Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - N1 Liquidating Trust | Financial_Report.xls |
EX-4.1 - EXHIBIT 4.1 - N1 Liquidating Trust | c19043exv4w1.htm |
EX-31.1 - EX-31.1 - N1 Liquidating Trust | c19043exv31w1.htm |
EX-32.1 - EX-32.1 - N1 Liquidating Trust | c19043exv32w1.htm |
EX-31.2 - EX-31.2 - N1 Liquidating Trust | c19043exv31w2.htm |
EX-32.2 - EX-32.2 - N1 Liquidating Trust | c19043exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
Commission File Number: 333-157688
NORTHSTAR REAL ESTATE INCOME TRUST, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland (State or Other Jurisdiction of Incorporation or Organization) |
26-4141646 (IRS Employer Identification No.) |
399 Park Avenue, 18th Floor New York, NY 10022
(Address of Principal Executive Offices, Including Zip Code)
(Address of Principal Executive Offices, Including Zip Code)
(212) 547-2600
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by the check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date:
The
Company has one class of common stock, par value $0.01 per share,
7,166,528 shares
outstanding as of August 10, 2011.
NORTHSTAR REAL ESTATE INCOME TRUST, INC.
QUARTERLY REPORT
For the Three and Six Months Ended June 30, 2011
QUARTERLY REPORT
For the Three and Six Months Ended June 30, 2011
TABLE OF CONTENTS
2
Table of Contents
NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS: |
||||||||
Cash |
$ | 24,037,982 | $ | 20,404,832 | ||||
Restricted cash |
5,060,530 | | ||||||
Real estate securities, available for sale |
31,781,397 | 31,264,331 | ||||||
Real estate debt investments, net |
19,791,462 | | ||||||
Receivables |
255,093 | 128,287 | ||||||
Deferred financing costs, net |
41,004 | 46,216 | ||||||
Other assets |
745,803 | 234,267 | ||||||
Total assets |
$ | 81,713,271 | $ | 52,077,933 | ||||
LIABILITIES: |
||||||||
Secured term loans |
$ | 24,061,212 | $ | 24,061,212 | ||||
Accounts payable and accrued expenses |
691,921 | 255,874 | ||||||
Escrow deposits payable |
5,060,530 | | ||||||
Distribution payable |
368,652 | 208,594 | ||||||
Total liabilities |
30,182,315 | 24,525,680 | ||||||
EQUITY: |
||||||||
NorthStar Real Estate Income Trust, Inc. Stockholders Equity |
||||||||
Preferred stock, $0.01 par value per share; 50,000,000 shares authorized, no
shares
issued and outstanding at June 30, 2011 and December 31, 2010 |
| | ||||||
Common stock, $0.01 par value per share; 400,000,000 shares authorized,
6,028,620
and 3,193,414 shares issued and outstanding at June 30, 2011 and December 31,
2010, respectively |
60,286 | 31,934 | ||||||
Additional paid-in capital |
52,086,597 | 26,775,538 | ||||||
Retained (deficit) earnings |
(620,196 | ) | 740,547 | |||||
Total NorthStar Real Estate Income Trust, Inc. stockholders equity |
51,526,687 | 27,548,019 | ||||||
Non-controlling interests |
4,269 | 4,234 | ||||||
Total equity |
51,530,956 | 27,552,253 | ||||||
Total liabilities and equity |
$ | 81,713,271 | $ | 52,077,933 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
||||||||||||||||
Interest income |
$ | 679,278 | $ | 426,995 | $ | 1,052,744 | $ | 705,249 | ||||||||
Total revenues |
679,278 | 426,995 | 1,052,744 | 705,249 | ||||||||||||
Expenses |
||||||||||||||||
Interest expense |
224,929 | 224,917 | 447,498 | 345,121 | ||||||||||||
Advisory fees related party |
213,737 | 16,439 | 278,616 | 23,073 | ||||||||||||
Auditing and professional fees |
42,702 | 130,423 | 89,465 | 130,423 | ||||||||||||
General and administrative expenses |
302,316 | 156,812 | 487,419 | 276,055 | ||||||||||||
Total expenses |
783,684 | 528,591 | 1,302,998 | 774,672 | ||||||||||||
Loss from operations |
(104,406 | ) | (101,596 | ) | (250,254 | ) | (69,423 | ) | ||||||||
Realized gain on investments and other |
| 199,604 | | 199,604 | ||||||||||||
Unrealized gain on investments and other |
585,719 | 857,388 | 581,312 | 1,104,247 | ||||||||||||
Consolidated net income |
481,313 | 955,396 | 331,058 | 1,234,428 | ||||||||||||
Less: net income attributable to non-controlling interests |
58 | 179 | 35 | 289 | ||||||||||||
Net income attributable to NorthStar Real Estate Income Trust, Inc. common stockholders |
$ | 481,255 | $ | 955,217 | $ | 331,023 | $ | 1,234,139 | ||||||||
Net income per share of common stock, basic |
$ | 0.10 | $ | 0.68 | $ | 0.08 | $ | 1.28 | ||||||||
Weighted average number of shares of common stock
outstanding, basic |
5,059,326 | 1,411,911 | 4,286,614 | 965,711 |
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Common Stock | Additional | Retained | Total Companys | Non-Controlling | Total | |||||||||||||||||||||||
Shares | Amount | Paid-in Capital | Earnings | Stockholders Equity | Interests | Stockholders Equity | ||||||||||||||||||||||
Balance, December 31, 2009 |
113,828 | $ | 1,138 | $ | 998,862 | $ | 680,530 | $ | 1,680,530 | $ | 3,361 | $ | 1,683,891 | |||||||||||||||
Activity prior to the merger: |
||||||||||||||||||||||||||||
Proceeds from issuance of common
stock |
3,669,919 | 36,699 | 35,032,407 | | 35,069,106 | | 35,069,106 | |||||||||||||||||||||
Cost of capital |
| | (3,459,410 | ) | | (3,459,410 | ) | | (3,459,410 | ) | ||||||||||||||||||
Stock distribution reinvestment |
7,915 | 79 | 74,262 | | 74,341 | | 74,341 | |||||||||||||||||||||
Distribution paid |
| | | (1,075,268 | ) | (1,075,268 | ) | | (1,075,268 | ) | ||||||||||||||||||
Shares redeemed for cash |
(893,968 | ) | (8,939 | ) | (8,233,445 | ) | | (8,242,384 | ) | | (8,242,384 | ) | ||||||||||||||||
Balance as of October 18, 2010 |
2,897,694 | $ | 28,977 | $ | 24,412,676 | $ | (394,738 | ) | $ | 24,046,915 | $ | 3,361 | $ | 24,050,276 | ||||||||||||||
Shares of the accounting acquiree (1) |
39,039 | 390 | 62,326 | | 62,716 | 545 | 63,261 | |||||||||||||||||||||
Proceeds from issuance of common
stock |
250,467 | 2,505 | 2,493,805 | | 2,496,310 | | 2,496,310 | |||||||||||||||||||||
Cost of capital |
| | (260,678 | ) | | (260,678 | ) | | (260,678 | ) | ||||||||||||||||||
Stock distribution reinvestment |
6,214 | 62 | 58,970 | | 59,032 | | 59,032 | |||||||||||||||||||||
Distribution paid |
| | | (285,713 | ) | (285,713 | ) | | (285,713 | ) | ||||||||||||||||||
Distribution declared |
| | | (208,594 | ) | (208,594 | ) | | (208,594 | ) | ||||||||||||||||||
Amortization of equity-based
compensation |
| | 8,439 | | 8,439 | | 8,439 | |||||||||||||||||||||
Net income |
| | | 1,629,592 | 1,629,592 | 328 | 1,629,920 | |||||||||||||||||||||
Balance, December 31, 2010 |
3,193,414 | $ | 31,934 | $ | 26,775,538 | $ | 740,547 | $ | 27,548,019 | $ | 4,234 | $ | 27,552,253 | |||||||||||||||
Proceeds from issuance of common
stock |
2,801,853 | 28,019 | 27,833,000 | | 27,861,019 | | 27,861,019 | |||||||||||||||||||||
Cost of capital |
| | (2,777,789 | ) | | (2,777,789 | ) | | (2,777,789 | ) | ||||||||||||||||||
Shares redeemed for cash |
(14,748 | ) | (148 | ) | (147,332 | ) | | (147,480 | ) | | (147,480 | ) | ||||||||||||||||
Stock distribution reinvestment |
40,601 | 406 | 385,300 | | 385,706 | | 385,706 | |||||||||||||||||||||
Distribution paid |
| | | (1,323,114 | ) | (1,323,114 | ) | | (1,323,114 | ) | ||||||||||||||||||
Distribution declared |
| | | (368,652 | ) | (368,652 | ) | | (368,652 | ) | ||||||||||||||||||
Stock awards |
7,500 | 75 | | | 75 | | 75 | |||||||||||||||||||||
Amortization of equity-based
compensation |
| | 17,880 | | 17,880 | | 17,880 | |||||||||||||||||||||
Net income |
| | | 331,023 | 331,023 | 35 | 331,058 | |||||||||||||||||||||
Balance, June 30, 2011 (unaudited) |
6,028,620 | $ | 60,286 | $ | 52,086,597 | $ | (620,196 | ) | $ | 51,526,687 | $ | 4,269 | $ | 51,530,956 | ||||||||||||||
(1) | NorthStar Real Estate Income Trust, Inc., the surviving legal entity, issued
24,039 shares for its initial capitalization and 15,000 shares to its Board of Directors prior to
the merger with Northstar Income Opportunity REIT I, Inc. |
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net cash provided by operating activities |
$ | 286,293 | $ | 199,563 | ||||
Cash flows from investing activities: |
||||||||
Origination of real estate debt investments |
(19,857,400 | ) | | |||||
Origination fees |
47,500 | | ||||||
Acquisition of real estate securities |
| (29,616,265 | ) | |||||
Sale of real estate security |
| 1,852,500 | ||||||
Net cash (used in) investing activities |
(19,809,900 | ) | (27,763,765 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
27,057,174 | 15,769,078 | ||||||
Proceeds from distribution reinvestment plan |
385,706 | 10,502 | ||||||
Redemption of common stock |
(147,480 | ) | | |||||
Cost of capital |
(2,606,935 | ) | (1,630,466 | ) | ||||
Distributions paid on common stock |
(1,531,708 | ) | (81,445 | ) | ||||
Borrowings under secured term loans |
| 24,089,417 | ||||||
Repayment of secured term loans |
| (28,205 | ) | |||||
Payment of deferred financing costs |
| (55,287 | ) | |||||
Net cash provided by financing activities |
23,156,757 | 38,073,594 | ||||||
Net increase in cash |
3,633,150 | 10,509,392 | ||||||
Cash, beginning of period |
20,404,832 | 55,630 | ||||||
Cash, end of period |
$ | 24,037,982 | $ | 10,565,022 | ||||
Supplemental disclosure of non-cash financing
activities: |
||||||||
Distribution payable |
$ | 368,652 | $ | 272,363 | ||||
Accrued cost of capital |
170,854 | | ||||||
Funds held by transfer agent from stock purchases |
803,845 | |
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Formation and Organization
NorthStar Real Estate Income Trust, Inc. (the Company) was formed on January 26, 2009, and
intends to qualify as a real estate investment trust (REIT) beginning with the taxable year ended
December 31, 2010. The Company was organized primarily to originate, acquire and manage portfolios of commercial real estate debt,
commercial real estate securities and select commercial real estate equity investments. Commercial real estate debt investments may include first
mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans. Commercial real estate securities
will primarily consist of commercial mortgage backed securities
(CMBS) and may include unsecured REIT debt, collateralized debt obligations and other securities. The Company
is externally managed by NS Real Estate Income Trust Advisor, LLC (the Advisor) and has no
employees.
