N1 Liquidating Trust - FORM 10-Q - August 12, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015

Commission File Number: 000-54671
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)

(212) 547-2600
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer ý
(Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No ý

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
The Company has one class of common stock, $0.01 par value per share, 119,872,428 shares outstanding as of August 11, 2015.
 



NORTHSTAR REAL ESTATE INCOME TRUST, INC.
FORM 10-Q
TABLE OF CONTENTS


Index
 
Page
 
 
 
 
 
 
 
 
 
 


2


FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue,” “future” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to our ability to make distributions to our stockholders, our reliance on our advisor and our sponsor, the operating performance of our investments, our financing needs, the effects of our current strategies and investment activities and our ability to effectively deploy capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the economic environment. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements. These factors include, but are not limited to:
•
adverse economic conditions and the impact on the commercial real estate industry;
•
our ability to deploy capital quickly and successfully;
•
our dependence on the resources and personnel of our advisor, our sponsor and their affiliates;
•
the performance of our advisor, our sponsor and their affiliates;
•
our liquidity and access to capital;
•
our use of leverage;
•
our ability to make distributions to our stockholders;
•
the lack of a public trading market for our shares;
•
the effect of economic conditions on the valuation of our investments;
•
the impact of NorthStar Realty Finance Corp.’s spin-off of its asset management business, which included our advisor;
•
our advisor’s and its affiliates’ ability to attract and retain sufficient personnel to support our operations;
•
the impact of market and other conditions influencing the performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments;
•
changes in our business or investment strategy;
•
the impact of economic conditions on borrowers of the debt we originate and acquire and the mortgage loans underlying the commercial mortgage backed securities in which we invest as well as on the tenants of the real property that we own;
•
changes in the value of our portfolio;
•
our ability to realize current and expected return over the life of our investments;
•
any failure in our advisor’s and its affiliates’ due diligence to identify relevant facts during our underwriting process or otherwise;
•
illiquidity of debt investments or properties in our portfolio;
•
our ability to finance our assets on terms that are acceptable to us, if at all, including our ability to complete securitization financing transactions;
•
environmental compliance costs and liabilities;
•
risks associated with our joint ventures and unconsolidated entities, including our lack of sole decision making authority and the financial condition of our joint venture partners;

3


•
increased rates of loss or default and decreased recovery on our investments;
•
the degree and nature of our competition;
•
the effectiveness of our portfolio management techniques and strategies;
•
failure to maintain effective internal controls and disclosure controls and procedures;
•
regulatory requirements with respect to our business and the related cost of compliance;
•
legislative and regulatory changes, including changes to laws governing the taxation of real estate investment trusts, or REITs, and changes to laws affecting non-traded REITs and alternative investments generally;
•
our ability to maintain our qualification as a REIT for federal income tax purposes and limitations imposed on our business by our status as a REIT;
•
the loss of our exemption from registration under the Investment Company Act of 1940, as amended;
•
general volatility in capital markets;
•
the adequacy of our cash reserves and working capital; and
•
other risks associated with investing in our targeted investments, including changes in our industry, interest rates, the securities markets, the general economy or the capital markets and real estate markets specifically.
The foregoing list of factors is not exhaustive. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.
Factors that could have a material adverse effect on our operations and future prospects are set forth in our filings with the United States Securities and Exchange Commission, or the SEC, included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 under the heading “Risk Factors.” The risk factors set forth 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.





4


PART I. Financial Information
Item 1.  Financial Statements
NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
 
June 30, 2015
(Unaudited)
 
December 31, 2014
Assets
 
 
 
Cash
$
40,294

 
$
35,755

Restricted cash
112,010

 
125,459

Real estate debt investments, net
1,219,780

 
1,327,925

Operating real estate, net
401,375

 
403,347

Investments in unconsolidated ventures (refer to Note 5)
178,716

 
195,860

Real estate securities, available for sale
79,738

 
79,636

Receivables, net
13,296

 
12,080

Deferred costs and other assets, net
8,930

 
12,836

Total assets
$
2,054,139

 
$
2,192,898

Liabilities
 
 
 
Securitization bonds payable
$
283,409

 
$
413,510

Mortgage notes payable
318,639

 
318,062

Credit facilities
269,483

 
269,483

Accounts payable and accrued expenses
14,363

 
13,812

Escrow deposits payable
93,098

 
104,325

Other liabilities
12,870

 
11,009

Total liabilities
991,862

 
1,130,201

Commitments and contingencies

 

Equity
 
 
 
NorthStar Real Estate Income Trust, Inc. Stockholders’ Equity
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding as of June 30, 2015 and December 31, 2014
—

 
—

Common stock, $0.01 par value, 400,000,000 shares authorized, 119,600,840 and 117,846,562 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
1,196

 
1,178

Additional paid-in capital
1,067,202

 
1,050,632

Retained earnings (accumulated deficit)
(52,949
)
 
(36,884
)
Accumulated other comprehensive income (loss)
27,923

 
28,414

  Total NorthStar Real Estate Income Trust, Inc. stockholders’ equity
1,043,372

 
1,043,340

Non-controlling interests
18,905

 
19,357

Total equity
1,062,277

 
1,062,697

Total liabilities and equity
$
2,054,139

 
$
2,192,898





Refer to accompanying notes to consolidated financial statements.

5


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net interest income
 
 
 
 
 
 
 
 
Interest income
 
$
24,598

 
$
26,901

 
$
50,219

 
$
51,002

Interest expense
 
5,326

 
5,710

 
11,150

 
11,294

Net interest income
 
19,272

 
21,191

 
39,069

 
39,708

 
 
 
 
 
 
 
 
 
Property and other revenues
 
 
 
 
 
 
 
 
Rental and other income
 
15,027

 
5,634

 
30,027

 
10,478

Total property and other revenues
 
15,027

 
5,634

 
30,027

 
10,478

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Asset management and other fees - related party
 
6,031

 
5,723

 
12,397

 
10,642

Mortgage notes interest expense
 
3,737

 
1,519

 
7,248

 
2,805

Transaction costs
 
443

 
758

 
577

 
770

Property operating expenses
 
7,524

 
2,787

 
14,770

 
5,245

General and administrative expenses (refer to Note 8)
 
4,106

 
3,529

 
7,897

 
6,090

Depreciation and amortization
 
3,262

 
1,420

 
7,517

 
2,603

Total expenses
 
25,103

 
15,736

 
50,406

 
28,155

 
 
 
 
 
 
 
 
 
Other income (loss)
 
 
 
 
 
 
 
 
Realized gain (loss) on investments and other
 
—

 
—

 
—

 
(175
)
Unrealized gain (loss) on investments and other
 
(3,731
)
 
—

 
(5,586
)
 
—

Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
5,465

 
11,089

 
13,104

 
21,856

Equity in earnings (losses) of unconsolidated ventures
 
9,509

 
9,740

 
19,833

 
19,591

Income tax benefit (expense)
 
(779
)
 
(779
)
 
(1,520
)
 
(1,493
)
Net income (loss)
 
14,195

 
20,050

 
31,417

 
39,954

Net (income) loss attributable to non-controlling interests
 
(252
)
 
178

 
(330
)
 
205

Net income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders
 
$
13,943

 
$
20,228

 
$
31,087

 
$
40,159

Net income (loss) per share of common stock, basic/diluted
 
$
0.12

 
$
0.17

 
$
0.26

 
$
0.35

Weighted average number of shares of common stock outstanding, basic/diluted
 
119,264,371

 
116,020,563

 
118,847,243

 
115,572,651

Distributions declared per share of common stock
 
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40





Refer to accompanying notes to consolidated financial statements.

6


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
14,195

 
$
20,050

 
$
31,417

 
$
39,954

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on real estate securities, available for sale
(277
)
 
1,725

 
(491
)
 
3,446

Total other comprehensive income (loss)
(277
)
 
1,725

 
(491
)
 
3,446

Comprehensive income (loss)
13,918

 
21,775

 
30,926

 
43,400

Comprehensive (income) loss attributable to non-controlling interests
(252
)
 
178

 
(330
)
 
205

Comprehensive income (loss) attributable to NorthStar Real Estate Income Trust, Inc. 
$
13,666

 
$
21,953

 
$
30,596

 
$
43,605





































Refer to accompanying notes to consolidated financial statements.

7


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars and Shares in Thousands)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Total
Company’s
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
 
Balance as of December 31, 2013
114,536

 
$
1,145

 
$
1,019,348

 
$
(32,886
)
 
$
13,044

 
$
1,000,651

 
$
4,574

 
$
1,005,225

Non-controlling interests - contributions
—

 
—

 
—

 
—

 
—

 
—

 
15,727

 
15,727

Non-controlling interests - distributions
—

 
—

 
—

 
—

 
—

 
—

 
(773
)
 
(773
)
Proceeds from distribution reinvestment plan
4,493

 
45

 
42,614

 
—

 
—

 
42,659

 
—

 
42,659

Shares redeemed for cash
(1,193
)
 
(12
)
 
(11,456
)
 
—

 
—

 
(11,468
)
 
—

 
(11,468
)
Issuance and amortization of equity-based compensation
11

 
—

 
126

 
—

 
—

 
126

 
—

 
126

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
15,370

 
15,370

 
—

 
15,370

Distributions declared
—

 
—

 
—

 
(93,122
)
 
—

 
(93,122
)
 
—

 
(93,122
)
Net income (loss)
—

 
—

 
—

 
89,124

 
—

 
89,124

 
(171
)
 
88,953

Balance as of December 31, 2014
117,847

 
$
1,178

 
$
1,050,632

 
$
(36,884
)
 
$
28,414

 
$
1,043,340

 
$
19,357

 
$
1,062,697

Non-controlling interests - contributions
—

 
—

 
—

 
—

 
—

 
—

 
105

 
105

Non-controlling interests - distributions
—

 
—

 
—

 
—

 
—

 
—

 
(887
)
 
(887
)
Proceeds from distribution reinvestment plan
2,281

 
23

 
21,690

 
—

 
—

 
21,713

 
—

 
21,713

Shares redeemed for cash
(542
)
 
(5
)
 
(5,224
)
 
—

 
—

 
(5,229
)
 
—

 
(5,229
)
Issuance and amortization of equity-based compensation
15

 
—

 
104

 
—

 
—

 
104

 
—

 
104

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(491
)
 
(491
)
 
—

 
(491
)
Distributions declared
—

 
—

 
—

 
(47,152
)
 
—

 
(47,152
)
 
—

 
(47,152
)
Net income (loss)
—

 
—

 
—

 
31,087

 
—

 
31,087

 
330

 
31,417

Balance as of June 30, 2015 (Unaudited)
119,601

 
$
1,196

 
$
1,067,202

 
$
(52,949
)
 
$
27,923

 
$
1,043,372

 
$
18,905

 
$
1,062,277











Refer to accompanying notes to consolidated financial statements.

