 12.7 % 13.44 % 13.46 % 13.81 % 80.0 % Subordinate interests 9 302,728 310,549 24.7 % 12.60 % 12.33 % 12.92 % 27.1 % Term loans(1) 4 230,343 238,082 18.8 % 12.45 % - 12.94 % - Total/Weighted average 39 $ 1,227,673$ 1,210,279 100.0 % 12.68 % 9.13 % 12.31 % 52.2 %



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(1) Term loans include one revolver of $25 million, of which $19 million is

outstanding as of June 30, 2014.

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

(3) Certain CRE debt investments serve as collateral for financing transactions

including carrying value of $135 million for securitization financing transactions and $164 million for credit facilities. The remainder is unleveraged.



(4) Based on principal amount.

(5) Excludes three CRE debt investments with an aggregate principal amount of $27

million that were originated prior to 2008.

The following presents our $1.2 billion CRE debt portfolio's diversity across property type and geographic location based on principal amount. Debt Investments by Property Type Debt Investments by Geographic Location

[[Image Removed]] [[Image Removed]] CRE Securities We historically originated or acquired CRE debt and securities investments that were predominately financed through permanent, non-recourse CDOs. We sponsored nine CDOs, three of which were primarily collateralized by CRE debt and six of which were primarily collateralized by CRE securities. In addition, we acquired the equity interests of two CRE debt focused CDOs, the CSE CDO, and the CapLease CDO. We refer to those CRE debt and securities investments that serve as collateral for N-Star CDO financing transactions as legacy CRE debt and securities, respectively. At the time of issuance of the N-Star CDOs, we retained the below investment grade bonds, which are referred to as subordinate bonds, and preferred shares and equity notes, which are referred to as equity interests. In addition, since the initial issuance of the N-Star CDOs, we repurchased CDO bonds originally issued to third parties at discounts to par. These repurchased CDO bonds and retained subordinate bonds are herein collectively referred to as N-Star CDO bonds. All of the N-Star CDOs are amortizing over time as the underlying assets paydown or are sold. We have been winding down our legacy CDO business, and as a result, such legacy business is a significantly smaller portion of our business today than in the past. 72



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In March 2014 and May 2014, N-Star CDOs V and III were deconsolidated from our consolidated balance sheets. Additionally, in 2013, our CRE debt CDOs were deconsolidated from our consolidated balance sheets. N-Star CDOs I and IX continue to be consolidated. Refer to "Liquidity and Capital Resources" for further discussion of our legacy CDO business. Our CRE securities portfolio is predominately comprised of N-Star CDO bonds and N-Star CDO equity of our deconsolidated N-Star CDOs and includes other securities, mostly conduit CMBS, meaning each asset is a pool backed by a large number of commercial real estate loans. We also invest in opportunistic CRE securities such as an investment in a "B-piece" CMBS. The following table presents our interest in the N-Star CDOs as of June 30, 2014 (dollars in thousands): Number Amount(1) N-Star CDO bonds(2) 44 $ 610,575 N-Star CDO equity (3) 5 152,284 Total 49 $ 762,859



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(1) Based on principal amount for N-Star CDO bonds and amortized cost for N-Star CDO equity. (2) Includes eight N-Star CDO bonds with a principal amount of $88 million



related to our securities CDOs that are eliminated in consolidation.

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

Sources of Operating Revenues and Cash Flows Subsequent to the spin-off of our asset management business, we primarily generate revenue from rental and other operating income from our real estate properties and net interest income on our CRE debt and securities portfolios. Additionally, we record equity in earnings of unconsolidated ventures, including from PE Investments. Our income is primarily derived through the difference between revenue and the cost at which we are able to finance our investments. We may also acquire investments which generate attractive returns without any leverage. For financial information regarding our asset management segment prior to the spin-off, refer to Note 18. "Segment Reporting" in our accompanying consolidated financial statements included in Item 1. "Financial Statements." Profitability and Performance Metrics We calculate several metrics to evaluate the profitability and performance of our business. Cash available for distribution, or CAD (refer to "Non-GAAP Financial Measure-Cash Available for Distribution" for a description of this metric).



Credit losses are a measure of performance and can be used to compare the

credit performance of our assets to our competitors and other finance

companies.

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

Outlook and Recent Trends 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 73



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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, we 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. Virtually all commercial real estate property types were adversely impacted by the credit crisis and subsequent recession, while others such as land, condominium and other commercial property types were more severely impacted. Our commercial real estate equity, debt and securities investments could be negatively impacted by weak real estate markets and economic conditions. 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. Our Strategy Our primary business objectives are to invest in commercial real estate assets that we expect will generate attractive risk-adjusted returns and in turn will generate stable cash flow for distribution to our stockholders. We currently anticipate that most of our investment activity and uses of available cash liquidity will be focused on our businesses of acquiring real estate, originating or acquiring loans, as well as pursuing opportunistic CRE investments across our businesses, both in the United States and internationally. Opportunistic investments may include investing in real estate private equity funds, strategic joint ventures and repurchasing our CDO bonds at discounts to par. Availability and cost of capital will impact our profitability and earnings since we must raise new capital to fund a majority of this growth. During the credit crisis covering 2007 to 2010, upon observing the deteriorating market conditions, we responded by decreasing investment activity and preserving capital. Availability and cost of capital will impact our profitability and earnings since we must raise new capital to fund a majority of this growth. In 2014 and 2013, we took advantage of improved market conditions in terms of both capital raising and investment activity. We issued $761 million of capital thus far in 2014 and a total of $1.9 billion of capital in 2013. In addition, as of June 30, 2014, we have two credit facilities with an aggregate of $240 million to finance the origination of CRE first mortgage loans. Additionally, in August 2014, we and certain of our subsidiaries entered into a revolving corporate credit facility with certain commercial bank lenders, with a total commitment amount of $500 million for a three year term (refer to Recent Developments). In November 2012 and August 2013, we, and on behalf of NorthStar Income, entered into Securitization Financing Transactions to finance debt investments on a permanent, non-recourse, non-mark-to-market basis that were previously financed on credit facilities. We actively invested across our businesses in 2014. The following table presents our gross investments and equity invested, including commitments, through August 8, 2014 (excluding the pending merger with Griffin-American) (dollars in millions): Investment Number Gross Investments Invested



Equity

Formation Portfolio(1) 80 properties $ 1,061 $



358

Hotel portfolios(2) 67 properties 1,328



245

Industrial portfolio(3) 39 properties 406 167 PE Investments 3 portfolios 120 108 CRE debt 6 loans 231 220 Aerium 1 joint venture 73 73 Manufactured housing 4 properties 55 38 N-Star CDO bonds 2 bonds 11 7 Total $ 3,285 $ 1,216



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(1) Represents properties held through a joint venture.

(2) Represents two hotel portfolios held through joint ventures.