Substantially all of the Companys business is conducted through NorthStar Real Estate Income Trust
Operating Partnership, LP, the Companys operating partnership (the OP). The Company is the sole
general partner of the OP. The initial limited partners of the OP are the Advisor and NorthStar OP
Holdings, LLC (the Special Unit Holder). The Advisor invested $1,000 in the OP in exchange for
common units and the Special Unit Holder invested $1,000 in the OP and has been issued a
separate class of limited partnership units (the Special Units), which is recorded as
non-controlling interest in the condensed consolidated balance sheets as of June 30, 2011 and
December 31, 2010. As the Company accepts subscriptions for shares, it will transfer substantially
all of the net proceeds from the continuous public offering to the OP as a capital contribution.
The Companys charter authorizes the issuance of up to 400,000,000 shares of common stock with a
par value of $0.01 per share, and 50,000,000 shares of preferred stock, $0.01 par value per share. The
Companys board of directors is authorized to amend its charter, without the approval of the
stockholders, to increase the aggregate number of authorized shares of capital stock or the number
of shares of any class or series that the Company has authority to issue. On February 19, 2009, the
Company was initially capitalized through the sale of 24,039 shares of common stock to NRFC
Sub-REIT Corp., a wholly-owned subsidiary of NorthStar Realty Finance Corp. (the Sponsor), for
$200,004.
On March 4, 2009, the Company filed a registration statement on Form S-11 with the Securities and
Exchange Commission (the SEC) to offer a minimum of 200,000 shares and a maximum of 110,526,315
shares of common stock in a continuous, public offering (the Offering), of which 10,526,315
shares would be offered pursuant to the Companys distribution reinvestment plan (DRP). The SEC
declared the Companys registration statement effective on July 19, 2010, and the Company retained
NRF Capital Markets, LLC (the Dealer Manager), an affiliate of the Company, to serve as the
dealer manager of the Offering. The Dealer Manager is responsible for marketing the Companys
shares being offered pursuant to the Offering. As described above, the Company intends to use
substantially all of the net proceeds from the Offering to invest in a diverse portfolio of
commercial real estate debt, commercial real estate securities and select commercial real estate
equity investments.
On October 18, 2010, the Company completed a merger, accounted for as a reverse merger and
recapitalization, with NorthStar Income Opportunity REIT I, Inc., (NSIO REIT) also sponsored by
the Sponsor (the Merger Transaction). The Company was considered the surviving legal entity and
NSIO REIT was considered the accounting acquirer and the surviving accounting entity. As the
surviving accounting entity, NSIO REITs financial information is presented in these financial
statements on a historical carryover basis.
2,828,552 shares of NSIO REIT, par value $0.01 per share, issued and outstanding immediately prior
to the Merger Transaction were converted into 2,897,694 shares of the Companys common stock, par
value $0.01, at a conversion rate of 1.02444444 shares of the Companys stock for every one share
of NSIO REIT stock and 893,968 shares of NSIO REIT, par value $0.01 per share, issued and
outstanding immediately prior to the Merger Transaction were converted into cash, without interest,
in an amount of $9.22 per share. All NSIO REIT stockholders who would otherwise have been entitled
to a fractional share of the Companys shares received cash in an amount equal to such fraction of
the Companys shares based on a conversion price of $9.22. The Company used $8,242,384 of the cash
received from NSIO REIT in connection with the closing of the Merger Transaction to satisfy the
Companys obligation to pay the cash consideration. On the closing date, 411 NSIO REIT stockholders
became stockholders of the Company with each of their shares of NSIO REIT common stock being
converted to unregistered shares of the Companys common stock at the ratio set forth above.
7
Table of Contents
NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In addition, as a result of the Merger Transaction, the Company eliminated the minimum offering
requirement and terminated its escrow agreement with Wells Fargo Bank, N.A.
2. Summary of Significant Accounting Policies
Basis of Quarterly Presentation
The accompanying condensed consolidated financial statements and related notes of the Company have
been prepared in accordance with accounting principles generally accepted in the United States
(U.S. GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures normally included in
consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the
opinion of management, all adjustments considered necessary for a fair presentation of the
Companys financial position, results of operations and cash flows have been included and are of a
normal and recurring nature. The operating results presented for interim periods are not
necessarily indicative of the results that may be expected for any other interim period or for the
entire year. These condensed consolidated financial statements should be read in conjunction with the
Companys consolidated financial statements and notes thereto included in the Companys annual
report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and
Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in the
Companys December 31, 2010 consolidated financial statements included in its annual report on Form
10-K.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its
subsidiaries, which are majority-owned and controlled by the Company. All significant intercompany
balances have been eliminated in consolidation.
Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the amounts reported in the
condensed consolidated financial statements and accompanying notes. Actual results could materially
differ from those estimates.
Restricted Cash
Restricted cash consists of escrow deposits for future debt service payments, taxes, insurance,
tenant improvements, and other costs collected in connection with first mortgage loan originations.
Real Estate Debt Investments
Real estate debt investments are intended to be held to maturity and, accordingly, are carried at
cost, net of unamortized loan origination fees, discounts, and unfunded commitments unless such
loan or investment is deemed to be impaired. Interest income is recorded on the accrual basis and
discounts, premiums, origination costs, and fees on originated assets are amortized over the life
of the investment using the effective interest method. The amortization is reflected as an
adjustment to interest income.
Credit Losses and Impairment on Investments
Real Estate Securities
The Company assesses whether unrealized losses on the change in fair value on the real estate
securities reflect a decline in value which is other than temporary. If it is determined the
decline in fair value is other than temporary, the impaired securities are written down in the
condensed consolidated statements of operations and recorded in realized gain (loss) on investments and other.
8
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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Real Estate Debt Investments
The
Company will maintain a provision for losses on its real estate debt investments as appropriate. A provision is
established for loans that are either non-performing or where there are any indicators of possible
impairment. A loan is generally categorized as non-performing if it is in maturity default or it
is past due at least 90 days on its contractual debt service payments. The Company assesses the
credit quality of the portfolio and adequacy of reserves on a quarterly basis, or more frequently
as necessary. Significant judgment of the Company is required in this analysis. The Company
considers the estimated net recoverable value of the loan as well as other factors, including but
not limited to fair value of any collateral, the amount and the status of any senior debt, the
prospects for the borrower and the economic situation of the region where the borrower does
business. Because this determination is based upon projections of future economic events, which
are inherently subjective, the amounts ultimately realized may differ materially from the carrying
value as of the balance sheet date.
Income recognition is suspended for the loans at the earlier of the date at which payments become
90-days past due or when, in the opinion of the Company, a full recovery of income and principal
becomes doubtful. Income recognition is resumed when the suspended loan becomes contractually
current and performance is demonstrated to be resumed. A loan is written off when it is no longer
realizable and legally discharged.