8


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
31,417

 
$
39,954

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Equity in (earnings) losses of unconsolidated ventures
(19,833
)
 
(19,591
)
Depreciation and amortization
7,517

 
2,603

Straight line rental income
(992
)
 
—

Amortization of premium/accretion of discount and fees on investments and borrowings, net
1,483

 
1,500

Amortization of deferred financing costs
2,164

 
3,299

Interest accretion on investments
(3,268
)
 
—

Distributions from unconsolidated ventures (refer to Note 5)
16,943

 
17,853

Realized (gain) loss on investments and other
—

 
175

Unrealized (gain) loss on investments and other
5,586

 
—

Amortization of equity-based compensation
104

 
60

Deferred income tax expense
97

 
775

Changes in assets and liabilities:
 
 
 
Restricted cash
1,477

 
191

Receivables, net
(222
)
 
(775
)
Deferred costs and other assets
613

 
17

Due to related party
—

 
(3,076
)
Accounts payable and accrued expenses
3,338

 
2,736

Other liabilities
1,008

 
439

Net cash provided by (used in) operating activities
47,432

 
46,160

Cash flows from investing activities:
 
 
 
Origination of real estate debt investments, net
(14,234
)
 
(248,339
)
Repayment on real estate debt investments
125,001

 
78,016

Proceeds from sale of real estate debt investments
—

 
17,325

Acquisition of operating real estate
—

 
(14,142
)
Improvements of operating real estate
(4,534
)
 
(906
)
Investments in unconsolidated ventures (refer to Note 5)
(9,700
)
 
(53,404
)
Distributions from unconsolidated ventures (refer to Note 5)
16,796

 
22,716

Change in restricted cash
937

 
—

Net cash provided by (used in) investing activities
114,266

 
(198,734
)
Cash flows from financing activities:
 
 
 
Proceeds from distribution reinvestment plan
21,713

 
20,962

Shares redeemed for cash
(5,229
)
 
(3,842
)
Distributions paid on common stock
(47,295
)
 
(45,981
)
Repayment of mortgage notes
(85
)
 
(30
)
Repayment of securitization bonds
(124,971
)
 
(24,766
)
Borrowings from credit facilities
—

 
148,598

Repayment of credit facilities
—

 
(7,638
)
Change in restricted cash
—

 
41,801

Payment of deferred financing costs
(510
)
 
(1,225
)
Contributions from non-controlling interests
105

 
3,044

Distributions to non-controlling interests
(887
)
 
(215
)
Net cash provided by (used in) financing activities
(157,159
)
 
130,708

Net increase (decrease) in cash
4,539

 
(21,866
)
Cash - beginning of period
35,755

 
119,595

Cash - end of period
$
40,294

 
$
97,729

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Escrow deposits payable related to real estate debt investments
$
11,227

 
$
57,424

Distribution payable
7,864

 
7,649

Non-cash related to PE Investments (refer to Note 5)
7,352

 
105

Securitization bonds payable
5,272

 
—

Acquisition of operating real estate / assumption of mortgage notes payable
—

 
29,133



Refer to accompanying notes to consolidated financial statements.

9


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business and Organization
NorthStar Real Estate Income Trust, Inc. (the “Company”) was formed to originate, acquire and asset manage a diversified portfolio of commercial real estate (“CRE”) debt, select equity and securities investments, predominantly in the United States. The Company may also invest in CRE investments internationally. CRE debt investments include first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests. Real estate equity investments include the Company’s direct ownership in properties, which may be structurally senior to a third-party partner’s equity and indirect interests in real estate through real estate private equity funds (“PE Investments”). CRE securities primarily consist of commercial mortgage-backed securities (“CMBS”) and may include unsecured real estate investment trust (“REIT”) debt, collateralized debt obligation (“CDO”) notes and other securities. In addition, the Company may own investments through a joint venture. The Company was formed in January 2009 as a Maryland corporation and commenced operations in October 2010. The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2010. The Company conducts its operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.
The Company is externally managed and has no employees. Prior to June 30, 2014, the Company was managed by an affiliate of NorthStar Realty Finance Corp. (NYSE: NRF) (“NorthStar Realty”). Effective June 30, 2014, NorthStar Realty spun-off its asset management business into a separate publicly traded company, NorthStar Asset Management Group Inc. (NYSE: NSAM) (the “Sponsor”). The Sponsor and its affiliates provide asset management and other services to the Company, NorthStar Realty, other sponsored public non-traded companies and any other companies the Sponsor and its affiliates may manage in the future (collectively, the “NSAM Managed Companies”), both in the United States and internationally. Concurrent with the spin-off, affiliates of the Sponsor entered into a new advisory agreement with the Company and each of the other NSAM Managed Companies. Pursuant to the Company’s advisory agreement, NSAM J-NSI Ltd, an affiliate of the Sponsor (the “Advisor”), agreed to manage the day-to-day operations of the Company on terms substantially similar to those set forth in the Company’s prior advisory agreement with NS Real Estate Income Trust Advisor, LLC (the “Prior Advisor”). References to the “Prior Advisor” herein refer to the services performed by and fees paid and accrued to the Prior Advisor during the period prior to June 30, 2014. The spin-off of NorthStar Realty’s asset management business had no impact on the Company’s operations.
Substantially all the Company’s business is conducted through NorthStar Real Estate Income Trust Operating Partnership, LP (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The limited partners of the Operating Partnership are the Prior Advisor and NorthStar OP Holdings, LLC (the “Special Unit Holder”), each an affiliate of the Sponsor. The Prior Advisor invested $1,000 in the Operating Partnership in exchange for common units and the Special Unit Holder invested $1,000 in the Operating Partnership and was issued a separate class of limited partnership units (the “Special Units”), which are collectively recorded as non-controlling interests on the consolidated balance sheets as of June 30, 2015 and December 31, 2014. As the Company accepted subscriptions for shares in its continuous, public offering which closed in July 2013, it contributed substantially all of the net proceeds to the Operating Partnership as a capital contribution. As of June 30, 2015, the Company’s limited partnership interest in the Operating Partnership was 99.98%.
The Company’s charter authorizes the issuance of up to 400,000,000 shares of common stock with a par value of $0.01 per share and up to 50,000,000 shares of preferred stock with a par value of $0.01 per share. The board of directors of the Company 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.
The Company initially registered to offer up to 100,000,000 shares pursuant to its primary offering to the public (the “Primary Offering”) and up to 10,526,315 shares pursuant to its distribution reinvestment plan (the “DRP”), which are herein collectively referred to as the Offering. In April 2013, the board of directors of the Company authorized the reallocation of shares available under the DRP to the Primary Offering. The Primary Offering (including 7.6 million shares reallocated from the DRP, the “Total Primary Offering”) was completed on July 1, 2013 and all of the shares initially registered for the Offering were issued. As a result of a registration statement to offer up to an additional 15.0 million shares pursuant to the DRP, the Company continues to offer shares beyond the Total Primary Offering.
The Company has raised total gross proceeds of $1.2 billion in the Offering.

10

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2.
Summary of Significant Accounting Policies
Basis of Quarterly Presentation
The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with the Securities and Exchange Commission (the “SEC”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“VIE”) where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.
Variable Interest Entities
A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.
The Company evaluates its investments and financings, including investments in unconsolidated ventures and securitization financing transactions to determine whether they are a VIE. The Company analyzes new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing. As of June 30, 2015, the Company identified one VIE related to its securities investments. The VIE has a carrying value of $53.1 million as of June 30, 2015. The Company’s maximum exposure to loss as of June 30, 2015 would not exceed the carrying value of its investment. Based on management’s analysis, the Company determined that it does not currently or potentially hold a significant interest in this VIE and, therefore, is not the primary beneficiary. Accordingly, the VIE is not consolidated in the Company’s financial statements as of June 30, 2015. The Company did not provide financial support to its unconsolidated VIE during the six months ended June 30, 2015. As of June 30, 2015, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to its unconsolidated VIE. An affiliate of the Sponsor is named special servicer of the VIE.

11

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Voting Interest Entities
A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party.
The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.
Investments in Unconsolidated Ventures
A non-controlling, unconsolidated ownership interest in an entity may be accounted for using the equity method, at fair value or the cost method.
Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity’s net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents. Equity method investments are recognized using a cost accumulation model in which the investment is recognized based on the cost to the investor, which includes acquisition fees. The Company records as an expense certain acquisition costs and fees associated with consolidated investments deemed to be business combinations and capitalizes these costs for investments deemed to be acquisitions of an asset, including an equity method investment.
The Company may account for an investment in an unconsolidated entity at fair value by electing the fair value option. The Company elected the fair value option for PE Investments. The Company records the change in fair value for its share of the projected future cash flow of such investments from one period to another in equity in earnings (losses) from unconsolidated ventures in the consolidated statements of operations. Any change in fair value attributed to market related assumptions is considered unrealized gain (loss).
The Company may account for an investment that does not qualify for equity method accounting or for which the fair value option was not elected using the cost method if the Company determines the investment in the unconsolidated entity is insignificant. Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment.
Non-controlling Interests
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. A non-controlling interest is required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) and other comprehensive income (loss) (“OCI”) attributable to controlling and non-controlling interests. An allocation to a non-controlling interest may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions.
Reclassifications
Certain prior period amounts have been reclassified in the consolidated financial statements to conform to current period presentation.

12

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Comprehensive Income (Loss)
The Company reports consolidated comprehensive income (loss) in separate statements following the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and OCI. The only component of OCI is unrealized gain (loss) on CRE securities available for sale for which the fair value option was not elected.
Fair Value Option
The fair value option provides an election that allows a company to irrevocably elect fair value for certain financial assets and liabilities on an instrument-by-instrument basis at initial recognition. The Company will generally not elect the fair value option for its assets and liabilities. However, the Company may elect to apply the fair value option for certain investments. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.
Real Estate Debt Investments
CRE debt investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium, discount and unfunded commitments. CRE debt investments that are deemed to be impaired are carried at amortized cost less a loan loss reserve, if deemed appropriate, which approximates fair value. CRE debt investments where the Company does not have the intent to hold the loan for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or estimated value.
Operating Real Estate
Operating real estate is carried at historical cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life. The Company follows the purchase method for an acquisition of operating real estate, where the purchase price is allocated to tangible assets such as land, building, tenant and land improvements and other identified intangibles. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in the consolidated statements of operations.
Real Estate Securities
The Company classifies its CRE securities investments as available for sale on the acquisition date, which are carried at fair value. Unrealized gains (losses) are recorded as a component of accumulated OCI in the consolidated statements of equity. However, the Company may elect the fair value option for certain of its available for sale securities, and as a result, any unrealized gains (losses) on such securities are recorded in unrealized gain (loss) on investments and other in the consolidated statements of operations. As of June 30, 2015, the Company did not have any CRE securities investments for which it elected the fair value option.
Acquisition Fees and Expenses
The total of all acquisition fees and expenses for an investment, including acquisition fees to the Advisor, cannot exceed, in the aggregate, 6.0% of the contract purchase price of such investment unless such excess is approved by a majority of the directors, including independent directors. An acquisition fee incurred related to an equity investment will generally be expensed as incurred. An acquisition fee paid to the Advisor related to the acquisition of an equity or debt investment in an unconsolidated joint venture is included in investments in unconsolidated ventures on the consolidated balance sheets. An acquisition fee paid to the Advisor related to the origination or acquisition of debt investments is included in debt investments, net on the consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method. The Company records as an expense certain acquisition costs and fees associated with transactions deemed to be business combinations in which it consolidates the asset and capitalizes these costs for transactions deemed to be acquisitions of an asset, including an equity investment.