(3) Represents a commitment to invest in a preferred and common equity investment in 39 industrial properties. The weighted average initial (first year) expected yield on invested equity for these investments is 14%. There is no assurance we will realize the expected returns on invested equity over the term of these investments. Our actual return on invested equity could vary significantly from our expectations. 74



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Financing Strategy We seek to access a wide range of secured and unsecured debt and public and private equity capital sources to fund our investment activities and asset growth. We use investment-level financing as part of our strategy and we seek to match fund our assets and liabilities by having similar maturities and like-kind interest rate benchmarks (fixed or floating) to manage refinancing and interest rate risk. We seek access to diverse sources of short and long-term financing to enable us to prudently leverage our investments and deliver attractive risk-adjusted returns to our stockholders. Our real estate portfolio is typically financed with long-term, non-recourse, non-mark-to-market mortgages that we have been able to obtain financing at very favorable terms. Our more recent financings are typically assignable. Further, with respect to our healthcare and net lease properties, we seek to match the term of the financing with the remaining lease term of the properties. Borrowing levels for CRE investments may change depending upon the nature of the assets and the related financing. Our financing strategy for our CRE debt investments is dependent on our ability to obtain match-funded borrowings at rates that provide a positive net spread. We use secured term credit facilities to partially finance our CRE debt and securities investments. As of June 30, 2014, our credit facilities provide for an aggregate of up to $240 million to finance first mortgage loans and senior loan participations secured by commercial real estate. Additionally, in August 2014, we and certain of our subsidiaries entered into a revolving credit facility with certain commercial bank lenders, with a total commitment amount of $500 million for a three year term (refer to Recent Developments). We, and on behalf of NorthStar Income, use securitization financing transactions, which provide permanent, non-recourse, non-mark-to-market financing for newly-originated CRE debt investments that were previously financed on credit facilities. In November 2012 and in August 2013, we and on behalf of NorthStar Income, entered into Securitization 2012-1 and Securitization 2013-1. As of June 30, 2014, we had $82 million issued as part of Securitization 2012-1 and $101 million outstanding with $139 million available borrowing under our credit facilities. Historically, we used CDOs to finance legacy CRE debt and securities investments. We have been winding down our legacy CDO business and investing in a broad and diverse range of CRE assets. As a result, such legacy business is a significantly smaller portion of our business today than in the past. Refer to "Liquidity and Capital Resources" for a further discussion of our legacy CDO business. Portfolio Management Subsequent to the spin-off, NSAM will perform portfolio management on our behalf. The comprehensive portfolio management process generally includes day-to-day oversight by the portfolio management and servicing team, weekly management meetings and an exhaustive quarterly credit review process. These processes are designed to enable management to evaluate and proactively identify asset-specific credit issues and trends on a portfolio-wide basis. Nevertheless, we cannot be certain that such review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from investments that are not identified during these credit reviews. The portfolio management team uses many methods to actively manage our asset base to preserve our income and capital. Credit risk management is the ability to manage our assets in a manner that preserves principal/cost and income and minimizes credit losses that could decrease income and portfolio value. For CRE debt and real estate investments, frequent re-underwriting and dialogue with borrowers/tenants/operators/partners and regular inspections of our collateral and owned properties have proven to be an effective process for identifying issues early. With respect to our healthcare properties, we consider the impact of regulatory changes on operator performance and property values. During the quarterly credit review, or more frequently as necessary, investments are put on highly-monitored status and identified for possible asset impairment/loan loss reserves, as appropriate, based upon several factors, including missed or late contractual payments, significant declines in collateral performance and other data which may indicate a potential issue in our ability to recover our invested capital from an investment. The portfolio management process related to CRE debt and securities underlying our deconsolidated CDOs is limited to monitoring the CDO bonds and equity interests in such CDO financing transactions. A more detailed discussion of our CDO financing transactions and our delegation of collateral management rights for the deconsolidated N-Star CRE debt CDOs is provided in "Liquidity and Capital Resources." 75



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Critical Accounting Policies Principles of Consolidation Our consolidated financial statements include the accounts of NorthStar Realty Finance Corp. and its consolidated subsidiaries. We consolidate variable interest entities, or VIEs, where we are the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by us. All significant intercompany balances are eliminated in consolidation. Variable Interest Entities A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. We base the qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. We reassess the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events. A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE's economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. We determine whether we are the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE's economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for us or other interests to provide financial support; consideration of the VIE's purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to our business activities and the other interests. We reassess the determination of whether we are the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions. We evaluate our CRE debt and securities, investments in unconsolidated ventures and securitization financing transactions, such as our CDOs and our liabilities to subsidiary trusts issuing preferred securities to determine whether they are a VIE. We analyze new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing. Voting Interest Entities A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If we have a majority voting interest in a voting interest entity, the entity will generally be consolidated. We do not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party. We perform on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework. Investments in Unconsolidated Ventures We have non-controlling, unconsolidated ownership interests in entities that may be accounted for using the equity method, at fair value or the cost method. Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity's net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. Allocations of net income (loss) may differ from the stated ownership percentage interest in such entities as a result of preferred returns and allocation formulas, if any, as described in such governing documents. We may account for an investment in an unconsolidated entity at fair value by electing the fair value option. We elected the fair value option for PE Investments, certain components of our investment in RXR Realty and our investment in Aerium. PE Investments are recorded as investments in private equity funds, at fair value. Investments in RXR Realty and Aerium are recorded in unconsolidated ventures on the consolidated balance sheets. 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 76



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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 investments that do not qualify for equity method accounting or for which the fair value option was not elected using the cost method if we determine the investment in the unconsolidated entity is insignificant. Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment. Fair Value Option The fair value option provides an election that allows a company to irrevocably elect fair value for certain financial assets and liabilities on an instrument-by-instrument basis at initial recognition. We will generally not elect the fair value option for our assets and liabilities. However, we may elect to apply the fair value option for certain investments. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings. Operating Real Estate We follow the purchase method for an acquisition of operating real estate, where the purchase price is allocated to tangible assets such as land, building, tenant and land improvements and other identified intangibles, such as goodwill. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life. Ordinary repairs and maintenance are expensed as incurred. Operating real estate is carried at historical cost less accumulated depreciation. Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in our consolidated statements of operations. We evaluate whether real estate acquired in connection with a REO constitutes a business and whether business combination accounting is appropriate. Any excess upon taking title to collateral between the carrying value of a loan over the estimated fair value of the property is charged to provision for loan losses. Operating real estate, including REO, which has met the criteria to be classified as held for sale, is separately presented on the consolidated balance sheets. Such operating real estate is recorded at the lower of its carrying value or its estimated fair value less the cost to sell. Once a property is determined to be held for sale, depreciation is no longer recorded. Real Estate Debt Investments CRE debt investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium, discount and unfunded commitments. CRE debt investments that are deemed to be impaired are carried at amortized cost less a loan loss reserve, if deemed appropriate, which approximates fair value. CRE debt investments where we do not have the intent to hold the loan for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or estimated value. Real Estate Securities We classify our CRE securities investments as available for sale on the acquisition date, which are carried at fair value. We have historically elected to apply the fair value option for our CRE securities investments. For those CRE securities for which the fair value option was elected, any unrealized gains (losses) from the change in fair value is recorded in unrealized gains (losses) on investments and other in the consolidated statements of operations. We may decide to not elect the fair value option for certain CRE securities due to the nature of the particular instrument. For those CRE securities for which the fair value option was not elected, any unrealized gains (losses) from the change in fair value is recorded as a component of accumulated other comprehensive income, or OCI, in the consolidated statements of equity, to the extent impairment losses are considered temporary. Fair Value Measurement The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on our consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows: Level 1. Quoted prices for identical assets or liabilities in an active market. 77