Recently Issued Pronouncements
In April 2011, the Financial Accounting Standards Board (FASB) issued an accounting update that
clarifies when creditors should classify loan modifications as troubled debt restructurings and
provides examples and factors to be considered in the determination. Loan modifications that
qualify as troubled debt restructuring could result in additional disclosures and may impact
provision for loan losses. The update is effective for the first interim or annual period beginning
after June 15, 2011, with retroactive application to the beginning of the year. The Company is
currently evaluating the impact of this accounting update and does not expect it will have a
material impact on the condensed consolidated financial statements.
3. Fair Value Measurements
The Company has categorized its financial instruments in accordance with U.S. GAAP based on the
priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The
fair value hierarchy gives the highest priority to quoted prices in active markets for identical
assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the
inputs used to measure the financial instruments fall within different levels of the hierarchy, the
categorization is based on the lowest level input that is significant to the fair value measurement
of the instrument.
Financial
assets and liabilities recorded on the condensed consolidated balance sheets are categorized based
on the inputs to the valuation techniques as follows:
Level 1. Quoted prices for identical assets or liabilities in an active market. |
|||
Level 2. Financial assets and liabilities whose values are based on the following: |
a) | Quoted prices for similar assets or liabilities in active markets. |
||
b) | Quoted prices for identical or similar assets or liabilities in non-active markets. |
||
c) | Pricing models whose inputs are observable for substantially the full term of the
asset or liability. |
||
d) | Pricing models whose inputs are derived principally from or corroborated by
observable market data for substantially the full term of the asset or liability. |
Level 3. Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value
measurement. |
Determination of Fair Value
The following is a description of the valuation techniques used to measure fair value and the
general classification of these instruments pursuant to the fair value hierarchy.
9
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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Real Estate Securities
Real estate securities are generally valued using a third-party pricing service or broker
quotations. These quotations are based on observable inputs that can be validated, and as such,
are classified as Level 2 of the fair value hierarchy. Certain real estate securities that may be
valued based on a single broker quote or an internal pricing model, and have less observable
pricing will be classified as Level 3 of the fair value hierarchy. For real estate securities using an
internal pricing model, inputs include assumptions related to the timing and amount of expected
future cash flows, the discount rate, prepayments and losses.
Financial assets are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. The following table sets forth the Companys financial
assets that were accounted for at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 by level
within the fair value hierarchy:
June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Real estate
securities |
||||||||||||||||||||||||||||||||
CMBS |
$ | | $ | 31,781,397 | $ | | $ | 31,781,397 | $ | | $ | 31,264,331 | $ | | $ | 31,264,331 |
At June 30, 2011, the Company had no financial assets or liabilities that were accounted for
at fair value on a non-recurring basis.
Fair Value Option
The
Company elected to apply the fair value option of accounting to its current CMBS investments at the time
of initial recognition of the investments.
Changes in fair value for assets and liabilities for which the election is made will be recognized
in income as they occur. The fair value option may be elected on an instrument-by-instrument basis
at initial recognition of an asset or liability or upon an event that gives rise to a new basis of
accounting for that instrument. The following table sets forth fair value of the Companys
financial instruments for which the fair value option was elected and the aggregate contractual
amounts of real estate securities as of June 30, 2011 and December 31, 2010:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Real estate securities |
||||||||
CMBS, at fair value |
$ | 31,781,397 | $ | 31,264,331 | ||||
CMBS, contractual amount due upon maturity |
28,856,000 | 28,856,000 | ||||||
Difference |
$ | 2,925,397 | $ | 2,408,331 | ||||
For
the three months ended June 30, 2011 and 2010, the Company
recognized a net unrealized gain of
$585,719 and $857,388, respectively, from the change in fair value of financial assets for which
the fair value option was elected. For the six months ended June 30, 2011 and 2010, the Company
recognized a net unrealized gain of $581,312 and $1,104,247, respectively. These amounts are recorded as
unrealized gain on investments and other in the Companys condensed consolidated statements of
operations.
Fair
Value of Other Financial Instruments
In addition to the above disclosures regarding assets or liabilities which are recorded at fair
value, U.S. GAAP requires disclosure of fair value about all other financial instruments. The
following disclosures of estimated fair value of financial instruments were determined by the
Company, using available market information and appropriate valuation methodologies. Considerable
judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the Company could realize
on disposition of the financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value amounts.
10
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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table shows the principal amount, carrying value, and fair value of our financial
assets and liabilities which are not currently recorded at fair value at June 30, 2011 and December
31, 2010:
June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
Principal | Carrying | Fair | Principal | Carrying | Fair | |||||||||||||||||||
Amount | Value | Value | Amount | Value | Value | |||||||||||||||||||
Financial assets: |
||||||||||||||||||||||||
Real estate debt
investments |
$ | 19,857,400 | $ | 19,791,462 | $ | 19,857,400 | $ | | $ | | $ | | ||||||||||||
Financial liabilities: |
||||||||||||||||||||||||
Secured term loans |
24,061,212 | 24,061,212 | 25,179,246 | 24,061,212 | 24,061,212 | 24,976,290 |
As of June 30, 2011 and December 31, 2010, the carrying value of receivables and accounts
payable reasonably approximate their fair values due to the short-term maturities of these items.
Disclosure about fair value of financial instruments is based on pertinent information available to
management at the time. Although management is not aware of any factors that would
significantly affect the fair value amounts, such amounts have not been comprehensively revalued
for purposes of these financial statements since that date and current estimates of fair value may
differ significantly from the amounts presented herein.
Real Estate Debt Investments
For real estate debt investments, fair value was approximated by
comparing yields at which the investments are held to estimated yields at which loans originated
with similar credit risks or market yields at which a third party might require to purchase the
investment by discounting future cash flows at such market yields. Prices were calculated assuming
fully-extended maturities regardless of structural or economic tests required to achieve such
extended maturities.
Secured Term Loans
The estimated fair value is based on interest rates available for issuance of debt with similar terms and remaining maturities. The estimated
fair value of the Companys secured term loans is not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
4. Real Estate Securities, Available for Sale
Real estate securities are comprised of two AAA-rated CMBS backed by a pool of
commercial real estate loans which are typically well-diversified by type and geography. The
following table is a summary of the Companys real estate securities as of June
30, 2011:
Cumulative | Weighted | |||||||||||||||||||
Amortized | Gain on | Average | Number of | |||||||||||||||||
Asset Type: | Cost | Investments | Fair Value | Coupon | Investments | |||||||||||||||
CMBS |
$ | 29,475,447 | $ | 2,305,950 | $ | 31,781,397 | 5.73% | 2 |
11
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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table is a summary of the Companys real estate securities as of December 31, 2010:
Cumulative | Weighted | |||||||||||||||||||
Amortized | Gain on | Average | Number of | |||||||||||||||||
Asset Type: | Cost | Investments | Fair Value | Coupon | Investments | |||||||||||||||
CMBS |
$ | 29,539,693 | $ | 1,724,638 | $ | 31,264,331 | 5.55% | 2 |
At June 30, 2011 and December 31, 2010, the contractual maturities of the real estate securities
averaged 35 years, with a weighted average expected life of 4.3 years and 4.9 years,
respectively.
On June 30, 2010 the Company sold a real estate security for proceeds of $1,852,500. In connection
with the sale, the Company recorded a realized gain on investments and other for $199,604 in its
condensed consolidated statements of operations.
5. Real Estate Debt Investments
The following table is a summary of the Companys real estate debt investments as of June 30, 2011:
Weighted Average | ||||||||||||||||||||||||
Maturity | Extended | Spread over | Principal | Carrying | Number of | |||||||||||||||||||
Asset Type: | Date | Maturity Date | LIBOR (1) | Amount | Value | Investments | ||||||||||||||||||
First mortgage
loans |
April 2014 | April 2016 | 4.00% | $ | 19,857,400 | $ | 19,791,462 | 2 |
(1) | Represents the weighted average spread over one-month LIBOR. All loans are subject
to a 4.00% LIBOR floor. |
As of June 30, 2011 all of the Companys real estate debt investments were performing in
accordance with the terms of the loan agreements.
6.
Secured Term Loans
The following table is a summary of the Companys Term Asset-Backed Securities Loan Facility
(TALF) as of June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | ||||||||||||||||||
Stated | Interest | Principal | Principal | ||||||||||||||||
Type | Maturity | Rate | Amount | Amount | |||||||||||||||
Secured term loans |
|||||||||||||||||||
TALF I |
Non-recourse | January 2015 | 3.73% | $ | 11,629,213 | $ | 11,629,213 | ||||||||||||
TALF II |
Non-recourse | February 2015 | 3.69% | 12,431,999 | 12,431,999 | ||||||||||||||
Weighted
Average/Total |
3.71% | $ | 24,061,212 | $ | 24,061,212 | ||||||||||||||
The TALF borrowings were used to finance the Companys CMBS investments with a fair
value of $31,781,397 and $31,264,331 as of June 30, 2011 and December 31, 2010, respectively.
12
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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Related Party Arrangements
NS Real Estate Income Trust Advisor, LLC
Subject to certain restrictions and limitations, the Advisor, an indirect subsidiary of the
Sponsor, is responsible for managing the Companys affairs on a day-to-day basis and for
identifying and making acquisitions and investments on behalf of the Company. For such services,
the Advisor receives fees and compensation from the Company. Below is a summary of the fees due
the Advisor.