13

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Revenue Recognition
Real Estate Debt Investments
Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such loan is reclassified to held for sale.
Operating Real Estate
Rental and other income from operating real estate is derived from leasing of space to various types of tenants. The leases are for fixed terms of varying length and generally provide for annual rentals and expense reimbursements to be paid in monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rent recognized over the amount contractually due pursuant to the underlying leases is included in receivables on the consolidated balance sheets. 
Real Estate Securities
Interest income is recognized using the effective interest method with any premium or discount amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expected cash flow may result in a change to the yield which is then applied retrospectively for high-credit quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment or prospectively for all other securities to recognize interest income.
Credit Losses and Impairment on Investments
Real Estate Debt Investments
Loans are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis or more frequently as necessary. Significant judgment of the Company is required in this analysis. The Company considers the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each loan is maintained at a level that is determined to be adequate by management to absorb probable losses.
Income recognition is suspended for a loan at the earlier of the date at which payments become 90-days past due or when, in the opinion of the Company, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.
Operating Real Estate
The Company’s real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate expected future undiscounted cash flow generated by the property is less than the carrying value. In conducting this review, the Company considers U.S. macroeconomic factors, real estate sector conditions and asset specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value and recorded in impairment on operating real estate in the consolidated statements of operations.
An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due.

14

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts.
Investments in Unconsolidated Ventures
The Company reviews its investments in unconsolidated ventures for which the Company did not elect the fair value option on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value may be impaired or that its carrying value may not be recoverable. An investment is considered impaired if the projected net recoverable amount over the expected holding period is less than the carrying value. In conducting this review, the Company considers U.S. macroeconomic factors, including real estate sector conditions, together with investment specific and other factors. To the extent an impairment has occurred and is considered to be other than temporary, the loss is measured as the excess of the carrying value of the investment over the estimated fair value and recorded in provision for loss on equity investment in the consolidated statements of operations.
Real Estate Securities
CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment (“OTTI”) as any change in fair value is recorded in the consolidated statements of operations. Realized losses on such securities are reclassified to realized gain (loss) on investments and other as losses occur.
CRE securities for which the fair value option is not elected are evaluated for OTTI quarterly. Impairment of a security is considered to be other-than-temporary when: (i) the holder has the intent to sell the impaired security; (ii) it is more likely than not the holder will be required to sell the security; or (iii) the holder does not expect to recover the entire amortized cost of the security. When a CRE security has been deemed to be other-than-temporarily impaired due to (i) or (ii), the security is written down to its fair value and an OTTI is recognized in the consolidated statements of operations. In the case of (iii), the security is written down to its fair value and the amount of OTTI is then bifurcated into: (a) the amount related to expected credit losses; and (b) the amount related to fair value adjustments in excess of expected credit losses. The portion of OTTI related to expected credit losses is recognized in the consolidated statements of operations. The remaining OTTI related to the valuation adjustment is recognized as a component of accumulated OCI in the consolidated statements of equity. The portion of OTTI recognized through earnings is accreted back to the amortized cost basis of the security through interest income, while amounts recognized through OCI are amortized over the life of the security with no impact on earnings. CRE securities which are not high-credit quality are considered to have an OTTI if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of OTTI is then bifurcated as discussed above. As of June 30, 2015, the Company did not have any OTTI recorded on its CRE securities.
Derivatives
Derivatives are used to manage exposure to interest rate risk. All cash settlements and any change in fair value are recorded in interest income in the consolidated statements of operations. As of June 30, 2015, the Company had one interest rate floor as a hedge related to its floating-rate investments, maturing in October 2015 with a fair value of $1.2 million and a notional amount of $225.0 million. Derivatives are generally valued using a third-party pricing service. These quotations are not adjusted and are based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy. Refer to Note 12 for further disclosure. The interest rate floor is included in deferred costs and other assets, net on the consolidated balance sheet as of June 30, 2015.
Organization and Offering Costs
The Prior Advisor, or its affiliates, was entitled to receive reimbursement for costs paid on behalf of the Company in connection with the Offering. The Company was obligated to reimburse the Prior Advisor for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs do not exceed 15.0% of gross offering proceeds from the Total Primary Offering. The Prior Advisor initially expected reimbursable organization and offering costs would not exceed $15.0 million, or 1.5% of the total proceeds available to be raised from the Total Primary Offering. Based on gross proceeds raised of $1,072.9 million from the Total Primary Offering, the Company incurred reimbursable organization and offering costs, excluding selling commissions and dealer manager fees, of 1.0%, which was less than the 1.5% expected. The Company recorded organization and offering costs each period based upon an allocation determined by the expectation of total organization and offering costs to be reimbursed. Organization costs were recorded as an expense in general and administrative expenses in the consolidated statements of operations and offering costs were recorded as a reduction to equity.

15

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Income Taxes
The Company elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code beginning in its taxable year ended December 31, 2010. Accordingly, the Company will generally not be subject to U.S. federal income tax to the extent of its distributions to stockholders as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. The Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. The Company believes that all of the criteria to maintain the Company’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.
Current and deferred taxes are recorded on the portion of earnings (losses) recognized by the Company with respect to its interest in taxable REIT subsidiaries. Deferred income tax assets and liabilities are calculated based on temporary differences between the Company’s U.S. GAAP consolidated financial statements and the federal, state, local and foreign tax basis of assets and liabilities as of the consolidated balance sheet date. The Company evaluates the realizability of its deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in provision for income tax expense included in income tax benefit (expense) in the consolidated statements of operations.
The Company recorded an income tax expense of $0.8 million for the three months ended June 30, 2015 and 2014. The Company recorded an income tax expense of $1.5 million for the six months ended June 30, 2015 and 2014.
Other
Refer to Note 2 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for further disclosure of the Company’s significant accounting policies.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers.  The accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP.  In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year.  The effective date of the new revenue standard for the Company will be January 1, 2018. The Company is in the process of evaluating the impact, if any, of the update on its consolidated financial position, results of operations and financial statement disclosures.
In February 2015, the FASB issued updated guidance that changes the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.
In April 2015, the FASB issued an accounting update changing the presentation of financing costs in financial statements. Under the new guidance, an entity would present these costs in the balance sheet as a direct deduction from the related liability rather than as an asset.  Amortization of the costs would continue to be reported as interest expense.  The new guidance is effective for annual periods and interim periods beginning after December 15, 2015, with early adoption permitted. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

16

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

3.
Real Estate Debt Investments
The following table presents CRE debt investments as of June 30, 2015 (dollars in thousands):
 
 
 
 
 
 
 
 
 
Weighted Average
 
Floating
Rate as
% of
Principal
Amount
Asset Type:
Number
 
Principal
Amount (1)
 
Carrying
Value (2)
 
Allocation by Investment Type (3)
 
Fixed
Rate
 
Spread
over
LIBOR (4)
 
Total Unleveraged
Current
Yield
 
First mortgage loans
19
 
$
998,221

 
$
972,995

 
79.1
%
 
—

 
6.16
%
 
6.18
%
 
100.0
%
Mezzanine loans
6
 
149,639

 
131,336

 
11.9
%
 
10.10
%
 
13.56
%
 
13.32
%
 
92.0
%
Subordinate interests
1
 
34,661

 
34,661

 
2.7
%
 
13.11
%
 
—

 
13.24
%
 
—

Preferred equity interests (5)
1
 
80,175

 
80,788

 
6.3
%
 
10.00
%
 
—

 
10.00
%
 
—

Total/Weighted average
27
 
$
1,262,696

 
$
1,219,780

 
100.0
%
 
10.86
%
 
6.96
%
 
7.40
%
 
90.0
%
__________________________________________________________
(1)
Includes future funding commitments of $45.4 million.
(2)
Certain CRE debt investments serve as collateral for financing transactions including carrying value of $431.8 million for Securitization 2013-1 and $388.8 million for Term Loan Facilities (refer to Note 7). The remainder is unleveraged.
(3)
Based on principal amount.
(4)
Includes a fixed minimum LIBOR rate (“LIBOR floor”), as applicable. As of June 30, 2015, the Company had $926.0 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.64%.
(5)
Represents a preferred equity interest originated through a joint venture with affiliates of RXR Realty LLC (“RXR”). The Company’s proportionate interest of the loan is 90%, representing $72.8 million of the carrying value. The Company consolidates the loan and records RXR’s investment as a non-controlling interest.
The following table presents CRE debt investments as of December 31, 2014 (dollars in thousands):
 
 
 
 
 
 
 
 
 
Weighted Average
 
Floating
Rate as
% of
Principal
Amount
Asset Type:
Number
 
Principal
Amount (1)
 
Carrying
Value (2)
 
Allocation by Investment Type (3)
 
Fixed
Rate
 
Spread
over
LIBOR (4)
 
Total Unleveraged
Current
Yield
 
First mortgage loans
22
 
$
1,123,192

 
$
1,092,958

 
81.2
%
 
—

 
6.16
%
 
6.19
%
 
100.0
%
Mezzanine loans
6
 
149,669

 
123,011

 
10.8
%
 
10.10
%
 
13.95
%
 
13.66
%
 
92.0
%
Subordinate interests
1
 
33,250

 
33,250

 
2.4
%
 
13.11
%
 
—

 
13.24
%
 
—

Preferred equity interests (5)
1
 
78,044

 
78,706

 
5.6
%
 
10.00
%
 
—

 
10.00
%
 
—

Total/Weighted average
30
 
$
1,384,155

 
$
1,327,925

 
100.0
%
 
10.85
%
 
6.87
%
 
7.28
%
 
91.1
%
__________________________________________________________
(1)
Includes future funding commitments of $59.3 million.
(2)
Certain CRE debt investments serve as collateral for financing transactions including carrying value of $632.8 million for Securitization Financing Transactions (including $0.8 million of cash pending investment) and $385.7 million for Term Loan Facilities (refer to Note 7). The remainder is unleveraged.
(3)
Based on principal amount.
(4)
Includes a LIBOR floor, as applicable. As of December 31, 2014, the Company had $1,027.6 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.66%.
(5)
Represents a preferred equity interest originated through a joint venture with affiliates of RXR. The Company’s proportionate interest of the loan is 90%, representing $70.9 million of the carrying value. The Company consolidates the loan and records RXR’s investment as a non-controlling interest.