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Level 2. Financial assets and liabilities whose values are based on the following: (a)Quoted prices for similar assets or liabilities in active markets. (b)Quoted prices for identical or similar assets or liabilities in non-active markets. (c)Pricing models whose inputs are observable for substantially the full term of the asset or liability. (d) Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability. Level 3. Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement. Financial assets and liabilities recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as our knowledge and experience of the market. With respect to valuation for CRE securities, we generally obtain at least one quote from a pricing service or broker. Furthermore, we may use internal pricing models to establish arm's length prices. Generally, the quote from the pricing service is used to determine fair value for the securities. The quotes are not adjusted. The pricing service uses market-based measurements based on valuation techniques that reflect market participants' assumptions and maximize the use of relevant observable inputs including prices for similar assets, benchmark yield curves and market corroborated inputs such as contractual terms, discount rates for similar securities and credit (such as credit support and delinquency rates). We believe such broker quote is generally based on a market transaction of comparable securities. To determine the fair value of CRE securities, we maintain a comprehensive quarterly process that includes a valuation committee comprised of senior members of the investment and accounting teams that is designed to enable management to ensure the prices used are representative of fair value and the instruments are properly classified pursuant to the fair value hierarchy. Initially, a member of the investment team on the valuation committee reviews the prices at quarter end to ensure current market conditions are fairly presented. The investment team is able to assess these values because they are actively engaged in the market, reviewing bid lists, recent sales and frequently have discussions with various banks and other financial institutions regarding the state of the market. We then perform a variety of analyses to ensure the quotes are in a range which it believes to be representative of fair value and to validate the quotes obtained and used in determining the ultimate value used in the financial statements. At the portfolio level, we evaluate the overall change in fair value versus the overall change in the market. We review significant changes in fair value for individual instruments, both positive and negative, from the prior period. We perform back testing on any securities sold to validate the quotes used for the prior quarter. Where multiple quotes are available, we evaluate any large variance between the high and low price. We obtain any available market data that provides insight into the price through recent or comparable security trades, multiple broker bids and other pertinent information. This data may be available through the pricing service or based on data directly available to us. If as part of any of these processes, we are aware of data which we believe better supports the fair value, we challenge the quote provided by either the pricing service or broker. Any discrepancy identified from our processes are reviewed and resolved. The valuation committee approves the final prices. We believe these procedures are designed to enable us to estimate fair value. Once we determine fair value of CRE securities, we review to ensure the instrument is properly classified pursuant to the fair value hierarchy consistent with U.S. GAAP through our understanding of the valuation methodologies used by the pricing service via discussion with representatives of the pricing service and review of any documentation describing its valuation methodology. Generally, when fair value is based on the pricing service or multiple broker quotes, we believe, based on our analysis, such quotes are based on observable inputs and are therefore classified as Level 2. Where the price is based on either a single broker quote or an internal pricing model, we generally consider such price to be based on less observable data and therefore classify such instruments as Level 3. 78



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Revenue Recognition Operating Real Estate Rental and escalation income from operating real estate is derived from leasing of space to various types of tenants and healthcare operators. The leases are for fixed terms of varying length and generally provide for annual rentals and expense reimbursements to be paid in monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in unbilled rent receivable on our consolidated balance sheets. Escalation income represents revenue from tenant/operator leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by us on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred. We generate operating income from healthcare and hotel properties under a RIDEA structure. Revenue related to healthcare properties include resident room and care charges and other resident charges. Revenue related to operating hotel properties primarily consists of room and food and beverage sales. Revenue is recognized when such services are provided, generally defined as the date upon which a guest occupies a room or uses the hotel services and is recorded in resident fee and hotel income in the consolidated statements of operations. Real Estate Debt Investments Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in our consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such loan is reclassified to held for sale. Real Estate Securities Interest income is recognized using the effective interest method with any premium or discount amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expected cash flow may result in a change to the yield which is then applied retrospectively for high-credit quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment or prospectively for all other securities to recognize interest income. Credit Losses and Impairment on Investments Operating Real Estate Our real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our operating real estate may be impaired or that its carrying value may not be recoverable. A property's value is considered impaired if management's estimate of the aggregate expected future undiscounted cash flow generated by the property is less than the carrying value. In conducting this review, management considers U.S. macroeconomic factors, real estate sector conditions and asset specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value and recorded in impairment on operating real estate in our consolidated statements of operations. An allowance for a doubtful account for a tenant/operator receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of tenant/operator to make required rent and other payments contractually due. Additionally, we establish, on a current basis, an allowance for future tenant/operator/resident/guest credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts. Real Estate Debt Investments Loans are considered impaired when based on current information and events, it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis or more frequently as necessary. Significant judgment of management is required in this analysis. We consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each loan is maintained at a level that is determined to be adequate by management to absorb probable losses. 79



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Income recognition is suspended for a loan at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged. Investments in Unconsolidated Ventures We review our investments in unconsolidated ventures for which we did not elect the fair value option on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value may be impaired or that its carrying value may not be recoverable. An investment is considered impaired if the projected net recoverable amount over the expected holding period is less than the carrying value. In conducting this review, we consider U.S. macroeconomic factors, including real estate sector conditions, together with asset specific and other factors. To the extent an impairment has occurred and is considered to be other than temporary, the loss is measured as the excess of the carrying value of the investment over the estimated fair value and recorded in provision for loss on equity investment in our consolidated statements of operations. Real Estate Securities CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment, or OTTI, as any change in fair value is recorded in our consolidated statements of operations. Realized losses on such securities are reclassified to realized gain (loss) on investments and other as losses occur. CRE securities for which the fair value option is not elected are evaluated for OTTI quarterly. Impairment of a security is considered to be other-than-temporary when: (i) the holder has the intent to sell the impaired security; (ii) it is more likely than not the holder will be required to sell the security; or (iii) the holder does not expect to recover the entire amortized cost of the security. When a CRE security has been deemed to be other-than-temporarily impaired due to (i) or (ii), the security is written down to its fair value and an OTTI is recognized in the consolidated statements of operations. In the case of (iii), the security is written down to its fair value and the amount of OTTI is then bifurcated into: (a) the amount related to expected credit losses; and (b) the amount related to fair value adjustments in excess of expected credit losses. The portion of OTTI related to expected credit losses is recognized in our consolidated statements of operations. The remaining OTTI related to the valuation adjustment is recognized as a component of accumulated OCI in our consolidated statements of equity. The portion of OTTI recognized through earnings is accreted back to the amortized cost basis of the security through interest income, while amounts recognized through OCI are amortized over the life of the security with no impact on earnings. CRE securities which are not high-credit quality are considered to have an OTTI if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of OTTI is then bifurcated as discussed above. Other Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for a complete discussion of our critical accounting policies. Recent Accounting Pronouncements In April 2014, the Financial Accounting Standards Board ("FASB") issued an accounting update that changes the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity or a business. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The requirements of this accounting update will be effective for us for the annual period beginning after December 15, 2014, however, early adoption is permitted but only for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issue. We early adopted this accounting pronouncement effective January 1, 2014 and the update did not have a material impact on our consolidated financial statements. In May 2014, the FASB issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers. When it becomes effective on January 1, 2017, the accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP. We are in the process of evaluating the impact, if any, of the update on our consolidated financial statements and related disclosures. 80