Organization and Offering Costs
The Advisor and certain affiliates of the Advisor are entitled to receive reimbursement for costs
paid on behalf of the Company in connection with the Offering. Upon completion of the Merger
Transaction on October 18, 2010, to the extent the aggregate of the dealer manager fees and other
organization and offering expenses do not exceed 15% of gross offering proceeds, the Company is
obligated to reimburse the Advisor for organization and offering costs up to a maximum of
$15,000,000, which is 1.5% of the maximum gross offering proceeds of $1,000,000,000. The Company shall not reimburse
the Advisor for any organization and offering costs that the independent directors determine are not fair
and commercially reasonable to the Company.
As of June 30, 2011, the Advisor had unreimbursed organization and offering costs of $2,846,858
which it has incurred on behalf of the Company. For the six months ended June 30, 2011, the Company
raised gross offering proceeds of $27,861,019 and, accordingly, was obligated to reimburse up to a
total of $395,356 of organization and offering costs. The organization and offering costs
consisted of $261,907 of organization costs included in general and administrative expenses in the
condensed consolidated statements of operations and $133,449 of offering costs which are recorded as
a reduction to stockholders equity. For the three months ended June 30, 2011, accrued
organization and offering costs consisted of $175,545 of organization costs included in general and
administrative expenses in the condensed consolidated statements of operations and $96,833 of
offering costs which are recorded as a reduction to stockholders equity. As of June 30, 2011, a
total of $272,378 of organization and offering costs are recorded in accounts payable and accrued
expenses in the condensed consolidated balance sheets.
Prior to the Merger Transaction, organization and offering costs (other than selling commissions
and the dealer manager fee) of the accounting acquirer were being paid by the Advisor or its
affiliates, subject to reimbursement. These fees were reimbursable up to a maximum of $1,000,000,
which is 1.0% of the maximum gross offering proceeds of $100,000,000 or a minimum of $60,000. For
the three and six months ended June 30, 2010, the accounting acquirer reimbursed $90,000 and
$150,000 of these costs to the Advisor, respectively.
Operating Costs
The Advisor and certain affiliates of the Advisor are entitled to receive reimbursement for
operating costs incurred by the Advisor in connection with services provided to the Company. The
Company will reimburse the Advisor for operating costs (including the asset management fee) at the
end of the four preceding fiscal quarters not to exceed the greater of: (i) 2% of its average
invested assets; or (ii) 25% of its net income determined without reduction for any additions to
reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from
the sale of the Companys assets for that period. Notwithstanding the above, the Company may
reimburse the Advisor for expenses in excess of this limitation if a majority of the independent
directors determines that such excess expenses are justified based on unusual and non-recurring
factors.
The Company calculates the expense reimbursement quarterly and will true-up the calculation at the
end of the twelve-month period. As of June 30, 2011, the Advisor has incurred unreimbursed
operating expenses of $998,537 on behalf of the Company. For the three months ended June 30, 2011,
the Company accrued $102,620 of operating costs, which is recorded in accounts payable and accrued expenses in the
condensed consolidated balance sheets. For the three months ended June 30, 2011, accrued
operating costs consisted of $42,702 of auditing and professional fees and $59,918 of general and
administrative expenses. For the six months ended June 30, 2011, operating costs consisted of
$89,465 of auditing and professional fees and $92,285 of general and administrative expenses.
From the effective date October 18, 2010 through June 30, 2011, $274,648 is reimbursable to the
Advisor based upon the preliminary expense calculation, of which $172,028 has been reimbursed as of
June 30, 2011.
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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Advisory Fees
Asset Management Fee
The Company pays the Advisor a monthly asset management fee equal to one-twelfth of 1.25% of
the sum of the cost of all investments made and of the Companys investments in joint ventures,
including acquisition fees, origination and acquisition expenses and any debt attributable to such
investments, less any principal repaid by borrowers on the Companys debt investments (or the
Companys proportionate share thereof in the case of debt investments made through joint ventures).
The Advisor, at its discretion, elected to compute the monthly asset management fee based on the net equity for the two real estate
securities that were assumed as a result of the Merger Transaction. For the three and six months ended June 30, 2011, the Company incurred $62,662 and $80,244
respectively, in asset management fees, which was recorded in advisory fees - related party in the condensed consolidated statements of operations. As of June 30, 2011, a total of $62,662 of asset
management fees are recorded in accounts payable and accrued expenses in the condensed consolidated
balance sheets.
Prior to the Merger Transaction, the accounting acquirer paid the Advisor a monthly asset management fee equal
to one-twelfth of 1.00% of the sum of the cost of all investments. For the three and six months
ended June 30, 2010, the accounting acquirer incurred $16,439 and $23,073 respectively, in asset
management fees, which was recorded in advisory fees - related party in the condensed consolidated
statements of operations.
Asset Acquisition Fee
The Advisor also receives an acquisition fee equal to 1% of the amount funded by the Company to
originate or acquire commercial real estate loans or the amount invested in the case of other real
estate investments including any origination and acquisition expenses and any debt attributable to
such investments. For the three and six months ended June 30,
2011, the Company incurred $151,075
and $198,372, respectively, in acquisition fees payable to the Advisor which is included in
advisory fees - related party in the condensed consolidated statements of operations. As of June 30,
2011, a total of $151,075 of asset acquisition fees are recorded in accounts payable and accrued
expenses in the condensed consolidated balance sheets.
Asset Disposition Fee
For substantial assistance in connection with the sale of investments, the Company will pay the
Advisor or its affiliate a disposition fee of 1% of the contract sales price of each commercial
real estate debt, commercial real estate security or select commercial real estate
equity investment sold, including mortgage-backed securities or collateralized debt obligations
issued by a subsidiary of the Company as part of a securitization transaction. The Company will not
pay a disposition fee upon the maturity, prepayment, workout modification or extension of a loan or
other debt-related investment unless there is a corresponding fee paid by the borrower, in which
case the disposition fee will be the lesser of: (i) 1% of the principal amount of the loan or
debt-related investment prior to such transaction; or (ii) the amount of the fee paid by the
borrower in connection with such transaction. If the Company takes ownership of a property as a
result of a workout or foreclosure of a loan, the Company will pay a disposition fee upon the sale
of such property.
NRF Capital Markets, LLC
Pursuant to a dealer manager agreement, the Company pays the Dealer
Manager, an indirect subsidiary of the Sponsor, selling commissions of up to 7% of gross offering
proceeds, all of which are reallowed by the Dealer Manager to
participating broker-dealers. In
addition, the Company will pay the Dealer Manager a dealer manager fee of 3% of gross offering
proceeds, a portion of which may be reallowed by the Dealer Manager to participating
broker-dealers. No selling commissions or dealer manager fee will be paid for sales under the distribution
reinvestment plan. For the six months ended June 30, 2011, the Company incurred $2,644,340 in
selling commissions and dealer manager fees, which are recorded as a cost of capital in the
condensed consolidated statements of stockholders equity. For the six months ended June 30, 2010,
the Company incurred $371,712, in selling commissions and dealer manager fees, which are recorded
as a cost of capital in the condensed consolidated statements of stockholders equity.
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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Stockholders Equity
Common Stock
For the six months ended June 30, 2011, the Company sold 2,801,853 shares of common stock pursuant
to its Offering, generating net proceeds of $25,216,679.
Sponsor Purchase of Common Stock
The Sponsor has committed to purchase up to $10,000,000 of shares of the Companys common stock
during the two-year period following commencement of the Companys Offering under certain
circumstances in which the Companys distributions exceed its adjusted funds from operations
(AFFO) in order to provide additional funds to support distributions to stockholders. On March
23, 2011 and May 12, 2011, the Companys board of directors approved the sale of 43,439 and 58,565
shares of the Companys common stock, $0.01 par value per share, to a subsidiary of the Sponsor, at
a price of $9.00 per Share.
Distribution Reinvestment Plan
The Company has adopted a DRP through which common
stockholders may elect to reinvest an amount equal to the distributions declared on their shares in
additional shares of the Companys common stock in lieu of receiving cash distributions. The
initial purchase price per share under the DRP is $9.50. Once the Company establishes an estimated
value per share, shares issued pursuant to the DRP will be priced at the
estimated value per share of the Companys common stock, as determined by the Advisor or another
firm chosen for that purpose. The Company expects to establish an estimated value per share after
the completion of its offering stage. The offering stage will be considered complete when the
Company is no longer publicly offering equity securities, whether through the Offering or follow-on
public offerings, and has not done so for 18 months. No selling commissions or dealer manager fees
will be paid on shares sold under the DRP. The board of directors of the Company may amend or
terminate the DRP for any reason upon ten-days notice to participants. For the six months ended
June 30, 2011, the Company issued 40,601 shares totaling $385,706 of gross offering proceeds
pursuant to the DRP. At June 30, 2011, the Company recorded a distribution payable of $106,633
related to the approved June cash distribution which was reinvested pursuant to the DRP in July
2011. At December 31, 2010, the Company recorded a distribution payable of $44,321 related to the
approved December cash distribution which was reinvested pursuant to the DRP in January 2011.
Distributions
On December 21, 2010, the Companys board of directors approved a daily cash distribution of
$0.002191781 per share of common stock, for each of the three months ended March 31, 2011. The
January, February and March distributions were paid in cumulative amounts on February 1, 2011,
March 1, 2011, and April 1, 2011 respectively, and totaled $527,087.