17

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following table presents maturities of CRE debt investments based on principal amount as of June 30, 2015 (dollars in thousands):
 
Initial
Maturity
 
Maturity
Including
Extensions (1)
July 1 to December 31, 2015
$
271,325

 
$
—

Years Ending December 31:
 
 
 
2016
263,300

 
68,000

2017
341,246

 
213,325

2018
—

 
353,300

2019
162,150

 
253,246

Thereafter
224,675

 
374,825

Total
$
1,262,696

 
$
1,262,696

__________________________________________________________
(1)
Assumes that all debt with extension options will qualify for extension at such maturity according to the conditions set forth in the governing documents.
As of June 30, 2015, the weighted average maturity, including extensions, of CRE debt investments was 4.3 years.
Credit Quality Monitoring
CRE debt investments are typically loans secured by direct senior priority liens on real estate properties or by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its debt investments at least quarterly and differentiates the relative credit quality principally based on: (i) whether the borrower is currently paying contractual debt service in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity. The Company categorizes a debt investment for which it expects to receive full payment of contractual principal and interest payments as “performing.” The Company will categorize a weaker credit quality debt investment that is currently performing, but for which it believes future collection of all or some portion of principal and interest is in doubt, into a category called “performing with a loan loss reserve.” The Company will categorize a weaker credit quality debt investment that is not performing, which the Company defines as a loan in maturity default and/or past due at least 90 days on its contractual debt service payments, as a non-performing loan (“NPL”). The Company’s definition of an NPL may differ from that of other companies that track NPLs.
As of June 30, 2015, the Company had one CRE debt investment that was not performing in accordance with the contractual terms. Subsequent to June 30, 2015, the loan repaid in full. For the six months ended June 30, 2015, no CRE debt investment contributed more than 10% of interest income.
4.
Operating Real Estate
The following table presents operating real estate, net as of June 30, 2015 and December 31, 2014 (dollars in thousands):
 
 
June 30, 2015
 
December 31,
 
 
(Unaudited)
 
2014
Land and improvements
 
$
45,446

 
$
43,504

Buildings and improvements
 
365,048

 
365,439

Furniture, fixtures and equipment
 
4,089

 
1,304

Subtotal
 
$
414,583

 
$
410,247

Less: Accumulated depreciation
 
(13,208
)
 
(6,900
)
Operating real estate, net
 
$
401,375

 
$
403,347


18

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following table presents the final allocation of the purchase price of the assets acquired and liabilities issued for two of the Company’s properties acquired in 2014 (dollars in thousands):
Assets:
 
 
Land and improvements
 
$
5,872

Buildings and improvements
 
34,306

Other assets acquired (1)
 
3,962

Total assets acquired
 
$
44,140

Liabilities:
 
 
Mortgage notes payable
 
$
28,286

Other liabilities assumed (2)
 
1,811

Total liabilities
 
30,097

Total NorthStar Real Estate Income Trust, Inc. stockholders’ equity
 
11,234

Non-controlling interests
 
2,809

Total equity
 
14,043

Total liabilities and equity
 
$
44,140

____________________________________________________________
(1)
Primarily includes furniture and fixtures, escrows and reserves, as applicable.
(2)
Primarily includes prepaid rent and accrued expenses.
5.
Investments in Unconsolidated Ventures
Investments in Private Equity Funds
The following is a description of investments in private equity funds that own PE Investments indirectly through unconsolidated ventures (“PE Investment I”) and (“PE Investment II”). The Company elected the fair value option for PE Investments. As a result, the Company records equity in earnings (losses) based on the change in fair value for its share of the projected future cash flow from one period to another. Both PE Investments are considered voting interest entities and are not consolidated by the Company due to the substantive participating rights of the partners in joint ventures that own the interests in the real estate private equity funds.
The Company evaluates whether disclosure of summarized financial statement information is required for any individually significant investment in unconsolidated ventures. The Company determined there were two significant unconsolidated joint ventures with respect to certain PE Investments as of June 30, 2015. Summarized financial data for such unconsolidated joint ventures for the three months ended March 31, 2015, which is the most recent financial information available from the underlying funds, included net investment income of $2.9 million, realized gains of $5.5 million and unrealized gains of $5.1 million. However, the Company records equity in earnings (losses) based on the change in fair value for its share of the projected cash flow from one period to another and not based on such summarized financial data.
Summary
The following tables summarize the Company’s PE Investments as of June 30, 2015 (dollars in millions):
PE Investment
 
Initial Closing Date
 
NAV Reference Date (1)
 
Number of Funds
 
Purchase Price
 
Expected Future Contributions (2)
PE Investment I
 
February 15, 2013
 
June 30, 2012
 
49
 
$
118.0

 
$
3

PE Investment II
 
July 3, 2013
 
September 30, 2012
 
24
 
75.7

 
1

Total
 
 
 
 
 
73
 
$
193.7

 
$
4

____________________________________________________________
(1)
Represents the net asset value (“NAV”) date on which the Company agreed to acquire the respective PE Investment.
(2)
Represents the estimated amount of expected future contributions to funds as of June 30, 2015.



19

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
 
Carrying Value
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
PE Investment
 
June 30, 2015
 
December 31, 2014
 
Equity in Earnings
 
Cash Distributions
 
Cash Contributions
 
Equity in Earnings
 
Cash Distributions
 
Cash Contributions
PE Investment I (1)
 
$
72.2

 
$
91.5

 
$
5.2

 
$
13.5

 
$
0.2

 
$
5.9

 
$
11.7

 
$
—

PE Investment II
 
48.9

 
49.6

 
2.9

 
11.1

 
9.2

 
2.8

 
5.5

 
—

Total
 
$
121.1

 
$
141.1

 
$
8.1

 
$
24.6

 
$
9.4

 
$
8.7

 
$
17.2

 
$
—

____________________________________________________________
(1)
For the three months ended June 30, 2015, the Company recorded an unrealized loss of $3.7 million related to PE Investment I, representing a partial reversal of an unrealized gain recorded in the fourth quarter 2014.
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
PE Investment
 
Equity in Earnings
 
Cash Distributions (1)
 
Cash Contributions
 
Equity in Earnings
 
Cash Distributions (1)
 
Cash Contributions
PE Investment I (1)
 
$
11.0

 
$
25.2

 
$
0.5

 
$
11.6

 
$
7.8

 
$
—

PE Investment II(2)
 
5.9

 
15.9

 
9.2

 
5.7

 
5.1

 
1.1

Total
 
$
16.9

 
$
41.1

 
$
9.7

 
$
17.3

 
$
12.9

 
$
1.1

___________________________________________________________
(1)
For the six months ended June 30, 2015, the Company recorded an unrealized loss of $5.6 million related to PE Investment I, representing a partial reversal of an unrealized gain recorded in the fourth quarter 2014.
(2)
Contributions for the six months ended June 30, 2015 represents a payment of the deferred purchase price for PE Investment II.
PE Investment I
In February 2013, the Company completed the initial closing (“PE I Initial Closing”) of PE Investment I which through a preferred investment owns a portfolio of limited partnership interests in real estate private equity funds managed by institutional-quality sponsors. Pursuant to the terms of the agreement, at the PE I Initial Closing, the full purchase price was funded, excluding future capital commitments. Accordingly, the Company funded $118.0 million and NorthStar Realty (together with the Company, the “NorthStar Entities”) funded $282.1 million. The NorthStar Entities have an aggregate ownership interest in PE Investment I of 51.0%, of which the Company owns 29.5% and NorthStar Realty owns 70.5%. Teachers Insurance and Annuity Association of America (the “Class B Partner”) contributed its interests in 49 funds subject to the transaction in exchange for all of the Class B partnership interests in PE Investment I.
PE Investment I provides for all cash distributions on a priority basis to the NorthStar Entities as follows: (i) first, 85.0% to the NorthStar Entities and 15.0% to the Class B Partner until the NorthStar Entities receive a 1.5x multiple on all of their invested capital, including amounts funded in connection with future capital commitments; (ii) second, 15.0% to the NorthStar Entities and 85.0% to the Class B Partner until the Class B Partner receives a return of its then remaining June 30, 2012 capital; and (iii) third, 51.0% to the NorthStar Entities and 49.0% to the Class B Partner. All amounts paid to and received by the NorthStar Entities are based on each partner’s proportionate interest.
PE Investment II
In June 2013, the Company, NorthStar Realty and funds managed by Goldman Sachs Asset Management (“Vintage Funds”) (each a “Partner”) formed joint ventures and entered into an agreement with Common Pension Fund E, a common trust fund created under New Jersey law (“PE II Seller”), to acquire a portfolio of limited partnership interests in 24 real estate private equity funds managed by institutional-quality sponsors. The aggregate reported NAV acquired was $910.0 million as of September 30, 2012. The Company, NorthStar Realty and the Vintage Funds each have an ownership interest in PE Investment II of 15.0%, 70.0% and 15.0%, respectively. All amounts paid and received are based on each Partner’s proportionate interest.
PE Investment II paid $504.8 million to PE II Seller for all of the fund interests, or 55.0% of the September 30, 2012 NAV (the “Initial Amount”), and will pay the remaining $411.4 million, or 45.0% of the September 30, 2012 NAV (the “Deferred Amount”), by the last day of the fiscal quarter after the four year anniversary following the closing date of each fund interest. As of June 30, 2015, the Company’s share of the Deferred Amount was $52.1 million. In April 2015, PE Investment II paid $61.3 million of the Deferred Amount to PE II Seller, of which the Company’s share was $9.2 million. The Company funded all of its proportionate share of the Initial Amount at the initial closing on July 3, 2013. The Deferred Amount is a liability of PE Investment II. Each Partner, directly or indirectly, guaranteed its proportionate interest of the Deferred Amount. The Company determined there was an immaterial amount of fair value related to the guarantee.
On March 31st of each year, commencing on March 31, 2015 and for a period of two years thereafter, PE Investment II will pay, within 10 business days of March 31st, an amount necessary to reduce the Deferred Amount by the greater of 15.0% of the

20

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

then outstanding Deferred Amount or 15.0% of the aggregate distributions received by PE Investment II during the preceding 12 month period.
On the last day of the fiscal quarter after the four-year anniversary of the applicable closing date of each fund interest, PE Investment II will be required to pay to PE II Seller the then outstanding unpaid Deferred Amount. PE Investment II will receive 100% of all distributions following the payment of the Deferred Amount.
Other
In June 2014, the Company entered into a joint venture with affiliates of RXR to originate a mezzanine loan. The mezzanine loan had a principal amount of $183.7 million, including future funding commitments. The joint venture owns 50% of the mezzanine loan, of which the Company’s interest in the joint venture is 78.0%. As of June 30, 2015, the carrying value of the investment was $57.7 million. For the three and six months ended June 30, 2015, the Company recognized $1.4 million and $2.9 million of equity in earnings, respectively. For the three and six months ended June 30, 2014, the Company recognized $0.2 million of equity in earnings.
In April 2013, in connection with a loan on a hotel property in New York, the Company and NorthStar Realty acquired an aggregate 35.0% interest in the Row NYC (formerly the Milford) hotel and retail component, of which the Company owns 35.0% and NorthStar Realty owns 65.0%. There was no carrying value as of June 30, 2015 and December 31, 2014. For the six months ended June 30, 2014, the Company recognized $0.6 million of equity in earnings.
6.
Real Estate Securities, Available for Sale
CRE securities are comprised of CMBS backed by a pool of CRE loans which are typically well-diversified by type and geography. The following table presents CMBS investments (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average
 
 
 
Principal
Amount (1)
 
Amortized
Cost
 
Cumulative Unrealized
on Investments
Fair
Value
 
 
 
Unleveraged
Current
Yield
As of Date:
Number
 
Gain
 
(Loss)
 
 
Coupon (2)
 
June 30, 2015
7
 
$
100,542

 
$
51,816

 
$
29,050

 
$
(1,128
)
 
$
79,738

 
4.49
%
 
9.12
%
December 31, 2014
7
 
100,542

 
51,222

 
29,264

 
(850
)
 
79,636

 
4.63
%
 
9.40
%
_______________________________________________________________
(1)
Certain CRE securities serve as collateral for financing transactions including carrying value of $17.0 million for the CMBS Facilities (refer to Note 7). The remainder is unleveraged.
(2)
All CMBS are fixed rate.
The Company recorded unrealized gains (losses) in OCI for the three months ended June 30, 2015 and 2014 of $(0.3) million and $1.7 million, respectively. The Company recorded unrealized gains (losses) in OCI for the six months ended June 30, 2015 and 2014 of $(0.5) million and $3.4 million, respectively. As of June 30, 2015, the Company held two securities with an aggregate carrying value of $17.0 million with an unrealized loss of $1.1 million, both of which were in an unrealized loss position for a period of greater than 12 months. Based on management’s quarterly evaluation, no OTTI was identified related to these securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of its amortized cost basis, which may be at maturity.
As of June 30, 2015, the weighted average contractual maturity of CRE securities was 32 years with an expected maturity of 6.3 years.