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Results of Operations Comparison of the Three Months Ended June 30, 2014 to June 30, 2013 (Dollars in Thousands): Three Months Ended Increase June 30, (Decrease) 2014 2013 Amount % Net interest income Interest income $ 75,867$ 73,148$ 2,719 3.7 % Interest expense on debt and securities 3,106 11,588 (8,482 ) (73.2 )% Net interest income on debt and securities 72,761 61,560 11,201 18.2 % Other revenues Rental and escalation income 78,776 64,253 14,523 22.6 % Resident fee and hotel income 37,586 - 37,586 NA Other revenue 2,995 961 2,034 211.7 % Total other revenues 119,357 65,214 54,143 83.0 % Expenses Other interest expense 44,880 34,344 10,536 30.7 % Real estate properties-operating expenses 51,671 18,069 33,602 186.0 % Other expenses 154 1,423 (1,269 ) (89.2 )% Transaction costs 31,650 6,750 24,900 368.9 % Provision for loan losses, net 833 - 833 NA General and administrative expenses Salaries and related expense 17,392 6,075 11,317 186.3 % Equity-based compensation expense 7,879 1,970 5,909 299.9 % Other general and administrative expenses 3,580 4,341 (761 ) (17.5 )% Total general and administrative expenses 28,851 12,386 16,465 132.9 % Depreciation and amortization 33,672 21,526 12,146 56.4 % Total expenses 191,711 94,498 97,213 102.9 % Income (loss) from operations 407 32,276 (31,869 ) (98.7 )% Equity in earnings (losses) of unconsolidated ventures 31,380 15,119 16,261 107.6 % Unrealized gain (loss) on investments and other (56,605 ) (57,834 ) 1,229 (2.1 )% Realized gain (loss) on investments and other (320 ) 12,133 (12,453 ) (102.6 )% Gain (loss) from deconsolidation of N-Star CDOs (34,778 ) - (34,778 ) NA Income (loss) from continuing operations (59,916 ) 1,694 (61,610 ) (3,637.0 )% Income (loss) from discontinued operations (572 ) (2,240 ) 1,668 (74.5 )% Net income (loss) $ (60,488 )$ (546 )$ (59,942 ) 10,978.4 % Net Interest Income Net interest income is generated on our interest-earning assets less related interest-bearing liabilities and is recorded as part of our CRE debt and securities segments and our N-Star CDO segments. For assets financed in a CDO, also referred to as legacy investments, the N-Star CDO segments are based on the primary collateral of the CDO financing transaction and as such may include other types of investments. 81



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The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the three months ended June 30, 2014 and 2013. Amounts presented have been impacted by the timing of new investments and repayments during the periods (dollars in thousands): Three Months Ended June 30, 2014 2013 Average Interest WA Yield/ Average Interest WA Yield/ Carrying Income/ Financing Carrying Income/ Financing Value(2) Expense(3) Cost(4) Value(2) Expense(3) Cost(4) Interest-earning assets:(1) CRE debt investments $ 1,197,140$ 40,781 13.63 % $ 1,847,314$ 35,388 7.66 % CRE securities investments 1,104,180 35,086 12.71 % 1,610,921 37,760 9.38 % $ 2,301,320 75,867 13.19 % $ 3,458,235 73,148 8.46 % Interest-bearing liabilities:(1) CDO bonds payable $ 684,011 1,531 0.90 % (5) $ 2,866,400 9,238 3.51 % (5) Securitization bonds payable 82,370 664 3.22 % 98,001 781 3.19 % Credit facilities 81,599 911 4.47 % 97,312 1,426 5.86 % Secured term loan - - - % 14,653 143 3.92 % $ 847,980 3,106 1.47 % $ 3,076,366 11,588 3.58 % Net interest income $ 72,761$ 61,560



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(1) Excludes $32.6 million and $217.0 million average carrying value of REO and

investments in unconsolidated ventures, net of related financing as of

June 30, 2014 and 2013, respectively.

(2) Based on amortized cost for CRE debt and securities investments, principal

amount for N-Star CDOs, securitization bonds payable, credit facilities and

secured term loan and carrying value for the CSE and CapLease CDOs. All

amounts are calculated based on quarterly averages.

(3) Includes the effect of amortization of premium or accretion of discount and

deferred fees.

(4) Calculated based on annualized interest income or expense divided by average

carrying value.

(5) We use interest rate swaps in CDO financing transactions to manage interest

rate risk. Weighted average financing cost includes $4.0 million and $15.9

million of net cash payments on interest rate swaps recorded in unrealized

gain (loss) in our consolidated statements of operations for the three months

ended June 30, 2014 and 2013, respectively.

Interest income increased $2.7 million, primarily attributable to increased income related to CRE debt and securities investments ($29.0 million) and investments in deconsolidated N-Star CDO bonds and equity notes ($12.9 million), offset by decreased interest income on CRE debt and securities investments in the N-Star CDOs segment ($39.2 million). Interest expense decreased $8.5 million, primarily attributable to the deconsolidation of N-Star CDO bonds payable ($7.4 million) and reduced interest on other borrowings in the CRE debt segment ($1.1 million). Other Revenues Rental and Escalation Income Rental and escalation income increased $14.5 million, primarily attributable to new manufactured housing, multifamily and healthcare investments ($23.6 million) and higher income on our net lease and healthcare properties ($1.5 million) in our real estate segment, offset by lower income related to REOs that were deconsolidated in the N-Star CDO CRE debt segment ($10.6 million). Resident Fee and Hotel Income We generated resident fee and hotel income of $37.6 million in 2014 related to new acquisitions, including the Innkeepers Portfolio ($22.5 million) and the RIDEA portion of the Formation Portfolio ($15.1 million). We did not generate any resident fee and hotel income in 2013. Other Revenue Other revenue increased $2.0 million primarily due to increases in various fees such as administrative fees from our deconsolidated N-Star CDOs. These fees were previously eliminated in consolidation. 82