On March 23, 2011, the Companys board of directors approved a daily cash distribution of
$0.002191781 per share of common stock, for each of the three months ended June 30, 2011. The April
and May distributions were paid, in cumulative amounts to the stockholders of record who are
entitled to receive such distributions on May 1, 2011 and June 1, 2011, respectively, and totaled
$454,642. At June 30, 2011, the Company recorded a distribution payable of $262,019, related to
the approved June cash distribution which was paid on July 1, 2011.
On May 12, 2011, the Companys board of directors approved a daily cash distribution of
$0.002191781 per share of common stock, for each of the three months ended September 30, 2011. The
July, August and September distributions were, or will be paid, in cumulative amounts to the
stockholders of record who are entitled to receive such distributions on August 1, 2011, September
1, 2011 and October 1, 2011, respectively.
Share Repurchase Program
The Company has adopted a share repurchase program that may enable stockholders to sell their
shares to the Company in limited circumstances. Share repurchases will be made at the sole
discretion of the board of directors. During the first quarter of 2011,
the Company repurchased 14,748 shares for a total of $147,480 or $10 per share. The Company did not
repurchase any common shares in the second quarter of 2011.
15
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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Equity-Based Compensation
Directors Shares
On July 19, 2010, each of the Companys three independent directors received 5,000 shares of
restricted stock in connection with the commencement of the Offering. On June 7, 2011, each of the
Companys three independent directors were re-elected to the board and received 2,500 shares of
restricted stock in connection with their re-election. The non-vested stock will generally vest
over four years; provided, however, that the non-vested stock will become fully vested on the
earlier occurrence of: (i) the termination of the independent directors service as a director due
to his or her death or disability; or (ii) a change in control of the Company. The total
compensation cost recognized in connection with the granting of the non-vested stock is $202,500,
which will be recorded in earnings ratably over the four-year vesting period.
For the three and six months ended June 30, 2011, the Company recognized $9,516 and $17,955 of
compensation expense, respectively, related to the 22,500 shares of restricted stock, which was
recorded in general and administrative expenses in the condensed
consolidated statements of
operations.
Long-Term Incentive Plan
The Company adopted a long-term incentive plan, which it uses to attract and retain qualified
directors. The Companys long-term incentive plan offers these individuals an opportunity to
participate in its growth through awards in the form of, or based on, its common stock. The Company
currently intends to issue awards only to its independent directors under its long-term incentive
plan.
The long-term incentive plan authorizes the granting of restricted stock, stock options, stock
appreciation rights, restricted or deferred stock units, performance awards, dividend equivalents,
limited partnership interests in the Companys operating partnership, other stock-based awards and
cash-based awards to directors of the Company. Stock options granted under the long-term incentive
plan will not exceed an amount equal to 10% of the outstanding shares of the Companys common stock
on the date of grant of any such stock options. Any stock options and stock appreciation rights
granted under the long-term incentive plan will have an exercise price or base price that is not
less than the fair market value of the Companys common stock on the date of grant.
The Companys board of directors, or a committee of the board, administers the long-term incentive
plan, with sole authority to determine all of the terms and conditions of the awards, including
whether the grants, vesting or settlement of awards may be subject to the attainment of one or more
performance goals.
The Company accounts for equity-based compensation in accordance with the FASBs fair value
recognition provisions. Under these provisions, equity-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense over the requisite
service period, which is the vesting period. Equity-based compensation is classified within general
and administrative expense in the condensed consolidated statements of operations. Equity-based
compensation expense is recorded based on
awards ultimately expected to vest, the amount of expense is reduced for estimated forfeitures.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Forfeitures are estimated on experience of other
companies in the same industry until entity-specific information is available.
10. Commitments and Contingencies
Advisor and Dealer Manager Services
The Company is dependent on the Advisor and the Dealer Manager for certain services that are
essential to the Company, including the sale of the Companys shares of common and preferred stock
available for issue; the identification, evaluation, negotiation, origination, acquisition and
disposition of investments; management of the daily operations of the Companys investment
portfolio; and other general and administrative responsibilities. In the event that these companies
are unable to provide the respective services, the Company will be required to obtain such services
from other sources.
16
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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Non-controlling Interests
Operating Partnership
Non-controlling
interests represent the aggregate limited partnership interests in the Operating
Partnership held by limited partners. Income allocated to the
non-controlling interests is based on
the limited partners ownership percentage of the Operating
Partnership. Income allocated to the operating partnership non-controlling interests for the three
and six months ended June 30, 2011 was $58 and $35, respectively. Income allocated to the
operating partnership non-controlling interests for the three and six months ended June 30, 2010 was
$179 and $289, respectively.
12. Subsequent Events
Offering Proceeds
For
the period from July 1, 2011 to August 10, 2011, the
Company sold 1,113,467 common shares pursuant to
its Offering, generating gross proceeds of $11,111,018.
Distributions
On August 11, 2011, the Companys board of directors approved a daily cash distribution of
$0.002191781 per share of common stock for each of the three months ended December 31, 2011. The
distribution will be paid in cumulative amounts to the stockholders of record entitled to receive
such distribution on November 1, 2011, December 1, 2011 and January 2, 2012.
New Investments
On August 11, 2011, the Company purchased a CMBS for $2,720,000,
with a principal amount of $4,000,000 and having a fixed coupon of 5.482%. It is backed by a diverse pool of 175 underlying
commercial real estate loans located throughout the United States.
The CMBS is rated as BB+ by Standard & Poors and Ba2 by Moodys Investors Services, Inc.
Sponsor Purchase of Common Stock
The Sponsor has committed to purchase up to $10 million of shares of the Companys common stock
during the two-year period following commencement of its Offering under certain circumstances in
which the Companys distributions exceed its AFFO in order to provide additional funds to support
distributions to stockholders. On August 11, 2011, the Companys board of directors approved the
sale of 79,629 shares of the Companys common stock, $0.01 par value per share, to NRFC Sub-REIT
Corp., a subsidiary of the Sponsor, at a price of $9.00 per share.
17
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with our condensed consolidated financial
statements and notes thereto included in Item 1 of this report. References to we, us, or our
refer to NorthStar Real Estate Income Trust, Inc. and its subsidiaries unless context specifically
requires otherwise.
Forward-Looking Statements
Certain items in this report may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among
other things, the operating performance of our investments, financing needs, future market
opportunities, financial condition and disclosure in Item 2. of this report - Managements
Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking
statements are generally identifiable by use of forward-looking terminology such as may, will,
should, potential, intend, expect, seek, anticipate, estimate, believe, could,
project, predict, continue or other similar words or expressions. Forward-looking statements
are not guarantees of performance and are based on certain assumptions, discuss future
expectations, describe plans and strategies, contain projections of results of operations or of
financial condition or state other forward-looking information. Our ability to predict results or
the actual effect of plans or strategies is inherently uncertain. Although we believe that the
expectations reflected in such forward-looking statements are based on reasonable assumptions, our
actual results and performance could differ materially from those set forth in the forward-looking
statements. These forward-looking statements involve risks, uncertainties and other factors that
may cause our actual results in future periods to differ materially from those forward looking
statements. We are under no duty to update any of the forward-looking statements after the date of
this report to conform these statements to actual results.
Factors that could have a material adverse effect on our operations and future prospects are
described in our reports filed with the Securities and Exchange Commission, or SEC, including in
Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010. The factors
set forth in the Risk Factors section and elsewhere in our filings with the SEC could cause our
actual results to differ significantly from those contained in any forward-looking statement
contained in this report.
Organization and Overview
We are an externally managed commercial real estate finance company that was formed in January 2009
to invest in and manage a diversified portfolio of commercial real estate debt, commercial real
estate securities and select commercial real estate equity investments. We commenced our operations
in October 2010. We conduct substantially all of our operations and make investments through our
operating partnership, of which we are the sole general partner. NS Real Estate Income Trust
Advisor, LLC is our external manager, or our Advisor, and is an affiliate of our sponsor, NorthStar
Realty Finance Corp. Through our operating partnership we seek to originate, acquire and asset
manage:
| commercial real estate debt, including first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans; |
||
| commercial real estate securities, including primarily commercial mortgage-backed securities (CMBS),
and may include unsecured REIT debt, collateralized debt obligations and other securities; and |
||
| select commercial real estate equity investments. |
We believe that these businesses are complementary to each other due to the overlapping sources of
investment opportunities and common reliance on real estate fundamentals.
We intend to make an election to be taxed as a real estate investment trust, or REIT, under the
Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31,
2010. If we qualify as a REIT for federal income tax purposes, we generally will not be subject to
federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail
to qualify as a REIT in any taxable year after electing REIT status, we will be subject to federal
income tax on our taxable income at regular corporate income tax rates and generally will not be
permitted to qualify for treatment as a REIT for federal income tax purposes for four years
following the year in which our qualification is denied. Such an event could materially and
adversely affect our net income and cash available for distribution. However, we believe that we
will be organized and will operate in a manner that will enable us to qualify for treatment as a
REIT for federal income tax purposes commencing with our taxable year ended December 31, 2010, and
we intend to continue to operate so as to remain qualified as a REIT for federal income tax
purposes thereafter.
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Sources of Operating Revenues
We earn interest income from real estate securities and our real estate debt
investments.