21

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

7.
Borrowings
The following table presents borrowings as of June 30, 2015 and December 31, 2014 (dollars in thousands):
 
 
 
 
 
 
 
June 30, 2015
 
December 31, 2014
 
Recourse vs. Non-Recourse
 
Final
Maturity
 
Contractual
Interest Rate (1)
 
Principal
Amount
 
Carrying
Value
 
Principal
Amount
 
Carrying
Value
Securitization bonds payable
 
 
 
 
 
 
 
 
 
 
 
 
 
Securitization 2013-1
Non-recourse
 
Aug-29
 
LIBOR + 2.97%
 
$
283,642

 
$
283,409

 
$
367,363

 
$
367,011

Securitization 2012-1
N/A
 
N/A
 
N/A
 
—

 
—

 
46,522

 
46,499

Subtotal securitization bonds payable
 
 
 
 
 
 
283,642

 
283,409

 
413,885

 
413,510

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage notes payable
 
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily 1
Non-recourse
 
Dec-23
 
4.84%
 
43,500

 
43,500

 
43,500

 
43,500

Multifamily 2
Non-recourse
 
Dec-23
 
4.94%
 
43,000

 
43,000

 
43,000

 
43,000

Office 1
Non-recourse
 
Oct-24
 
4.47%
 
108,850

 
108,850

 
108,850

 
108,850

Office 2
Non-recourse
 
Jan-25
 
4.30%
 
77,700

 
77,700

 
77,700

 
77,700

Student housing 1
Non-recourse
 
Jan-24
 
5.15%
 
16,000

 
16,000

 
16,000

 
16,000

Student housing 2 (2)
Non-recourse
 
Dec-20
 
5.27%
 
12,728

 
13,055

 
12,812

 
12,812

Student housing 3
Non-recourse
 
Nov-16
 
5.84%
 
16,200

 
16,534

 
16,200

 
16,200

Subtotal mortgage notes payable
 
 
 
 
 
 
317,978

 
318,639

 
318,062

 
318,062

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan Facility 2
Partial Recourse (3)
 
Oct-19 (4)
 
2.72% (5)
 
85,100

 
85,100

 
85,100

 
85,100

Loan Facility 3
Non-recourse
 
Jul-15 (6)
 
N/A (7)
 
—

 
—

 
—

 
—

Loan Facility 4
Partial Recourse (8)
 
Mar-18 (9)
 
2.72% (10)
 
172,698

 
172,698

 
172,698

 
172,698

CMBS Facilities
Recourse
 
(11)
 
1.49%
 
11,685

 
11,685

 
11,685

 
11,685

Subtotal credit facilities
 
 
 
 
 
 
269,483

 
269,483

 
269,483

 
269,483

Total
 
 
 
 
 
 
$
871,103

 
$
871,531

 
$
1,001,430

 
$
1,001,055

_____________________________________________________
(1)
Represents the weighted average as of June 30, 2015, as applicable.
(2)
Represents two separate senior mortgage notes with a weighted average maturity of December 1, 2020 and weighted average interest rate of 5.27%.
(3)
Recourse solely with respect to 25.0% of the repurchase price for purchased assets with a lender debt yield equal to or greater than 10% at the time of financing plus 100% of the repurchase price for purchased assets with a lender debt yield less than 10% at the time of financing.
(4)
The next maturity date is October 18, 2016, with three, one-year extensions available at the option of the Company, which may be exercised upon the satisfaction of certain customary conditions set forth in the governing documents.
(5)
The contractual interest rate depends upon asset type and characteristic and ranges from one-month LIBOR plus 2.0% to 4.0%.
(6)
The initial maturity date is July 30, 2015. The Company did not elect to exercise its extension option, as set forth in the governing documents.
(7)
The contractual interest rate depends upon asset type and characteristic and ranges from one-month LIBOR plus 3.95% to 5.95%.
(8)
Recourse solely with respect to the greater of: (i) 25.0% of the financed amount of stabilized loans plus the financed amount of transitional loans; or (ii) the lesser of $25.0 million or the aggregate financed amount of all loans.
(9)
The next maturity date is March 11, 2016, with two, one-year extensions available at the option of the Company, which may be exercised upon the satisfaction of certain customary conditions set forth in the governing documents.
(10)
The contractual interest rate depends upon asset type and characteristics and ranges from one-month LIBOR plus 2.5% to 3.0%.
(11)
The maturity dates on the CMBS Facilities are dependent upon asset type and will typically range from two to three months.

22

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The following table presents scheduled principal on borrowings, based on fully extended maturity as of June 30, 2015 (dollars in thousands):
    
 
Total
 
Securitization
Bonds Payable
 
Mortgage Notes Payable
 
Credit
Facilities
July 1 to December 31, 2015
$
11,685

 
$
—

 
$
—

 
$
11,685

Years Ending December 31:
 
 
 
 
 
 
 
2016
16,200

 
—

 
16,200

 
—

2017
—

 
—

 
—

 
—

2018
172,698

 
—

 
—

 
172,698

2019
—

 
—

 
—

 
—

Thereafter
670,520

 
283,642

 
301,778

 
85,100

Total
$
871,103

 
$
283,642

 
$
317,978

 
$
269,483

Securitization Financing Transactions
The Company entered into two securitization financing transactions collectively referred to as Securitization Financing Transactions, collateralized by CRE debt investments originated by the Company and NorthStar Realty.
Securitization 2013-1
In August 2013, the Company entered into a $531.5 million securitization financing transaction (“Securitization 2013-1”). The Company initially contributed eight CRE debt investments with a $346.1 million aggregate principal amount. Subsequent to the closing of Securitization 2013-1, the Company contributed four additional CRE debt investments with a $105.5 million aggregate principal amount. NorthStar Realty transferred three senior loans with an aggregate principal amount of $79.1 million at cost to Securitization 2013-1. NorthStar Realty did not retain any interest in such senior loans. A total of $382.7 million of permanent, non-recourse, non-mark-to-market investment-grade securitization bonds were issued, representing an advance rate of 72.0% with a current weighted average coupon of LIBOR plus 2.97%. The Company retained all of the below investment-grade securitization bonds, which the Company refers to as the Company’s retained equity interest in Securitization 2013-1. The Company used the proceeds to repay $222.7 million of borrowings on its term loan facilities. The collateral is used to service the interest payments on the investment-grade securitization bonds and the Company receives the excess cash flow on its retained equity interest. Securitization 2013-1 is considered a voting interest entity and since the Company has all of the controlling financial interest in Securitization 2013-1, the entity is consolidated by the Company.
Securitization 2012-1
In November 2012, the Company entered into a $351.4 million securitization financing transaction (“Securitization 2012-1”) collateralized by CRE debt investments originated by the Company and NorthStar Realty. The Company contributed nine CRE debt investments with a $199.2 million aggregate principal amount and retained an equity interest of $70.0 million. A total of $227.5 million of permanent, non-recourse, non-mark-to-market investment-grade securitization bonds were issued, of which $129.5 million financed the CRE debt investments contributed by the Company, representing an advance rate of 65.0%. The Company used the proceeds to repay $117.7 million of borrowings on its term loan facilities. In January 2015, all of the original bonds were repaid in full.
Term Loan Facilities
In February 2012, a subsidiary of the Company entered into a master repurchase and securities contract (“Loan Facility 1”) of $100.0 million to finance CRE first mortgage loans. In connection with Loan Facility 1, the Company, together with the Operating Partnership, entered into a guaranty agreement, under which the Company and the Operating Partnership guarantee certain of the obligations under Loan Facility 1. The Company terminated Loan Facility 1 in January 2014.
In July 2012, a subsidiary of the Company entered into a master repurchase agreement (“Loan Facility 2”) of $50.0 million to finance first mortgage loans and senior loan participations secured by commercial real estate. Loan Facility 2 was increased to $100.0 million in November 2012 and to $150.0 million in April 2013. In connection with Loan Facility 2, the Company agreed to guarantee certain obligations under Loan Facility 2 if the Company or an affiliate of the Company engages in certain customary bad acts. Loan Facility 2 and related agreements contain representations, warranties, covenants, conditions

23

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

precedent to funding, events of default and indemnities that are customary for agreements of this type. More specifically, the borrowing subsidiary of the Company must maintain at least $3.8 million and a maximum of $22.5 million in unrestricted cash, at all times during the term of Loan Facility 2.
In July 2012, a subsidiary of the Company entered into a credit and security agreement (“Loan Facility 3”) of $40.0 million on a non-recourse basis, subject to certain exceptions, to finance first mortgage loans and senior loan participations secured by commercial real estate. In connection with Loan Facility 3, the Operating Partnership agreed to guarantee interest payments and the customary obligations under Loan Facility 3 if either the Company or its affiliates engage in certain customary bad acts. In addition, the Operating Partnership pledged its interests in the Company’s borrowing subsidiary as collateral. Loan Facility 3 and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, the Operating Partnership must maintain at least $3.8 million and as much as $7.5 million in unrestricted cash or other eligible investments at all times during the term of Loan Facility 3. As of July 2015, the Company did not elect to exercise its extension option, as set forth in the governing documents.
In March 2013, a subsidiary of the Company entered into a master repurchase agreement (“Loan Facility 4”) of $200.0 million to finance first mortgage loans and senior interests secured by commercial real estate. In connection with Loan Facility 4, the Company and the Operating Partnership entered into a guaranty agreement under which the Company and the Operating Partnership guaranty certain of the obligations under Loan Facility 4. Loan Facility 4 and related agreements contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. More specifically, the Company must maintain at least $20.0 million in unrestricted cash or cash equivalents at all times during the term of Loan Facility 4. In addition, the Company has agreed to guarantee certain customary obligations under Loan Facility 4 if the Company or an affiliate of the Company engage in certain customary bad acts.
The loan facilities are collectively herein referred to as Term Loan Facilities. As of June 30, 2015, the Company had $388.8 million carrying value of CRE debt investments, financed with $257.8 million under two Term Loan Facilities.
The Term Loan Facilities act as revolving loan facilities that can be paid down as assets are repaid or sold and re-drawn upon for new investments. As of June 30, 2015, the Company was in compliance with all of its financial covenants.
CMBS Facilities
In September 2012, the Company entered into two master repurchase agreements (“CMBS Facilities”) to finance CMBS investments. The CMBS Facilities contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. As of June 30, 2015, the Company had $17.0 million carrying value of CRE securities, financed with $11.7 million under its CMBS Facilities.
8.
Related Party Arrangements
Advisor
In connection with the completion of NorthStar Realty’s spin-off of its asset management business into the Sponsor, on June 30, 2014, the Company entered into a new advisory agreement with the Advisor, an affiliate of the Sponsor, on terms substantially similar to those set forth in the prior advisory agreement, and terminated the advisory agreement with the Prior Advisor. For periods prior to June 30, 2014, the information below regarding fees and reimbursements incurred and accrued but not yet paid relates to the Prior Advisor.
Subject to certain restrictions and limitations, the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying, originating, acquiring and asset managing investments on behalf of the Company. The Advisor may delegate certain of its obligations to affiliated entities, which may be organized under the laws of the United States or foreign jurisdictions. References to the Advisor include the Advisor and any such affiliated entities. For such services, to the extent permitted by law and regulations, the Advisor receives fees and reimbursement from the Company. Below is a description and table of the fees and reimbursements incurred to the Advisor.