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Expenses

Other Interest Expense Other interest expense increased $10.5 million, primarily attributable to increased interest expense related to new mortgage notes payable associated with new property acquisitions in our real estate segment ($14.4 million) and interest expense on the new senior notes at the corporate level ($5.7 million), offset by lower interest expense from mortgage notes on REO that were deconsolidated in our N-Star CDO CRE debt segment ($3.2 million) and lower interest expense at the corporate level primarily due to conversions of exchangeable senior notes ($6.4 million). Real Estate Properties-Operating Expenses Real estate properties operating expenses increased $33.6 million, primarily attributable to new manufactured housing, multifamily, hotel and healthcare investments in our real estate segment ($38.5 million), offset by lower expenses related to REO that were deconsolidated in our N-Star CDO CRE debt segment ($4.9 million). Other Expenses Other expenses decreased $1.3 million related to decreased expense from N-Star debt CDOs that were deconsolidated in 2013 and were recorded as part of the N-Star CDO segments. These amounts include legal and consulting fees for loan modifications and restructurings and other expenses associated with managing the N-Star CDOs. Transaction Costs Transaction costs represent costs such as professional fees associated with new investments and restructuring charges related to existing investments. For the three months ended June 30, 2014, transaction costs of $31.7 million primarily related to our acquisition of the Innkeepers Portfolio ($19.7 million), the investment in Aerium ($3.6 million) and other real estate acquisitions in our real estate segment ($8.4 million). For the three months ended June 30, 2013, transaction costs of $6.8 million related to our acquisition of PE Investment II and our acquisition of real estate properties in our real estate segment. Provision for Loan Losses, Net Provision for loan losses, net on our CRE debt investments related to an existing first mortgage loan. General and Administrative Expenses General and administrative expenses are principally incurred at the corporate level except as it relates to compensation expense and other costs incurred at our broker-dealer, which is part of our asset management segment that was spun off effective June 30, 2014. General and administrative expenses increased $16.5 million primarily attributable to the following: Salaries and related expense increased $11.3 million primarily due to higher staffing to accommodate our new business activities, offset by an allocation of costs related to the NSAM Sponsored Companies. Equity-based compensation expense increased $5.9 million related to the issuance of Deferred LTIP Units, equity compensation for the 2013 long-term incentive plan and equity compensation issued by NSAM in connection with the spin-off. Other general and administrative expenses decreased $0.8 million at the corporate level primarily due to lower legal fees related to general corporate work. Depreciation and Amortization Depreciation and amortization expense increased $12.1 million, primarily related to new acquisitions in our real estate segment ($16.8 million), offset by lower expenses related to REO that were deconsolidated in our N-Star CDO CRE debt segment ($4.7 million). Equity in Earnings (Losses) of Unconsolidated Ventures Equity in earnings (losses) of unconsolidated ventures increased $16.3 million, primarily attributable to increased earnings from PE Investments ($14.8 million) and the investment in RXR Realty ($1.5 million), all in our real estate segment. 83



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Unrealized Gain (Loss) on Investments and Other Unrealized gain (loss) on investments and other is primarily related to the non-cash change in fair value adjustments and the remaining amount is related to net cash payments on interest rate swaps. Any change in fair value related to securities, CDO bonds payable and related derivatives and the associated net cash payments on interest rate swaps is primarily part of our N-Star CDO segments while any change in fair value and net cash payments on interest rate swaps related to junior subordinated notes are at the corporate level. The following table presents a summary of unrealized gain (loss) on investments and other for the three months ended June 30, 2014 and 2013 (dollars in thousands): Three Months Ended June 30, 2014 Three Months Ended June 30, 2013 N-Star CDOs N-Star CDOs CRE CRE CRE CRE CRE CRE CRE Debt Securities Securities Corporate Total Debt Securities Debt Securities Corporate Total Change in fair value of: Real estate securities, available for sale $ - $ (6,724 )$ 873 $ - $ (5,851 ) $ - $ (2,570 )$ 16,111$ 12,244 $ - $ 25,785 CDO bonds payable, at fair value - - (38,418 ) - (38,418 ) - - (44,643 ) (32,501 ) - (77,144 ) Junior subordinated notes, at fair value - - - (8,245 ) (8,245 ) - - - - (13,824 ) (13,824 ) Derivative liabilities, at fair value - - 275 - 275 - - 10,849 11,591 - 22,440 Other(1) (411 ) - - - (411 ) 829 - - - - 829 Net cash payments on interest rate swaps - - (3,955 ) - (3,955 ) - - (3,352 ) (12,568 ) - (15,920 ) Total unrealized gain (loss) on investments and other $ (411 )$ (6,724 )$ (41,225 )$ (8,245 )$ (56,605 )$ 829$ (2,570 )$ (21,035 )$ (21,234 )$ (13,824 )$ (57,834 )



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(1) Represents foreign currency remeasurement on an investment denominated in Euros. Realized Gain (Loss) on Investments and Other Realized losses of $0.3 million for the three months ended June 30, 2014 primarily related to losses on exchangeable senior notes ($6.8 million) in the corporate segment, loss on the sale of manufactured homes ($1.0 million) in the real estate segment, offset by net gains from the sale of CRE securities investments ($0.9 million) in the CRE securities segment and net realized gains from the sale of timeshare units ($0.2 million) in our real estate segment. The remaining change related to the N-Star CDO CRE securities segment and primarily included gains related to certain CRE securities investments ($6.4 million). Realized gains of $12.1 million for the three months ended June 30, 2013 primarily related to net realized gains from the sale of timeshare units ($7.8 million), gains from the sale of manufactured homes ($0.4 million) both in our real estate segment. The remaining change related to the N-Star CDO segments and primarily included net realized gains from the sale of CRE debt and securities investments ($0.8 million), gain from the liquidation of N-Star CDO II ($7.3 million), offset by losses related to certain CRE securities investments ($4.3 million). Gain (Loss) from Deconsolidation of N-Star CDOs The loss of $34.8 million related to the deconsolidation of N-Star CDO III, which was predominately due to the reversal of prior unrealized gains on CDO bonds payable recorded in prior periods due to the election of the fair value option. There was no gain (loss) from deconsolidation recorded for the three months ended June 30, 2013. Income (Loss) from Discontinued Operations The following table presents the consolidated statements of discontinued operations and excludes the effect of any fees that NSAM will earn in connection with the management agreement with us (dollars in thousands): Increase Three Months Ended June 30, (Decrease) 2014 2013 Amount % NSAM Total revenues $ 32,675$ 38,591$ (5,916 ) (15.3 )% Total expenses 32,994 40,939 (7,945 ) (19.4 )% NSAM income (loss) in discontinued operations (319 ) (2,348 ) 2,029 (86.4 )% Income (loss) from operating real estate discontinued operations (253 ) 108 (361 ) (334.3 )% Total income (loss) from discontinued operations $ (572 )$ (2,240 )$ 1,668 (74.5 )% 84



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The decrease in total revenues of $5.9 million is primarily attributable to a decrease of $13.2 million in commission income attributable to completing the offering of NorthStar Income on July 1, 2013 and commencing selling in NorthStar Healthcare and NorthStar Income II at the end of the third quarter 2013, offset by an increase of $7.3 million in fees from managing the NSAM Sponsored Companies. The decrease in expenses of $7.9 million is primarily attributable to a decrease of $11.4 million in commission expense corresponding with the decreased commission income, offset by a net increase of $3.5 million related to the allocation of general and administrative expenses associated with our historical asset management business including salaries, equity-based compensation and other general and administrative expenses. Income (loss) from operating real estate in discontinued operations primarily represents the operations of five healthcare properties classified as held for sale or sold in our real estate segment. Comparison of the Six Months Ended June 30, 2014 to June 30, 2013 (Dollars in Thousands): Six Months Ended Increase June 30, (Decrease) 2014 2013 Amount % Net interest income Interest income $ 154,546$ 143,483$ 11,063 7.7 % Interest expense on debt and securities 6,389 22,985 (16,596 ) (72.2 )% Net interest income on debt and securities 148,157 120,498 27,659 23.0 % Other revenues Rental and escalation income 147,201 102,189 45,012 44.0 % Resident fee and hotel income 37,586 - 37,586 NA Other revenue 5,479 1,306 4,173 319.5 % Total other revenues 190,266 103,495 86,771 83.8 % Expenses Other interest expense 83,913 60,124 23,789 39.6 % Real estate properties-operating expenses 73,629 26,734 46,895 175.4 % Other expenses 930 2,659 (1,729 ) (65.0 )% Transaction costs 39,760 10,503 29,257 278.6 % Provision for loan losses, net 2,719 2,336 383 16.4 % General and administrative expenses Salaries and related expense 20,720 12,894 7,826 60.7 % Equity-based compensation expense 11,784 6,688 5,096 76.2 % Other general and administrative expenses 8,102 7,863 239 3.0 % Total general and administrative expenses 40,606 27,445 13,161 48.0 % Depreciation and amortization 60,721 36,231 24,490 67.6 % Total expenses 302,278 166,032 136,246 82.1 % Income (loss) from operations 36,145 57,961 (21,816 ) (37.6 )% Equity in earnings (losses) of unconsolidated ventures 63,172 23,432 39,740 169.6 % Unrealized gain (loss) on investments and other (198,945 ) (45,978 ) (152,967 ) 332.7 % Realized gain (loss) on investments and other (45,832 ) 17,944 (63,776 ) (355.4 )% Gain (loss) from deconsolidation of N-Star CDOs (31,423 ) - (31,423 ) NA Income (loss) from continuing operations (176,883 ) 53,359 (230,242 ) (431.5 )% Income (loss) from discontinued operations (6,711 ) (4,209 ) (2,502 ) 59.4 % Net income (loss) $ (183,594 )$ 49,150$ (232,744 ) (473.5 )% Net Interest Income Net interest income is generated on our interest-earning assets less related interest-bearing liabilities and is recorded as part of our CRE debt and securities segments and our N-Star CDO segments. For assets financed in a CDO, also referred to as legacy investments, the N-Star CDO segments are based on the primary collateral of the CDO financing transaction and as such may include other types of investments. 85