Profitability and Performance Metrics
We calculate Adjusted Funds from Operations, or AFFO, (see Non-GAAP Financial MeasuresFunds from
Operations and Adjusted Funds from Operations for a description of this metric) to evaluate the
profitability and performance of our business.
Outlook and Recent Trends
Our strategy in the current market conditions is
a cautious but optimistic approach to investing. The
recent political indecisiveness concerning the U.S. debt ceiling, the Standard & Poors downgrade of
the United States government credit rating, combined with international instability has increased market volatility and impacted investor and consumer confidence. Despite the potential for
a slowdown in the recovery in the U.S. economy, we believe the current environment for commercial real estate lending will allow
us to implement our business plan and generate attractive risk-adjusted returns on our invested capital that will support
our distributions.
The
current market conditions combined with our Advisors platform provides opportunities to: (i) originate loans
with attractive current returns and strong structural features directly with borrowers, thereby taking advantage of the changing
market conditions in order to seek attractive risk-return dynamics for our stockholders; and (ii) purchase commercial real estate
debt and commercial real estate securities from third parties, in many instances at discounts to their face amount (or principal
amount), due to the lack of market liquidity and seller deleveraging.
We believe that the near and intermediate-term market for
originations and acquisitions of commercial real estate debt, commercial real estate securities and select commercial real
estate equity investments is one of the most compelling from a risk-return perspective that the Company or our Advisor has
experienced in recent years. We believe our strategy presents a favorable alternative to pure equity-oriented investment
strategies by offering attractive risk-adjusted returns and a higher potential for capital preservation should the real estate
capital market shift to a less favorable environment. Given the prospect of a continued slow recovery for the U.S. economy, we favor an investment strategy weighted towards targeting debt or securities assets which maximize
current income with the added features of subordinate capital and downside structural protection.
Many investors who acquired real estate assets prior to the recent
economic recession are now having to devote substantial effort to managing their investments and may not have the resources
or capital available to take advantage of current market opportunities. Companies such as ours, with no legacy asset issues,
should have a competitive advantage in the market. For example, our current originations and acquisitions of commercial real
estate debt, commercial real estate securities and select commercial real estate equity investments reflect valuations that
have already adjusted to post-recession pricing.
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We believe that the following conditions, which are by-products of the recent extended credit
market dislocation and the current, slow economic recovery, should create a favorable investment
environment for us:
| The post-recession market for investing in commercial real estate offers an opportunity
to participate in what we believe are favorable real estate asset valuations; |
| The scarcity of capital available in the new-issue CMBS market or related securitized debt market (such as collateralized debt obligations,
or CDOs) reduces a major source of debt capital for commercial property owners; |
| Contraction in the banking system and the high losses experienced by commercial banks has
greatly diminished their capacity to provide commercial real estate debt capital and credit
to property owners; |
| The increasing number of maturing commercial real estate loans over the next five years
should be much greater than the markets capacity to provide refinancing capital; |
| Insurance companies and government sponsored lending programs like Freddie Mac and Fannie
Mae have increased market share through the downturn, but still cannot come close to fully
satisfying demand for commercial real estate debt capital and the government sponsored
agencies are coming under significant scrutiny with many calling for their reduced role in
the future; |
| Capital markets disruption compounded by scrutiny on credit rating agencies offer
attractive investing opportunities in legacy CMBS; and |
| The restarting of the CMBS market, which is commonly referred to as CMBS 2.0 (generally
seeking to finance only the highest quality assets based on conservative underwriting) makes
new issue CMBS investing appealing. |
Due to the market conditions described above and our Advisors expertise and industry
relationships, we continue to see a robust pipeline of investment opportunities that have credit
qualities and yield profiles that are consistent with our underwriting standards and that we
believe offer the opportunity to meet or exceed our targeted returns. While we remain optimistic
that we will continue to be able to generate and capitalize on an attractive pipeline, there is no
assurance that will be the case.
Our Target Assets
We
intend to invest in both fixed and floating-rate debt and securities. Our fixed-rate assets
have set interest rates that do not fluctuate over time and we receive consistent payments from
these assets. Our floating-rate assets generally have interest rates based on a spread to one-month
London Interbank Offered Rate, or LIBOR, a floating-rate index based on rates that banks charge
each other to borrow. LIBOR as of June 30, 2011, was 0.19%, well below its 2.27% average over the
past five years. One-month LIBOR resets every 30 days and the total interest rate paid to us by our
borrowers on our floating-rate assets that are tied to LIBOR will generally fluctuate as LIBOR
rises and falls. Given the current one-month LIBOR rate is at
historically low levels, in order to generate minimum interest rates that are consistent with our targeted
returns, many of our LIBOR-based assets have a fixed minimum
LIBOR rate, or floor. The interest rate paid on our floating-rate assets with floors will not
increase until the actual one-month LIBOR rate surpasses the fixed floor rate. Our allocation of
fixed and floating-rate assets may vary significantly over time.
Returns on real estate securities are sensitive to interest rate volatility. For example, if
interest rates increase, the value of our fixed-rate real estate securities may tend to decrease.
On the other hand, if interest rates were to decrease, the value of our fixed-rate real estate
securities may tend to increase.
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Our Financing Strategy
We may employ leverage as a part of our investment strategy. Although we have a maximum leverage
level for our portfolio, we do not have a targeted debt-to-equity ratio, as we believe the
appropriate leverage for the particular assets we finance depends on the specific credit
characteristics of those assets. We utilize leverage for the sole purpose of financing our assets
and we do not employ leverage to speculate on changes in interest rates. When we employ leverage we
will generally seek to match fund our assets with respect to interest rate and maturity in order to
reduce the impact of interest rate fluctuation and risk of refinancing our liabilities prior to the
maturity of our assets.
We believe that liquidity is returning to the commercial real estate finance markets and banks have
begun to more actively provide credit to experienced real estate lenders with strong track records
to originate or purchase new real estate debt investments. We expect that credit availability will
continue to improve during the remainder of 2011, increasing opportunities for us to access
attractive capital to finance our assets.
Our Risk Management Strategy
Our Advisor uses many methods to actively manage our asset base to preserve our income and capital.
Frequent dialogue with borrowers and inspections of our collateral are an effective process for
identifying issues early and prior to missed debt service and other payments. Some of our loans may
require borrowers to replenish cash reserves for items such as taxes, insurance and future debt
service costs. Late replenishments of cash reserves also may be an early indicator there could be a
problem with the borrower or collateral property.
Our Advisor conducts comprehensive credit reviews that include day-to-day oversight by the
portfolio management team, weekly management meetings and a quarterly credit review process. These
processes are designed to enable management to evaluate and proactively manage asset-specific
credit issues and identify credit trends on a portfolio-wide basis. Nevertheless, we cannot be
certain that our Advisors review will identify all issues within our portfolio due to, among other
things, adverse economic conditions or events adversely affecting specific assets; therefore,
potential future losses may also stem from assets that are not identified by these credit reviews.
During the credit reviews, assets may be put on non-performing status and identified for possible
impairment based upon several factors, including missed or late contractual payments, significant
declines in collateral performance, and other data which may indicate a potential issue in our
ability to recover our capital from the investment.
Each of our assets, while primarily backed by commercial real estate collateral, is unique and
requires customized asset management strategies for dealing with potential credit situations. The
complexity of each situation depends on many factors, including the number of collateral
properties, the type of property, macro and local market conditions impacting the demand, cash flow
and value of the collateral, and the financial condition of our borrowers and their willingness to
support our collateral properties. Our Advisor has an experienced asset management team that
monitors those factors on our behalf.
Critical Accounting Policies
Refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2010
entitled Managements Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting policies for a full discussion of our critical accounting
policies.
Basis of Presentation
The following discussion is based upon the historical carryover financial statements of NorthStar
Income Opportunity REIT I, Inc., or NSIO REIT, the accounting acquirer, for the three and six
months ended June 30, 2010 and the financial statements of ours for the three and six months ended
June 30, 2011.
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Results of Operations
Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010
Three Months Ended June 30, | Increase (decrease) | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Revenues |
||||||||||||||||
Interest income |
$ | 679,278 | $ | 426,995 | $ | 252,283 | 59.1 | % | ||||||||
Total revenues |
679,278 | 426,995 | 252,283 | 59.1 | ||||||||||||
Expenses |
||||||||||||||||
Interest expense |
224,929 | 224,917 | 12 | 0.0 | ||||||||||||
Advisory fees related party |
213,737 | 16,439 | 197,298 | 1,200.2 | ||||||||||||
Auditing and professional fees |
42,702 | 130,423 | (87,721 | ) | (67.3 | ) | ||||||||||
General and administrative expenses |
302,316 | 156,812 | 145,504 | 92.8 | ||||||||||||
Total expenses |
783,684 | 528,591 | 255,093 | 48.3 | ||||||||||||
Loss from operations |
(104,406 | ) | (101,596 | ) | (2,810 | ) | 2.8 | |||||||||
Realized gain on investments and other |
| 199,604 | (199,604 | ) | (100.0 | ) | ||||||||||
Unrealized gain on investments and other |
585,719 | 857,388 | (271,669 | ) | (31.7 | ) | ||||||||||
Consolidated net income |
481,313 | 955,396 | (474,083 | ) | (49.6 | ) | ||||||||||
Less: net income attributable to non-controlling interests |
58 | 179 | (121 | ) | (67.6 | ) | ||||||||||
Net income attributable to NorthStar Real Estate Income |
||||||||||||||||
Trust, Inc. common stockholders |
$ | 481,255 | $ | 955,217 | $ | (473,962 | ) | (49.6 | %) | |||||||
Revenues
Interest Income
Interest income increased $252,283 over the prior period. The increase was
primarily attributable to interest income of $302,800 earned on two first mortgage loans that the
Company originated in 2011, partially offset by income on a security that was sold on June 30,
2010.