24

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Fees to Advisor
Asset Management Fee
The Advisor, or its affiliates, receives a monthly asset management fee equal to one-twelfth of 1.25% of the sum of the amount funded or allocated for CRE investments, including expenses and any financing attributable to such investments, less any principal received on debt and securities investments (or the proportionate share thereof in the case of an investment made through a joint venture).
Acquisition Fee
The Advisor, or its affiliates, also receives an acquisition fee equal to 1.0% of the amount funded or allocated by the Company to originate or acquire investments, including acquisition costs and any financing attributable to such investments (or the proportionate share thereof in the case of an investment made through a joint venture). An acquisition fee paid to the Advisor related to the origination or acquisition of CRE debt investments is included in CRE debt investments, net on the consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method. An acquisition fee incurred related to an equity investment will generally be expensed as incurred. An acquisition fee paid to the Advisor related to the acquisition of an equity or debt investment in an unconsolidated joint venture is included in investments in unconsolidated ventures on the consolidated balance sheets.
Disposition Fee
For substantial assistance in connection with the sale of investments and based on the services provided, the Advisor, or its affiliates, receives a disposition fee of 1.0% of the contract sales price of each CRE investment sold. The Company does not pay a disposition fee upon the maturity, prepayment, workout, modification or extension of a CRE debt investment unless there is a corresponding fee paid by the borrower, in which case the disposition fee is the lesser of: (i) 1.0% of the principal amount of the CRE debt 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 CRE debt investment, the Company will pay a disposition fee upon the sale of such property. A disposition fee from the sale of an investment is generally expensed and included in asset management and other fees - related party in the Company’s consolidated statements of operations. A disposition fee for a CRE debt investment incurred in a transaction other than a sale is included in CRE debt investments, net on the consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method.
Reimbursements to Advisor
Operating Costs
The Advisor, or its affiliates, is entitled to receive reimbursement for direct and indirect operating costs incurred by the Advisor in connection with administrative services provided to the Company. The Advisor allocates, in good faith, indirect costs to the Company related to the Advisor’s and its affiliates’ employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the advisory agreement with the Advisor. The indirect costs include the Company’s allocable share of the Advisor’s and its affiliates’ compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing the Company’s affairs, based upon the percentage of time devoted by such personnel to the Company’s affairs. The indirect costs also include rental and occupancy, technology, office supplies and other general and administrative costs and expenses. However, there is no reimbursement for personnel costs related to executive officers and other personnel involved in activities for which the Advisor receives an acquisition fee or a disposition fee. The Advisor allocates these costs to us relative to its and its affiliates’ other managed companies in good faith and has reviewed the allocation with the Company’s board of directors, including its independent directors. The Advisor will update the board of directors on a quarterly basis of any material changes to the expense allocation and will provide a detailed review to the board of directors, at least annually, and as otherwise requested by the board of directors. The Company reimburses the Advisor quarterly for operating costs (including the asset management fee) based on a calculation for the four preceding fiscal quarters not to exceed the greater of: (i) 2.0% of its average invested assets; or (ii) 25.0% of its net income determined without reduction for any additions to reserves for depreciation, loan losses or other similar non-cash reserves and excluding any gain from the sale of 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 Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. The Company calculates the expense reimbursement quarterly based upon the trailing twelve-month period.

25

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Organization and Offering Costs
The Prior Advisor, or its affiliates, was entitled to receive reimbursement for organization and offering costs paid on behalf of the Company in connection with the Offering. The Company was obligated to reimburse the Prior Advisor, or its affiliates, as applicable, for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs did not exceed 15.0% of gross proceeds from the Primary Offering. The Prior Advisor initially expected cumulative organization and offering costs, excluding selling commissions and dealer manager fees, would not exceed $15.0 million, or 1.5% of the proceeds expected to be raised from the Total Primary Offering. Based on gross proceeds raised of $1,072.9 million from the Total Primary Offering, the Company incurred reimbursable organization and offering costs, excluding selling commissions and dealer manager fees, of 1.0%, which was less than the 1.5% expected. The Company’s independent directors did not determine that any of the organization and offering costs were unfair or commercially unreasonable. Total underwriting compensation through the completion of the Total Primary Offering, including selling commissions, the dealer manager fee and amounts reimbursed to participating broker-dealers and investment advisors, did not exceed the 10.0% of gross Total Primary Offering proceeds limitation prescribed by the Financial Industry Regulatory Authority, Inc.
Dealer Manager
Selling Commissions and Dealer Manager Fees
Pursuant to the dealer manager agreement, the Company paid NorthStar Securities, LLC (the “Dealer Manager”), an affiliate of the Sponsor, selling commissions of up to 7.0% of gross proceeds from the Total Primary Offering, all of which were reallowed to participating broker-dealers. In addition, the Company paid the Dealer Manager a dealer manager fee of up to 3.0% of gross proceeds from the Total Primary Offering, a portion of which was reallowed to participating broker-dealers and paid to certain employees of the Dealer Manager. No selling commissions or dealer manager fees are paid for sales pursuant to the DRP.
Summary of Fees and Reimbursements
The following table presents the fees and reimbursements incurred to the Advisor for the three and six months ended June 30, 2015 and 2014 (dollars in thousands):
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Type of Fee or Reimbursement
 
Financial Statement Location
 
2015
 
2014
 
2015
 
2014
Fees to Advisor
 
 
 
 
 
 
 
 
 
 
Asset management
 
Asset management and other fees- related party
 
$
6,031

 
$
5,379

 
$
12,397

 
$
10,123

Acquisition (1)
 
Real estate debt investments, net / Investments in unconsolidated ventures / Asset management and other fees- related party
 
—

 
3,369

 
—

 
3,489

Disposition (1)
 
Real estate debt investments, net / Asset management and other fees - related party
 
220

 
632

 
1,236

 
807

Reimbursements to Advisor
 
 
 
 
 
 
 
 
 
 
Operating costs (2)
 
General and administrative expenses
 
3,624

 
3,007

 
6,378

 
5,262

___________________________________
(1)
Acquisition/disposition fees incurred to the Advisor related to CRE debt investments are generally offset by origination/exit fees paid to the Company by borrowers if such fees are required from the borrower. Acquisition fees related to equity investments are included in asset management and other fees - related party in the consolidated statements of operations. Acquisition fees related to investments in unconsolidated joint ventures are included in investments in unconsolidated ventures on the consolidated balance sheets. The Advisor may determine to defer fees or seek reimbursement. From inception through June 30, 2015, the Advisor deferred $0.5 million of acquisition fees and $0.4 million of disposition fees related to CRE securities.
(2)
As of June 30, 2015, the Advisor has incurred unreimbursed operating costs on behalf of the Company of $7.0 million, that remain eligible to allocate to the Company.
NorthStar Realty Purchase of Common Stock
Pursuant to the Second Amended and Restated Distribution Support Agreement, as amended (the “Distribution Support Agreement”), NorthStar Realty committed to purchase up to an aggregate of $10.0 million in shares of the Company’s common

26

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

stock at a price of $9.00 per share if cash distributions exceed modified funds from operations (as computed in accordance with the definition established by the Investment Program Association and adjusted for certain items) to provide additional funds to support distributions to stockholders. From inception through the expiration of the Distribution Support Agreement in July 2013, NorthStar Realty purchased 507,980 shares of the Company’s common stock for $4.6 million under such commitment.
Securitization 2012-1
The Company entered into an agreement with NorthStar Realty that provided that both the Company and NorthStar Realty receive the economic benefit and bear the economic risk associated with the investments the Company and NorthStar Realty each contributed into Securitization 2012-1. In January 2015, all of the original bonds were repaid in full.
Securitization 2013-1
In August 2013, the Company closed Securitization 2013-1. The Company initially contributed eight CRE debt investments with a $346.1 million aggregate principal amount. NorthStar Realty transferred three senior loans with an aggregate principal amount of $79.1 million at cost to Securitization 2013-1. NorthStar Realty did not retain any interest in such senior loans. An affiliate of the Sponsor was named special servicer of Securitization 2013-1.
PE Investments
In connection with PE Investments, the Company guaranteed all of its funding obligations that may be due and owed under the governing documents indirectly through an indemnification with NorthStar Realty, which in turn guaranteed the obligations directly to the PE Investment entities. The Company and NorthStar Realty each agreed to indemnify the other proportionately for any losses that may arise in connection with the funding and other obligations as set forth in the governing documents in the case of a joint default by the Company and NorthStar Realty. The Company and NorthStar Realty further agreed to indemnify each other for all of the losses that may arise as a result of a default that was solely caused by the Company or NorthStar Realty, as the case may be.
PE Investment I
In connection with PE Investment I, the Company assumed the rights to subscribe to 29.5% of PE Investment I from NorthStar Realty. The Company and NorthStar Realty contributed cash of $400.1 million, of which the Company and NorthStar Realty contributed $118.0 million and $282.1 million, respectively.
9.
Equity-Based Compensation
The Company adopted a long-term incentive plan, as amended (the “Plan”), which it may use to attract and retain qualified officers, directors, employees and consultants, as well as an independent directors compensation plan, which is a component of the Plan. Pursuant to the Plan, as of June 30, 2015, the Company’s independent directors were granted a total of 65,970 shares of restricted common stock for an aggregate $660,000. The restricted stock granted prior to 2013 generally vests quarterly over four years and the restricted stock granted in 2013, 2014 and 2015 generally vests quarterly over two years. However, the stock will become fully vested on the earlier occurrence of: (i) the termination of the independent director’s service as a director due to his or her death or disability; or (ii) a change in control of the Company.
The Company recognized equity-based compensation expense of $32,977 and $31,181 for the three months ended June 30, 2015 and 2014, respectively. The Company recognized equity-based compensation expense of $103,780 and $59,868 for the six months ended June 30, 2015 and 2014, respectively, related to the issuance of restricted stock to the independent directors, which was recorded in general and administrative expenses in the consolidated statements of operations.
10.
Stockholders’ Equity
Common Stock
The Company’s Total Primary Offering was completed on July 1, 2013. From inception through the completion of the Total Primary Offering, the Company issued 107.6 million shares of common stock generating gross proceeds from the Total Primary Offering of $1,072.9 million.