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The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the six months ended June 30, 2014 and 2013. Amounts presented have been impacted by the timing of new investments and repayments during the periods (dollars in thousands): Six Months Ended June 30, 2014 2013 Average Interest WA Yield/ Average Interest WA Yield/ Carrying Income/ Financing Carrying Income/ Financing Value(2) Expense(3) Cost(4) Value(2) Expense(3) Cost(4) Interest-earning assets:(1) CRE debt investments $ 1,141,786$ 75,899 13.29 % $ 1,842,286$ 66,154 7.18 % CRE securities investments 1,192,050 78,647 13.20 % 1,671,642 77,329 9.25 % $ 2,333,836 154,546 13.24 % $ 3,513,928 143,483 8.17 % Interest-bearing liabilities:(1) CDO bonds payable $ 779,413 3,344 2.59 % (5) $ 2,976,807 19,029 3.47 % (5) Securitization bonds payable 82,360 1,366 3.32 % 98,002 1,582 3.23 % Credit facilities 77,745 1,679 4.32 % 85,237 2,090 4.90 % Secured term loan - - - % 14,656 284 3.88 % $ 939,518 6,389 3.64 % $ 3,174,702 22,985 3.51 % Net interest income $ 148,157$ 120,498



____________________________________________________________

(1) Excludes $34.0 million and $203.2 million average carrying value of REO and

investments in unconsolidated ventures, net of related financing as of

June 30, 2014 and 2013, respectively.

(2) Based on amortized cost for CRE debt and securities investments, principal

amount for N-Star CDOs, securitization bonds payable, credit facilities and

secured term loan and carrying value for the CSE and CapLease CDOs. All

amounts are calculated based on quarterly averages.

(3) Includes the effect of amortization of premium or accretion of discount and

deferred fees.

(4) Calculated based on annualized interest income or expense divided by average

carrying value.

(5) We use interest rate swaps in CDO financing transactions to manage interest

rate risk. Weighted average financing cost includes $10.7 million and $32.7

million of net cash payments on interest rate swaps recorded in unrealized

gain (loss) in our consolidated statements of operations for the three months

ended June 30, 2014 and 2013, respectively.

Interest income increased $11.1 million, primarily attributable to increased income related to CRE debt and securities investments ($56.9 million) and investments in deconsolidated N-Star CDO bonds and equity notes ($26.7 million), offset by decreased interest income on CRE debt and securities investments in the N-Star CDOs segment ($72.5 million). Interest expense decreased $16.6 million, primarily attributable to the deconsolidation of N-Star CDO bonds payable ($15.0 million) and reduced interest on other borrowings in the CRE debt segment ($1.6 million). Other Revenues Rental and Escalation Income Rental and escalation income increased $45.0 million, primarily attributable to new manufactured housing, multifamily and healthcare investments ($62.5 million) and higher income on our net lease and healthcare properties ($3.1 million) in our real estate segment, offset by lower income related to REOs that were deconsolidated in the N-Star CDO CRE debt segment ($20.6 million). Resident Fee and Hotel Income We generated resident fee and hotel income of $37.6 million in 2014 related to new acquisitions, including the Innkeepers Portfolio ($22.5 million) and the RIDEA portion of the Formation Portfolio ($15.1 million). We did not generate any resident fee and hotel income in 2013. Other Revenue Other revenue increased $4.2 million primarily due to increases in various fees such as administrative fees from our deconsolidated N-Star CDOs. These fees were previously eliminated in consolidation. 86



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Expenses

Other Interest Expense Other interest expense increased $23.8 million, primarily attributable to increased interest expense related to new mortgage notes payable associated with new property acquisitions in our real estate segment ($29.8 million), offset by lower interest expense from mortgage notes on REO that were deconsolidated in our N-Star CDO CRE debt segment ($6.0 million). Real Estate Properties-Operating Expenses Real estate properties operating expenses increased $46.9 million, primarily attributable to new manufactured housing, multifamily, hotel and healthcare investments in our real estate segment ($56.7 million), offset by lower expenses related to REO that were deconsolidated in our N-Star CDO CRE debt segment ($9.8 million). Other Expenses Other expenses decreased $1.7 million related to decreased expense from N-Star debt CDOs that were deconsolidated in 2013 and were recorded as part of the N-Star CDO segments. These amounts include legal and consulting fees for loan modifications and restructurings and other expenses associated with managing the N-Star CDOs. Transaction Costs Transaction costs represent costs such as professional fees associated with new investments and restructuring charges related to existing investments. For the six months ended June 30, 2014, transaction costs of $39.8 million primarily related to our acquisition of the Innkeepers Portfolio ($19.7 million), the Formation Portfolio ($7.5 million), the investment in Aerium ($3.6 million) and other real estate acquisitions in our real estate segment ($9.0 million). For the six months ended June 30, 2013, transaction costs of $10.5 million related to our acquisition of PE Investment I and II and our acquisition of real estate properties in our real estate segment. Provision for Loan Losses, Net Provision for loan losses, net on our CRE debt investments increased $0.4 million. For the six months ended June 30, 2014, provision for loan losses, net of $2.7 million related to a provision for loan loss for an existing mezzanine loan and an existing first mortgage loan. For the six months ended June 30, 2013, provision for loan losses, net of $2.3 million related to a provision for loan loss for a mezzanine loan ($6.3 million), offset by a reversal of provision for loan loss for a mezzanine loan for which we contemporaneously took title to the collateral ($4.0 million). General and Administrative Expenses General and administrative expenses are principally incurred at the corporate level except as it relates to compensation expense and other costs incurred at our broker-dealer, which is part of our asset management segment that was spun off effective June 30, 2014. General and administrative expenses increased $13.2 million primarily attributable to the following: Salaries and related expense increased $7.8 million primarily due to higher staffing to accommodate our new business activities, offset by an allocation of costs related to the NSAM Sponsored Companies. Equity-based compensation expense increased $5.1 million related to the issuance of Deferred LTIP Units, equity compensation for the 2013 long-term incentive plan and equity compensation issued by NSAM in connection with the spin-off. Other general and administrative expenses increased $0.2 million at the corporate level primarily due to increased legal fees related to general corporate work, offset by the allocation of costs to the NSAM Sponsored Companies. Depreciation and Amortization Depreciation and amortization expense increased $24.5 million, primarily related to new acquisitions in our real estate segment ($34.3 million), offset by lower expenses related to REO that were deconsolidated in our N-Star CDO CRE debt segment ($9.8 million). Equity in Earnings (Losses) of Unconsolidated Ventures Equity in earnings (losses) of unconsolidated ventures increased $39.7 million, primarily attributable to increased earnings from PE Investments ($35.3 million), the investment in RXR Realty ($3.0 million) and earnings from equity investments in our CRE debt segment ($2.0 million), offset by equity in losses of $0.5 million related to investments in our real estate segment. 87