Expenses
Interest Expense
Interest expense remained flat over the prior period.
Advisory Fees Related Party
The increase in advisory fees related party was primarily attributable to an acquisition fee of
$151,075 to our Advisor for the origination of a first mortgage loan in the second quarter of 2011
and an increase in asset management fees of $46,223 due to increased investment activity.
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Auditing and Professional Fees
The decrease in auditing and professional fees was primarily attributable to one-time professional
fees incurred during the second quarter of 2010 in connection with the merger of NSIO REIT and the
Company.
General and Administrative Expenses
The increase in general and administrative expenses was primarily attributable to increases in
director and officer insurance, public company expenses, equity-based compensation expense, and
servicer fees.
Realized Gain on Investments and Other
We had no realized gain on investments and other for the three months ended June 30, 2011. The
realized gain on investments and other for the three months ended June 30, 2010 was generated from
the sale of a real estate security on June 30, 2010.
Unrealized Gain on Investments and Other
The decrease in unrealized gain on investments and other is primarily related to the change in fair
value on the real estate securities.
Comparison of the Six Months Ended June 30, 2011 to the Six Months Ended June 30, 2010
Six Months Ended June 30, | Increase (decrease) | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Revenues |
||||||||||||||||
Interest income |
$ | 1,052,744 | $ | 705,249 | $ | 347,495 | 49.3 | % | ||||||||
Total revenues |
1,052,744 | 705,249 | 347,495 | 49.3 | ||||||||||||
Expenses |
||||||||||||||||
Interest expense |
447,498 | 345,121 | 102,377 | 29.7 | ||||||||||||
Advisory fees related party |
278,616 | 23,073 | 255,543 | 1,107.5 | ||||||||||||
Auditing and professional fees |
89,465 | 130,423 | (40,958 | ) | (31.4 | ) | ||||||||||
General and administrative expenses |
487,419 | 276,055 | 211,364 | 76.6 | ||||||||||||
Total expenses |
1,302,998 | 774,672 | 528,326 | 68.2 | ||||||||||||
Loss from operations |
(250,254 | ) | (69,423 | ) | (180,831 | ) | 260.5 | |||||||||
Realized gain on investments and other |
| 199,604 | (199,604 | ) | (100.0 | ) | ||||||||||
Unrealized gain on investments and other |
581,312 | 1,104,247 | (522,935 | ) | (47.4 | ) | ||||||||||
Consolidated net income |
331,058 | 1,234,428 | (903,370 | ) | (73.2 | ) | ||||||||||
Less: net income attributable to non-controlling
interests |
35 | 289 | (254 | ) | (87.9 | ) | ||||||||||
Net
income attributable to NorthStar Real Estate Income |
||||||||||||||||
Trust, Inc. common stockholders |
$ | 331,023 | $ | 1,234,139 | $ | (903,116 | ) | (73.2 | %) | |||||||
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Revenues
Interest Income
The increase in interest income was primarily attributable to the full period benefit in 2011 of
the acquisition of two real estate securities, one in January 2010 and the second in February
2010, resulting in additional income of $132,347 and an increase in interest income of $304,911
on two first mortgage loans that the Company originated in 2011. The increase was partially offset
by the sale of a real estate security on June 30, 2010.
Expenses
Interest Expense
The increase in interest expense was primarily related to a full period of interest expense in 2011
from two Term Asset-Backed Securities Loan Facility agreements, or TALF borrowings, secured in
January 2010 and February 2010, respectively, which were used to finance the acquisition of two
real estate securities.
Advisory Fees Related Party
The increase in advisory fees related party was primarily attributable to acquisition fees of
$198,372 to our Advisor for the origination of two first mortgage loans in 2011 and an increase in
asset management fees of $57,171 due to increased investment activity.
Auditing and Professional Fees
The decrease in auditing and professional fees was primarily attributable to one-time professional
fees incurred during the second quarter of 2010 in connection with the merger of NSIO REIT and the
Company.
General and Administrative Expenses
The increase in general and administrative expenses was primarily attributable to increases in
director and officer insurance, public company expenses, equity-based compensation expense, and
servicer fees, partially offset by a one-time structure fee incurred in 2010 related to the TALF
borrowings.
Realized Gain on Investments and Other
We had no realized gain on investments and other for the six months ended June 30, 2011. Realized
gain on investments and other for 2010 was the result of the sale of one real estate security on
June 30, 2010.
Unrealized Gain on Investments and Other
The decrease in unrealized gain on investments and other is primarily related to the change in fair
value on the real estate securities.
Liquidity and Capital Resources
We are dependent upon the net proceeds from our continuous, public offering of up to a maximum of
110,526,315 shares of common stock, or our Offering, of which 10,526,315 shares will be offered
pursuant to our distribution reinvestment plan, or DRP, to conduct our operations. We will obtain
the capital required to originate and acquire commercial real estate debt investments, commercial real estate securities and select commercial real estate
equity investments and conduct our operations from the proceeds of our Offering and any future offerings we may conduct, from secured
or unsecured financings from banks and other lenders and from any undistributed funds from our
operations. For the six months ended June 30, 2011, we sold
2,801,853 shares generating gross proceeds of $27,861,019 and had
$24,037,982 of unrestricted cash available for investments as of June
30, 2011.
If we are unable to continue to raise funds in the Offering, we will be unable to make new
investments resulting in less diversification in terms of the type, number and size of investments
we make and the value of an investment in us will fluctuate with the performance of the specific
assets we acquire. Further, we have certain fixed operating expenses, including certain expenses as
a publicly offered REIT, regardless of whether we are able to continue to raise funds in the
Offering. Our
inability to continue to raise funds would increase our fixed operating expenses as a percentage of
gross income, reducing our net income and limiting our ability to make distributions.
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Once we have fully invested the proceeds of our Offering, we expect that our financing will
not exceed 50% of the greater of the cost or fair value of our investments, although it may
exceed this level during our offering stage. Our charter limits us from incurring
borrowings that would exceed 75% of our tangible assets. We cannot exceed this limit unless
any excess in borrowing over such level is approved by our stockholders. As of June 30, 2011, our
leverage was 55%, which is well below the maximum allowed by our charter.
In addition to making investments in accordance with our investment objectives, we expect to use
our capital resources to make certain payments to our Advisor and NRF Capital Markets, LLC, or the
Dealer Manager. During our organization and offering stage, these payments will include payments to
the Dealer Manager for selling commissions and the dealer manager fee and payments to the Dealer
Manager and our Advisor for reimbursement of certain organization and offering expenses. However,
our Advisor has agreed to reimburse us to the extent that selling commissions, the dealer manager
fee and other organization and offering expenses incurred by us exceed 15% of our gross offering
proceeds. During our acquisition and development stage, we expect to make payments to our Advisor
in connection with the selection and origination or acquisition of investments, the management of our
assets and costs incurred by our Advisor in providing services to us. The advisory agreement has a
one-year term but may be renewed for an unlimited number of successive one-year periods upon the
mutual consent of our Advisor and our board of directors.
We intend to elect to be taxed as a REIT and to operate as a REIT commencing with our taxable year
ended December 31, 2010. To maintain our qualification as a REIT, we will be required to make
aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income
(computed without regard to the dividends paid deduction and excluding net capital gain). Our board
of directors may authorize distributions in excess of those required for us to maintain REIT status
depending on our financial condition and such other factors as our board of directors deems
relevant. Provided we have sufficient available cash flow, we intend to authorize and declare daily
distributions and pay distributions on a monthly basis. We have not established a minimum
distribution level.
Cash Flows
The following discussion is based upon the historical carryover financial statements of NSIO REIT,
the accounting acquirer, for the six months ended June 30, 2010 and the financial statements of
ours for the six months ended June 30, 2011.
Net cash flow provided by operating activities was $286,293 for the six months ended June 30, 2011
compared to net cash provided by operating activities of $199,563 for the six months ended June 30,
2010. The principal source of cash flow was net interest income generated from our investments.
Net cash flow used in investing activities was $19,809,900 for the six months ended June 30, 2011
compared to net cash used in investing activities of $27,763,765 for the six months ended June 30,
2010. The principal use of cash for the six months ended June 30, 2011 was the origination of two
real estate debt investments. The principal use of cash for the six months ended June 30, 2010 was
the purchase of two real estate securities.
Net cash flow provided by financing activities was $23,156,757 for the six months ended June 30,
2011 compared to net cash provided by financing activities of $38,073,594 for the six months ended
June 30, 2010. The principal sources of cash for the six months ended June 30, 2011 were proceeds
from the issuance of common stock. The principal sources of cash for the six months ended June 30,
2010 were proceeds from the issuance of common stock and proceeds from two TALF borrowings.
Recent Developments
Offering Proceeds
For
the period from July 1, 2011 to August 10, 2011, we sold
1,113,467 common shares pursuant to our
Offering, generating gross proceeds of $11,111,018.