27

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Distribution Reinvestment Plan
The Company 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 Company’s common stock in lieu of receiving cash distributions. The initial purchase price per share pursuant to the DRP was $9.50. On December 16, 2014, the Company announced that the board of directors, including all of its independent directors, approved and established an estimated value per share of the Company’s common stock. The estimated value per share is based upon the estimated value of the Company’s assets less the estimated value of the Company’s liabilities as of October 31, 2014 (the “Valuation Date”).
Effective January 1, 2015, shares issued pursuant to the DRP are priced at 95.0% of this estimated value per share, or $9.52. The Company expects that the next estimated value per share will be based upon assets and liabilities as of December 31, 2015.
No selling commissions or dealer manager fees are paid on shares issued pursuant to the DRP. The board of directors of the Company may amend, suspend or terminate the DRP for any reason upon ten-days’ notice to participants.
In April 2013, the board of directors of the Company authorized the reallocation of shares available pursuant to the DRP to the Primary Offering. The Company continues to offer shares pursuant to the DRP beyond the Total Primary Offering. For the six months ended June 30, 2015, the Company issued 2.3 million shares totaling $21.7 million of proceeds pursuant to the DRP. For the year ended December 31, 2014, the Company issued 4.5 million shares totaling $42.7 million of proceeds pursuant to the DRP. From inception through June 30, 2015, the Company issued 11.5 million shares totaling $108.8 million of proceeds pursuant to the DRP.
Distributions
Distributions to stockholders are declared quarterly by the board of directors of the Company and are paid monthly based on a daily amount of $0.002191781 per share, which is equivalent to an annual distribution of $0.80 per share of the Company’s common stock. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution has accrued.
The following table presents distributions declared for the six months ended June 30, 2015 (dollars in thousands):
 
Distributions(1)
Period
Cash
 
DRP
 
Total
January
$
4,328

 
$
3,705

 
$
8,033

February
3,932

 
3,332

 
7,264

March
4,380

 
3,683

 
8,063

April
4,256

 
3,574

 
7,830

May
4,389

 
3,709

 
8,098

June
4,265

 
3,599

 
7,864

Total
$
25,550

 
$
21,602

 
$
47,152

_________________________________________________
(1)
Represents distributions declared for the period, even though such distributions are actually paid to stockholders the month following such period.
Share Repurchase Program
The Company adopted a share repurchase program that may enable stockholders to sell their shares to the Company in limited circumstances. On June 25, 2015, the Board amended and restated the share repurchase program (as amended, the “Share Repurchase Program”), which became effective ten days following written notice to participants. The Company may not repurchase shares unless a stockholder has held shares for one year. However, the Company may repurchase shares held less than one year in connection with a stockholder’s death or qualifying disability. The Company will repurchase shares within two years of such death or qualifying disability of a stockholder at the higher of the price paid for the shares, as adjusted for any stock dividends, combinations, splits, recapitalizations or any similar transaction with respect to the shares of common stock, or the Company’s estimated value per share. A qualifying disability is a disability as such term is defined in Section 72(m)(7) of the Internal Revenue Code that arises after the purchase of the shares requested to be repurchased. The Company is not obligated to repurchase shares under the Share Repurchase Program. Except in the case of death or qualifying disability (as described above), the price paid for shares redeemed under the Share Repurchase Program for requests received after January 1, 2015 will be 95% of the estimated value per share as of the Valuation Date until the Company updates its estimated value per

28

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

share at which time such purchase price will be 95% of the updated estimated value per share. The Company may amend, suspend or terminate the Share Repurchase Program at its discretion at any time, provided that any amendment that adversely affects the rights or obligations of a participant will take effect upon 10 days’ prior written notice (or 10 business days’ prior written notice if related to a change in the number of shares that can be repurchased in a calendar year). For the six months ended June 30, 2015, the Company repurchased 0.5 million shares of common stock for a total of $5.2 million or a weighted average price of $9.65 per share. For the year ended December 31, 2014, the Company repurchased 1.2 million shares of common stock for a total of $11.5 million or a weighted average price of $9.61 per share. The Company funds repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from its DRP. As of June 30, 2015, there were no unfulfilled repurchase requests.
11.
Non-controlling Interests
Operating Partnership
Non-controlling interests include the aggregate limited partnership interests in the Operating Partnership held by limited partners, other than the Company. Income (loss) attributable to the non-controlling interests is based on the limited partners’ ownership percentage of the Operating Partnership. Income (loss) allocated to the Operating Partnership non-controlling interests for the three and six months ended June 30, 2015 and 2014 was an immaterial amount.
Other
Other non-controlling interests represent third-party equity interests in ventures that are consolidated with the Company’s financial statements. Net income (loss) attributable to the other non-controlling interests for the three and six months ended June 30, 2015 was income of $0.3 million. Net income (loss) attributable to other non-controlling interests for the three and six months ended June 30, 2014 was a loss of $0.2 million.
12.
Fair Value
Fair Value Measurement
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1.
Quoted prices for identical assets or liabilities in an active market.
Level 2.
Financial assets and liabilities whose values are based on the following:
a)
Quoted prices for similar assets or liabilities in active markets.
b)
Quoted prices for identical or similar assets or liabilities in non-active markets.
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
Level 3.
Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
Determination of Fair Value
The following is a description of the valuation techniques used to measure fair value of assets accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.

29

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Investments in Private Equity Funds
The Company accounts for PE Investments at fair value which is determined based on a valuation model using assumptions for the timing and amount of expected future cash flow for income and realization events for the underlying assets in the funds and discount rate. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 of the fair value hierarchy. The Company is not using the NAV (practical expedient) of the underlying funds for purposes of determining fair value.
Real Estate Securities
CRE securities are generally valued using a third-party pricing service or broker quotations. These quotations are not adjusted and are based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy. Certain CRE securities may be valued based on a single broker quote or an internal price which may have less observable pricing, and as such, would be classified as Level 3 of the fair value hierarchy. Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as its knowledge of and experience in the market.
Fair Value Hierarchy
Financial assets recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table presents financial assets that were accounted for at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 by level within the fair value hierarchy (dollars in thousands):
 
June 30, 2015
 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in private equity funds, at fair value
$
—

 
$
—

 
$
121,056

 
$
121,056

 
$
—

 
$
—

 
$
141,091

 
$
141,091

Real estate securities, available for sale
—

 
79,738

 
—

 
79,738

 
—

 
79,636

 
—

 
79,636

The following table presents additional information about PE Investments which are measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 for which the Company has used Level 3 inputs to determine fair value (dollars in thousands):
 
Six Months Ended
 
Year Ended
 
June 30, 2015
 
December 31, 2014
Beginning balance
$
141,091

 
$
156,616

Purchases/contributions
9,700

 
1,766

Distributions
(41,092
)
 
(65,490
)
Equity in earnings (1)
16,943

 
34,549

Unrealized gain (loss) (2)
(5,586
)
 
13,650

Ending balance
$
121,056

 
$
141,091

__________________________________________________________
(1)
Excludes $1.8 million in current and deferred income tax expense for the year ended December 31, 2014.
(2)
Excludes $1.9 million in deferred income tax expense for the year ended December 31, 2014.
For the six months ended June 30, 2015, the Company used discounted cash flow models to quantify Level 3 fair value measurements on a recurring basis. The key unobservable inputs used in this analysis included discount rates ranging from 19% to 25% and includes timing and amount of expected future cash flow.
As of June 30, 2015 and December 31, 2014, the Company had no financial assets and liabilities that were accounted for at fair value on a non-recurring basis.
For the three and six months ended June 30, 2015, the Company recorded an unrealized loss of $3.7 million and $5.6 million, respectively, for financial assets for which the fair value option was elected. For the three and six months ended June 30, 2014, the Company did not recognize any unrealized gains (losses) for financial assets for which the fair value option was elected. These amounts, when incurred, are recorded as unrealized gain (loss) on investments and other in the consolidated statements of operations.

30

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Fair Value Option
The Company has historically elected not to apply the fair value option for the financial assets and liabilities existing at the time of adoption or at the time the Company recognizes the eligible item for the purpose of consistent accounting application. The Company may elect the fair value option for certain of its financial assets or liabilities due to the nature of the instrument. In the case of PE Investments, the Company elected the fair value option because management believes it is a more useful presentation for such investments. The Company determined recording the PE Investments based on the change in fair value of projected future cash flow from one period to another better represents the underlying economics of the respective investment.
Fair Value of Financial Instruments
In addition to the above disclosures regarding financial assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.
The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of June 30, 2015 and December 31, 2014 (dollars in thousands):
 
June 30, 2015
 
December 31, 2014
 
Principal
Amount
 
Carrying
Value
 
Fair
Value
 
Principal
Amount
 
Carrying
Value
 
Fair
Value
Financial assets: (1)
 
 
 
 
 
 
 
 
 
 
 
Real estate debt investments, net
$
1,217,310

(2) 
$
1,219,780

 
$
1,281,738

 
$
1,324,810

(2) 
$
1,327,925

 
$
1,389,365

Real estate securities, available for sale (3)
100,542

 
79,738

 
79,738

 
100,542

 
79,636

 
79,636

Financial liabilities: (1)

 
 
 
 
 
 
 
 
 
 
Securitization bonds payable
$
283,642

 
$
283,409

 
$
284,652

 
$
413,885

 
$
413,510

 
$
415,284

Mortgage notes payable
317,978

 
318,639

 
318,497

 
318,062

 
318,062

 
319,125

Credit facilities
269,483

 
269,483

 
269,483

 
269,483

 
269,483

 
269,483

______________________________________________
(1)
The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.
(2)
As of June 30, 2015 and December 31, 2014, excludes future funding commitments of $45.4 million and $59.3 million, respectively.
(3)
Refer to “Determination of Fair Value” above for disclosure of methodologies used to determine fair value.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of the reporting date. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
Real Estate Debt Investments
For CRE debt investments, fair value was approximated by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment. Fair value was determined assuming fully-extended maturities regardless of structural or economic tests required to achieve such extended maturities. These fair value measurements of CRE debt are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy.
Securitization Bonds Payable
Securitization bonds payable are valued using quotations from nationally recognized financial institutions that generally acted as underwriter for the transactions. These quotations are not adjusted and are generally based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy.

31

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Mortgage Notes Payable
For mortgage notes payable, the Company primarily uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using comparable U.S. Treasury rates as of the end of the reporting period. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
Credit Facilities
The Company has amounts outstanding under four credit facilities. All credit facilities bear floating rates of interest. As of the reporting date, the Company believes the carrying value approximates fair value. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
13.
Segment Reporting
The Company currently conducts its business through the following four segments, which are based on how management reviews and manages its business:
•
Commercial Real Estate Debt - Focused on originating, acquiring and asset managing CRE debt investments including first mortgage loans, subordinate interests and mezzanine loans and participations in such loans, as well as preferred equity interests.
•
Select Commercial Real Estate Equity - Focused on direct ownership in real estate, which may be structurally senior to a third-party partner’s equity and indirect interests in real estate through real estate private equity funds since the underlying collateral in the funds is primarily real estate.
•
Commercial Real Estate Securities - Focused on investing in CMBS, unsecured REIT debt, CDO notes and other securities.
•
Corporate - The corporate segment includes corporate level asset management and other fees - related party and general and administrative expenses.
The Company may also own investments indirectly through a joint venture.
The Company primarily generates revenue from net interest income on the CRE debt and securities portfolios, equity in earnings of unconsolidated ventures, including from PE Investments, and from rental and other income from its real estate equity investments. The Company’s income is primarily derived through the difference between revenue and the cost at which the Company is able to finance its investments. The Company may also acquire investments which generate attractive returns without any leverage.