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Unrealized Gain (Loss) on Investments and Other Unrealized gain (loss) on investments and other is primarily related to the non-cash change in fair value adjustments and the remaining amount is related to net cash payments on interest rate swaps. Any change in fair value related to securities, CDO bonds payable and related derivatives and the associated net cash payments on interest rate swaps is primarily part of our N-Star CDO segments while any change in fair value and net cash payments on interest rate swaps related to junior subordinated notes are at the corporate level. The following table presents a summary of unrealized gain (loss) on investments and other for the six months ended June 30, 2014 and 2013 (dollars in thousands): Six Months Ended June 30, 2014 Six Months Ended June 30, 2013 N-Star CDOs N-Star CDOs CRE CRE CRE CRE CRE CRE CRE Debt Securities Securities Corporate Total Debt Securities Debt Securities Corporate Total Change in fair value of: Real estate securities, available for sale $ - $ (7,498 )$ 17,840 $ - $ 10,342 $ - $ (1,858 )$ 44,715$ 79,411 $ - $ 122,268 CDO bonds payable, at fair value - - (181,779 ) - (181,779 ) - - (77,944 ) (71,485 ) - (149,429 ) Junior subordinated notes, at fair value - - - (20,242 ) (20,242 ) - - - - (23,444 ) (23,444 ) Derivative liabilities, at fair value - - 4,228 - 4,228 - - 17,597 20,604 - 38,201 Other(1) (800 ) - - - (800 ) (900 ) - - - - (900 ) Net cash payments on interest rate swaps - - (10,694 ) - (10,694 ) - - (6,535 ) (26,139 ) - (32,674 ) Total unrealized gain (loss) on investments and other $ (800 )$ (7,498 )$ (170,405 )$ (20,242 )$ (198,945 )$ (900 )$ (1,858 )$ (22,167 )$ 2,391$ (23,444 )$ (45,978 )



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(1) Represents foreign currency remeasurement on an investment denominated in Euros. Realized Gain (Loss) on Investments and Other Realized losses of $45.8 million for the six months ended June 30, 2014 primarily related to losses on exchangeable senior notes ($44.7 million) in our corporate segment, loss on the sale of manufactured homes ($4.5 million) in the real estate segment, offset by net gains from the sale of CRE securities investments ($4.3 million) in the CRE securities segment and net realized gains from the sale of timeshare units ($0.5 million) in our real estate segment. The remaining change related to the N-Star CDO CRE securities segment and primarily included losses related to certain CRE securities investments ($1.5 million). Realized gains of $17.9 million for the six months ended June 30, 2013 primarily related to net realized gains from the sale of timeshare units ($11.7 million), gains from the sale of manufactured homes ($0.5 million) both in our real estate segment and gains related to certain CRE securities investments ($0.5 million) in the CRE securities segment. The remaining change related to the N-Star CDO segments and primarily included net realized gains from the sale of CRE debt and securities investments ($5.3 million), gain from the liquidation of N-Star CDO II ($7.3 million), offset by losses on the repurchases of CDO bonds ($2.4 million) and losses related to certain CRE securities investments ($4.9 million). Gain (Loss) from Deconsolidation of N-Star CDOs The loss of $31.4 million related to the deconsolidation of N-Star CDOs III and V in 2014, which was predominately due to the reversal of prior unrealized gains on CDO bonds payable recorded in prior periods due to the election of the fair value option. There was no gain (loss) from deconsolidation recorded for the six months ended June 30, 2013. 88



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Income (Loss) from Discontinued Operations The following table presents the consolidated statements of discontinued operations and excludes the effect of any fees that NSAM will earn in connection with the management agreement with us (dollars in thousands): Increase Six Months Ended June 30, (Decrease) 2014 2013 Amount % NSAM Total revenues $ 56,013$ 60,146$ (4,133 ) (6.9 )% Total expenses 62,087 64,623 (2,536 ) (3.9 )% NSAM income (loss) in discontinued operations (6,074 ) (4,477 ) (1,597 ) 35.7 % Income (loss) from operating real estate discontinued operations (637 ) 268 (905 ) (337.7 )% Total income (loss) from discontinued operations $ (6,711 )$ (4,209 )



$ (2,502 ) 59.4 %

The decrease in total revenues of $4.1 million is primarily attributable to a decrease of $15.7 million in commission income attributable to completing the offering of NorthStar Income on July 1, 2013 and commencing selling in NorthStar Healthcare and NorthStar Income II at the end of the third quarter 2013, offset by an increase of $11.5 million in fees from managing the NSAM Sponsored Companies. The decrease in expenses of $2.5 million is primarily attributable to a decrease of $13.2 million in commission expense corresponding with the decreased commission income, offset by an increase of $10.7 million primarily due to compensation from higher staffing levels to accommodate growth in our historical asset management related business activities net of the allocation of costs to the NSAM Sponsored Companies. Income (loss) from operating real estate in discontinued operations primarily represents the operations of five healthcare properties classified as held for sale or sold in our real estate segment. Liquidity and Capital Resources We require capital to fund our investment activities and operating expenses. Our capital sources may include cash flow from operations, net proceeds from asset repayments and sales, borrowings under credit facilities, financings secured by our assets such as mortgage notes, securitization financing transactions, long-term senior and subordinate corporate capital such as senior term loans, senior notes, senior exchangeable notes, trust preferred securities, perpetual preferred stock and common stock. We seek to meet our long-term liquidity requirements, including the repayment of borrowings and our investment funding needs, through existing cash resources, issuance of debt or equity capital and the liquidation or refinancing of assets. Nonetheless, our ability to meet a long-term (beyond one year) liquidity requirement may be subject to obtaining additional debt and equity financing. Any decision by our lenders and investors to provide us with financing will depend upon a number of factors, such as our compliance with the terms of our existing credit arrangements, our financial performance, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders' and investors' resources and policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities. As a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where we do not receive corresponding cash, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Internal Revenue Code and to avoid federal income tax and the non-deductible excise tax. In the past, we maintained high unrestricted cash balances relative to the historical difference between our distributions and cash provided by operating activities. On a quarterly basis, our board of directors determines an appropriate common stock dividend based upon numerous factors, including CAD, REIT qualification requirements, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our business or prospects. Future dividend levels are subject to adjustment based upon our evaluation of the factors described above, as well as other factors that our board of directors may, from time-to-time, deem relevant to consider when determining an appropriate common stock dividend. We currently believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs. Unrestricted cash as of August 5, 2014 was approximately $282 million. 89