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Distributions
On August 11, 2011, our board of directors approved a daily cash distribution of $0.002191781 per
share of common stock for each of the three months ended December 31, 2011. The distribution will
be paid in cumulative amounts to the stockholders of record entitled to receive such distribution
on November 1, 2011, December 1, 2011 and January 1, 2012.
New Investments
On August 11, 2011, we purchased a CMBS for $2,720,000, with a principal amount of $4,000,000 and having a
fixed coupon of 5.482%. It is backed by a diverse pool of 175 underlying commercial real estate loans located
throughout the United States. The CMBS is rated as BB+ by Standard & Poors and Ba2 by Moodys Investors Services,
Inc.
Sponsor Purchase of Common Stock
The Sponsor has committed to purchase up to $10 million of shares of our common stock during the
two-year period following commencement of our Offering under certain circumstances in which our
distributions exceed our AFFO in order to provide additional funds to support distributions to
stockholders. On August 11, 2011, our board of directors approved the sale of 79,629 shares of our
common stock, $0.01 par value per share, to NRFC Sub-REIT Corp., a subsidiary of the Sponsor, at a
price of $9.00 per Share.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future
material effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources.
Non-GAAP Financial Measures
Funds from Operations and Adjusted Funds from Operations
Management believes that funds from operations, or FFO, and adjusted funds from operations, or
AFFO, each of which are non-GAAP measures, are additional appropriate measures of the operating
performance of a REIT and of our company in particular. We compute FFO in accordance with the
standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as
net income or loss (computed in accordance with generally accepted
accounting principles (U.S. GAAP)),
excluding gains or losses from sales of depreciable properties, the cumulative effect of changes in
accounting principles, real estate-related depreciation and amortization, and after adjustments for
unconsolidated/uncombined partnerships and joint ventures. FFO, as defined by NAREIT, is a
computation made by analysts and investors to measure a real estate companys cash flow generated
by operations.
We calculate AFFO by subtracting from (or adding to) FFO:
| the amortization or accrual of various deferred costs including equity based compensation;
and |
||
| an adjustment to reverse the effects of unrealized gains /(losses). |
Our calculation of AFFO differs from the methodology used for calculating AFFO by certain other
REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. Our
management utilizes FFO and AFFO as measures of our operating performance, and believes they are
also useful to investors, because they facilitate an understanding of our operating performance
after adjustment for certain non-cash income and expenses. Additionally, FFO and AFFO serve as
measures of our operating performance because they facilitate evaluation of our company without the
effects of selected items required in accordance with U.S. GAAP that may not necessarily be indicative
of current operating performance and that may not accurately compare our operating performance
between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are
defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide
us and our investors with an additional useful measure to compare our financial performance to
certain other REITs.
Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities
determined in accordance with U.S. GAAP. Furthermore, FFO and AFFO do not represent amounts
available for managements discretionary use because of needed capital replacement or expansion,
debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be
considered as an alternative to net income as an indicator of our operating performance or as an
alternative to cash flow from operating activities as a measure of our liquidity.
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Set forth below is a reconciliation of FFO and AFFO to net income attributable to NorthStar Real
Estate Income Trust, Inc. common stockholders:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Funds from Operations: |
||||||||||||||||
Net income attributable to NorthStar Real
Estate Income |
||||||||||||||||
Trust, Inc. common stockholders |
$ | 481,255 | $ | 955,217 | $ | 331,023 | $ | 1,234,139 | ||||||||
Funds from Operations |
481,255 | 955,217 | 331,023 | 1,234,139 | ||||||||||||
Adjusted Funds from Operations: |
||||||||||||||||
Funds from Operations |
481,255 | 955,217 | 331,023 | 1,234,139 | ||||||||||||
Amortization of equity-based compensation |
9,516 | | 17,955 | | ||||||||||||
Unrealized gains from fair value adjustments |
(585,719 | ) | (857,388 | ) | (581,312 | ) | (1,104,247 | ) | ||||||||
Adjusted Funds from Operations |
$ | (94,948 | ) | $ | 97,829 | $ | (232,334 | ) | $ | 129,892 | ||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We may be exposed to the effects of interest rate changes as a result of borrowings used to
maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate
investment portfolio and operations. Our profitability and the value of our investment portfolio
may be adversely affected during any period as a result of interest rate changes. Our interest rate
risk management objectives are to limit the impact of interest rate changes on earnings and cash
flows and to lower overall borrowing costs. We may utilize a variety of financial instruments,
including interest rate caps, floors, and swap agreements, in order to limit the effects of changes
in interest rates on our operations. When we use these types of derivatives to hedge the risk of
interest-earning assets or interest-bearing liabilities, we may be subject to certain risks,
including the risk that losses on a hedge position will reduce the funds available for payments to
holders of our common stock and that the losses may exceed the amount we invested in the
instruments. We will not enter into derivative or interest rate transactions for speculative
purposes.
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Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
The management of the Company established and maintains disclosure controls and procedures that are
designed to ensure that material information relating to the Company and its subsidiaries required
to be disclosed in the reports that are filed or submitted under the 1934 Act are recorded,
processed, summarized, and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures.
As of the end of the period covered by this report, the Companys management conducted an
evaluation, under the supervision and with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, of the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the
period covered by this report, the Companys disclosure controls and procedures are effective.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that it will detect or uncover failures within the
Company to disclose material information otherwise required to be set forth in the Companys
periodic reports.
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PART II. OTHER INFORMATION
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Recent Sales of Unregistered Securities
On June 7, 2011, we granted each of our three independent directors 2,500 shares of restricted stock in connection with
their re-election to our board of directors. The non-vested stock will generally vest over four years; provided,
however, that the non-vested stock will become fully vested on the earlier occurrence of: (i) the termination of the
independent directors service as a director due to his or her death or disability; or (ii) a change in control of the
Company. These shares were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act
for transactions not involving a public offering.
Use of Proceeds from Registered Securities
On July 19, 2010, our registration statement on Form S-11 (File No. 333-157688), covering our
Offering of up to 110,526,315 shares of common stock, of which 10,526,315 shares of common stock
would be offered pursuant to our DRP, was declared effective under the Securities Act and we
retained the Dealer Manager, an affiliate of ours, to serve as the dealer manager of the Offering.
We are offering up to 100,000,000 shares of common stock at an aggregate offering price of up to
$1.0 billion, or $10.00 per share, with discounts available to certain categories of purchasers,
and 10,526,315 shares of common stock pursuant to our DRP at an aggregate offering price of $100
million, or $9.50 per share.
As of June 30, 2011, we had sold the following securities in our Offering at the following
aggregate offering prices:
| 3,076,359 shares, equal to $30,557,333 in aggregate gross offering proceeds; and |
||
| 46,815 shares, equal to $444,738 in aggregate gross offering proceeds, pursuant to the DRP. |
In the aggregate, as of June 30, 2011, we had sold 3,099,135 shares resulting in gross proceeds of
$30,802,067, excluding the 24,039 shares purchased by NRFC Sub-REIT Corp preceding the commencement
of our Offering.
For the six months ended June 30, 2011, we repurchased 14,748 shares for a total of $147,480, or
$10.00 per share.
As of June 30, 2011, we have incurred the following costs in connection with the issuance and
distribution of the registered securities:
Type of Cost | Amount | |||
Offering costs to related parties |
$ | 3,038,467 |
From the commencement of the Offering through June 30, 2011, the net offering proceeds to us from the primary offering
component of the Offering, after deducting the total expenses
incurred described above, were $27,763,600. From the
commencement of the Offering through June 30, 2011, we had used
$19,809,900 of such net proceeds to originate real estate debt
investments. Of the amount used to originate the investments, $198,372 was paid to our Advisor as acquisition and asset
management fees and acquisition expense reimbursement.
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Table of Contents
Item 6. | Exhibits |
(a) | Exhibits |
Exhibit | ||||
Number | Description | |||
3.1 | Second Articles of Amendment and Restatement of NorthStar Real Estate Income Trust, Inc. (filed as
Exhibit 3.1 to the Companys Current Report on Form 8-K filed on August 26, 2010 and incorporated
herein by reference) |
|||
3.2 | Bylaws of NorthStar Real Estate Income Trust, Inc. (filed as Exhibit 3.2 to the Companys
Registration Statement on Form S-11 (File No. 333-157688) and incorporated herein by reference) |
|||
4.1 | * | Form of Subscription Agreement |
||
4.2 | Amended and Restated Distribution Reinvestment Plan (filed as Exhibit 4.2 to Post-Effective Amendment No. 2 to the
Companys Registration Statement on Form S-11 (File No. 333-157688) and incorporated herein by
reference) |
|||
31.1 | * | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2 | * | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 | * | Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
||
32.2 | * | Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
||
**101.INS | XBRL Instance Document |
|||
**101.SCH | XBRL Taxonomy Extension Schema Document |
|||
**101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
|||
**101.LAB | XBRL Taxonomy Extension Labels Linkbase Document |
|||
**101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
|||
**101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
* | Filed herewith |
** | Pursuant to Rule 406T of SEC Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NORTHSTAR REAL ESTATE INCOME TRUST, INC. | ||||||
Date: August 15, 2011
|
By: | /s/ David T. Hamamoto
|
||||
Chief Executive Officer | ||||||
By: | /s/ Lisa Meyer
|
|||||
Chief Financial Officer |
31