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Securitization Financing Transactions We, and on behalf of NorthStar Income, entered into two Securitization Financing Transactions in 2012 and 2013 that provide permanent, non-recourse, non-mark-to-market financing for a portion of our CRE debt investments. We expect to execute similar transactions to finance our newly-originated debt investments that might initially be financed on our credit facilities. Securitization 2012-1 In November 2012, we closed Securitization 2012-1, a $351 million securitization financing transaction which provides permanent, non-recourse, non-mark-to-market financing and is collateralized by CRE debt investments originated by us and on behalf of NorthStar Income. A total of $228 million of investment grade bonds were issued, $98 million of which was used to finance the assets we contributed, representing an advance rate of 65% and a weighted average coupon of LIBOR plus 1.63%. We used the proceeds to repay $95 million of borrowings on our loan facilities. Securitization 2013-1 In August 2013, we bifurcated three first mortgage loans with an aggregate principal amount of $142 million into senior loans of $79 million and subordinate interests of $63 million to facilitate the financing of the senior loans in Securitization 2013-1, a securitization financing transaction entered into by NorthStar Income. We transferred the senior loans at cost to Securitization 2013-1. We did not retain any interest in such senior loans and retained the subordinate interests on an unleveraged basis. Credit Facilities We maintain two separate credit facilities that provide up to an aggregate of $240 million to finance the origination of first mortgage loans and senior loan participations secured by commercial real estate. The interest rate and advance rate depend on asset type and characteristic. Maturity dates for these facilities range from March 2015 to July 2015 and both have extensions available at our option, subject to the satisfaction of certain customary conditions, with maturity dates extending through July 2018. Our loan facilities contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. We are currently in compliance with all of our financial covenants under our credit facilities. Senior Notes and Exchangeable Senior Notes In March 2014, $172.5 million principal amount of the 7.50% Notes were exchanged for $481 million principal amount of senior notes due September 30, 2014, or the Senior Notes. The Senior Notes are our senior unsecured obligations. The Senior Notes may be redeemed in whole or in part with not less than ten or more than 60 days notice. At the stated maturity date, the Senior Notes may be settled in cash or our common stock at our option. In connection with this exchange, we recorded a loss of $22 million in realized gain (loss) on investments and other in the consolidated statements of operations. In January 2014, $10 million principal amount of the 8.875% exchangeable senior notes were exchanged for 0.8 million shares of common stock and $137 million principal amount of the 5.375% exchangeable senior notes were exchanged for 7.0 million shares of common stock. In April 2014, $54 million principal amount of the 5.375% exchangeable senior notes were exchanged for 2.8 million shares of common stock. These amounts were adjusted for the Reverse Split. In connection with these conversions, we recorded an aggregate loss of $45 million in realized gain (loss) on investments and other in the consolidated statements of operations for the six months ended June 30, 2014. CDO Financing Transactions Our legacy CRE debt and securities investments are predominantly financed in CDOs. We sponsored nine CDOs, three of which were primarily collateralized by CRE debt and six of which were primarily collateralized by CRE securities. We acquired equity interests of two CRE debt focused CDOs, the CSE CDO and the CapLease CDO, which we collectively refer to as our acquired CDOs. In the case of the CSE CDO, we were delegated the collateral management and special servicing rights, and for the CapLease CDO, we acquired the collateral management rights. We continue to receive collateral management fees as named collateral manager or collateral manager delegate in connection with certain CDOs. In connection with deconsolidated CDOs, we retained administrative responsibilities and delegated certain collateral management responsibilities to a third-party collateral manager who is entitled to a percentage of the senior and subordinate collateral management fees. We own the equity interests in all of our N-Star CDO financing transactions whether or not we consolidate these transactions on our balance sheet. We do not, however, own undivided interests in any of the assets within our N-Star CDOs and all senior and junior bondholders of the CDOs have economic interests that are senior to our equity interests. 90



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These CDO financing transactions require that the underlying assets meet a collateral value coverage test, or OC test, and an interest coverage test, or IC test (as defined by each applicable indenture) in order for us, as the holder of the equity interests, to receive regular cash flow distributions. Primarily rating downgrades and/or defaults of CMBS and other securities can reduce the deemed value of the security in measuring the OC test. Also, defaults in CRE debt investments can reduce the OC test. Failing such tests means that cash flow that would normally be distributed to us would be used to amortize the senior CDO bonds until the tests are back in compliance. In such cases, this could decrease cash available to pay our dividend and affect compliance with REIT requirements. N-Star CDO Equity Substantially all of our N-Star CDO equity is invested in our CRE debt CDOs which currently have large OC cushions compared to our CRE securities CDOs. In fact, our CRE debt CDOs have distributed regular cash flow since their inception. Currently, all of our CRE debt CDOs are in compliance with their OC and IC tests. Currently, two CRE securities CDOs (N-Star CDOs II and VII) have been liquidated and two have been deconsolidated (N-Star CDOs III and V). One of the remaining two CRE securities CDOs (N-Star CDO I) is out of compliance with its respective OC test. We historically consolidated these CDO financing transactions under U.S. GAAP. More recently, we have been winding down our legacy CDO business resulting in liquidation and deconsolidation of certain of our N-Star CDOs. In May 2013, we completed the redemption of N-Star CDO II. We owned $71 million principal amount of CDO bonds that we repurchased in the open market at an aggregate purchase price of $36 million. On the redemption date, the issuer of N-Star CDO II sold its collateral and repaid the respective CDO bonds. We received $70 million in connection with the N-Star CDO II bonds repurchased in prior periods. We deconsolidated N-Star CDO II in the second quarter 2013 and recorded a realized gain of $7 million. In July 2013, we determined that we no longer had the power to direct the activities that most significantly impact the economic performance of N-Star CDO VII due to the ability of a single party to remove us as collateral manager as a result of an existing event of default. As a result, N-Star CDO VII was deconsolidated in July 2013. In the fourth quarter 2013, N-Star CDO VII was liquidated. In September 2013, we delegated the collateral management rights of N-Star CDOs IV, VI and VIII and the CapLease CDO to a third-party collateral manager but retained administrative responsibilities. As a result, we no longer have the power to direct the activities that most significantly impact the economic performance of these CDOs and therefore these CDOs were deconsolidated effective September 30, 2013. In December 2013, we delegated the collateral management rights of the CSE CDO to a third-party collateral manager but retained administrative responsibilities. As a result, we no longer have the power to direct the activities that most significantly impact the economic performance of this CDO and therefore this CDO was deconsolidated effective December 31, 2013. In March 2014, we determined that we no longer had the power to direct the activities that most significantly impact the economic performance of N-Star CDO V due to the ability of a single party to remove us as collateral manager as a result of an existing event of default. As a result, N-Star CDO V was deconsolidated in March 2014. In May 2014, we determined that we no longer had the power to direct the activities that most significantly impact the economic performance of N-Star CDO III due to the ability of a single party to remove us as collateral manager as a result of an existing event of default. As a result, N-Star CDO III was deconsolidated in May 2014. N-Star CDOs I and IX continue to be consolidated. The following table presents our deconsolidated N-Star CRE debt CDOs as of June 30, 2014 (dollars in thousands):


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