32

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following tables present segment reporting for the three and six months ended June 30, 2015 and 2014 (dollars in thousands):
Three Months Ended June 30, 2015
 
Real Estate
Debt
 
Real Estate
Equity
 
Real Estate
Securities
 
Corporate
 
Total
Net interest income
 
$
17,859

 
$
—

 
$
1,413

 
$
—

 
$
19,272

Rental and other income
 
—

 
15,027

 
—

 
—

 
15,027

Asset management and other fees - related party
 
—

 
—

 
—

 
6,031

 
6,031

Mortgage notes interest expense
 
—

 
3,737

 
—

 
—

 
3,737

Transaction costs
 
363

 
45

 
—

 
35

 
443

Property operating expenses
 
—

 
7,524

 
—

 
—

 
7,524

General and administrative expenses
 
325

 
42

 
18

 
3,721

 
4,106

Depreciation and amortization
 
—

 
3,262

 
—

 
—

 
3,262

Unrealized gain (loss) on investments and other
 
—

 
(3,731
)
 
—

 
—

 
(3,731
)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
17,171

 
(3,314
)
 
1,395

 
(9,787
)
 
5,465

Equity in earnings (losses) of unconsolidated ventures
 
1,419

 
8,090

 
—

 
—

 
9,509

Income tax benefit (expense)
 
—

 
(779
)
 
—

 
—

 
(779
)
Net income (loss)
 
$
18,590

 
$
3,997

 
$
1,395

 
$
(9,787
)
 
$
14,195

 

Three Months Ended June 30, 2014
 
Real Estate
Debt
 
Real Estate
Equity
 
Real Estate
Securities
 
Corporate
 
Total
Net interest income
 
$
19,737

 
$
—

 
$
1,454

 
$
—

 
$
21,191

Rental and other income
 
—

 
5,634

 
—

 
—

 
5,634

Asset management and other fees - related party
 
—

 
—

 
—

 
5,723

 
5,723

Mortgage notes interest expense
 
—

 
1,519

 
—

 
—

 
1,519

Transaction costs
 
—

 
758

 
—

 
—

 
758

Property operating expenses
 
—

 
2,787

 
—

 
—

 
2,787

General and administrative expenses
 
227

 
—

 
—

 
3,302

 
3,529

Depreciation and amortization
 
—

 
1,420

 
—

 
—

 
1,420

Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
19,510

 
(850
)
 
1,454

 
(9,025
)
 
11,089

Equity in earnings (losses) of unconsolidated ventures
 
217

 
9,523

 
—

 
—

 
9,740

Income tax benefit (expense)
 
—

 
(779
)
 
—

 
—

 
(779
)
Net income (loss)
 
$
19,727

 
$
7,894

 
$
1,454

 
$
(9,025
)
 
$
20,050



33

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Six Months Ended June 30, 2015

Real Estate
Debt

Real Estate
Equity

Real Estate
Securities

Corporate

Total
Net interest income

$
36,235


$
—


$
2,834


$
—


$
39,069

Rental and other income

—


30,027


—


—


30,027

Asset management and other fees - related party
 
—

 
—

 
—

 
12,397

 
12,397

Mortgage notes interest expense
 
—

 
7,248

 
—

 
—

 
7,248

Transaction costs
 
491

 
86

 
—

 
—

 
577

Property operating expenses
 
—

 
14,770

 
—

 
—

 
14,770

General and administrative expenses
 
422

 
78

 
25

 
7,372

 
7,897

Depreciation and amortization

—


7,517


—


—


7,517

Unrealized gain (loss) on investments and other
 
—

 
(5,586
)
 
—

 
—

 
(5,586
)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)

35,322


(5,258
)

2,809


(19,769
)

13,104

Equity in earnings (losses) of unconsolidated ventures

2,890


16,943


—


—


19,833

Income tax benefit (expense)
 
—

 
(1,520
)
 
—

 
—

 
(1,520
)
Net income (loss)

$
38,212


$
10,165


$
2,809


$
(19,769
)

$
31,417

 

Six Months Ended June 30, 2014
 
Real Estate
Debt
 
Real Estate
Equity
 
Real Estate
Securities
 
Corporate
 
Total
Net interest income
 
$
36,824

 
$
—

 
$
2,884

 
$
—

 
$
39,708

Rental and other income
 
—

 
10,478

 
—

 
—

 
10,478

Asset management and other fees - related party
 
—

 
—

 
—

 
10,642

 
10,642

Mortgage notes interest expense
 
—

 
2,805

 
—

 
—

 
2,805

Transaction costs
 
—

 
770

 
—

 
—

 
770

Property operating expenses
 
—

 
5,245

 
—

 
—

 
5,245

General and administrative expenses
 
462

 
—

 
—

 
5,628

 
6,090

Depreciation and amortization
 
—

 
2,603

 
—

 
—

 
2,603

Realized gain (loss) on investments and other
 
(175
)
 
—

 
—

 
—

 
(175
)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
36,187

 
(945
)
 
2,884

 
(16,270
)
 
21,856

Equity in earnings (losses) of unconsolidated ventures
 
837

 
18,754

 
—

 
—

 
19,591

Income tax benefit (expense)
 
—

 
(1,493
)
 
—

 
—

 
(1,493
)
Net income (loss)
 
$
37,024

 
$
16,316

 
$
2,884

 
$
(16,270
)
 
$
39,954

 
The following table presents total assets by segment as of June 30, 2015 and December 31, 2014 (dollars in thousands):
Total Assets
 
Real Estate
Debt
 
Real Estate
Equity
 
Real Estate
Securities
 
Corporate (1)
 
Total
June 30, 2015
 
$
1,398,494

 
$
556,531

 
$
80,164

 
$
18,950

 
$
2,054,139

December 31, 2014
 
$
1,516,904

 
$
578,399

 
$
79,986

 
$
17,609

 
$
2,192,898

__________________________________________________
(1)
Includes cash, unallocated receivables and deferred costs and other assets, net.
14.
Subsequent Events
Distribution Reinvestment Plan
From July 1, 2015 through August 11, 2015, the Company issued 0.8 million shares of common stock pursuant to the DRP raising proceeds of $7.3 million. As of August 11, 2015, 5.7 million shares were available to be issued pursuant to the DRP.

34

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Distributions
On August 11, 2015, the board of directors of the Company approved a daily cash distribution of $0.002191781 per share of common stock for each of the three months ended December 31, 2015. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution was accrued.
Share Repurchases
From July 1, 2015 through August 11, 2015, the Company repurchased 0.5 million shares for a total of $4.8 million or a weighted average price of $9.58 per share under the Share Repurchase Program that enables stockholders to sell their shares to the Company in certain circumstances, including death or a qualifying disability. The Company funds repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from its DRP.


35


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in Item 1. “Financial Statements” of this report. References to “we,’’ “us,’’ or “our’’ refer to NorthStar Real Estate Income Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.
Introduction
We were formed to originate, acquire and asset manage a diversified portfolio of commercial real estate, or CRE, debt, select equity and securities investments, predominantly in the United States. We may also invest in CRE investments internationally. CRE debt investments include first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests. Real estate equity investments include direct ownership in properties, which may be structurally senior to a third-party partner’s equity and indirect interests in real estate through real estate private equity funds, or PE Investments. CRE securities primarily consist of commercial mortgage-backed securities, or CMBS, and may include unsecured real estate investment trust, or REIT debt, collateralized debt obligation, or CDO, notes and other securities. In addition, we may own investments through a joint venture. We were formed in January 2009 as a Maryland corporation and commenced operations in October 2010. We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2010. We conduct our operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.
We are externally managed and have no employees. Prior to June 30, 2014, we were managed by an affiliate of NorthStar Realty Finance Corp. (NYSE: NRF), or NorthStar Realty. Effective June 30, 2014, NorthStar Realty spun-off its asset management business into a separate publicly traded company, NorthStar Asset Management Group Inc. (NYSE: NSAM), our Sponsor. Our Sponsor and its affiliates provide asset management and other services to us, NorthStar Realty, other sponsored public non-traded companies and any other companies our Sponsor and its affiliates may manage in the future, or collectively the NSAM Managed Companies, both in the United States and internationally. As of June 30, 2015, NSAM has an aggregate of $24.7 billion of assets under management, adjusted for acquisitions and commitments to acquire investments through August 5, 2015, in a variety of CRE investments.  Concurrent with the spin-off, affiliates of our Sponsor entered into a new advisory agreement with us and each of the other NSAM Managed Companies. Pursuant to our advisory agreement, NSAM J-NSI Ltd, an affiliate of our Sponsor, or our Advisor, agreed to manage our day-to-day operations on terms substantially similar to those set forth in our prior advisory agreement with NS Real Estate Income Trust Advisor, LLC, or our Prior Advisor. References to our Prior Advisor herein refer to the services performed by and fees paid and accrued to our Prior Advisor during the period prior to June 30, 2014. The spin-off of NorthStar Realty’s asset management business had no impact on our operations.
Our primary investment types are as follows:
•
Commercial Real Estate Debt - Our CRE debt investments include first mortgage loans, subordinate interests and mezzanine loans and participations in such loans, as well as preferred equity interests.
•
Select Commercial Real Estate Equity - Our CRE equity investments include direct ownership in real estate, which may be structurally senior to a third-party partner’s equity and indirect interests in real estate through PE Investments since the underlying collateral in the funds is primarily real estate.
•
Commercial Real Estate Securities - Our CRE securities investments may include CMBS, unsecured REIT debt, CDO notes and other securities.
We may also own investments indirectly through a joint venture.
We believe that our targeted investment types are complementary to each other due to their overlapping sources of investment opportunities, common reliance on real estate fundamentals and ability to apply similar portfolio management and servicing skills to maximize value and to protect capital.
We initially registered to offer up to 100,000,000 shares pursuant to our primary offering to the public, or our Primary Offering, and up to 10,526,315 shares pursuant to our distribution reinvestment plan, or DRP. In April 2013, our board of directors authorized the reallocation of shares available under our DRP to our Primary Offering. Our Primary Offering (including 7.6 million shares reallocated from our DRP, or our Total Primary Offering) was completed on July 1, 2013 and all of the shares initially registered for our Offering were issued. As a result of a registration statement to offer up to an additional 15.0 million shares pursuant to our DRP, we continue to offer shares beyond our Total Primary Offering.
We have raised total gross proceeds of $1.2 billion in the Offering.

36


Our Investments
The following table presents our investments as of June 30, 2015 (dollars in thousands):
Investment Type:
 
Number
 
Principal
Amount/ Cost (1)
 
% of
Principal Amount
CRE Debt
 
 
 
 
 
 
First mortgage loans (2)
 
19
 
$
998,221

 
49.1
%
Mezzanine loans (2)
 
7
 
218,877

 
10.8
%
Subordinate interests
 
1
 
34,661

 
1.7
%
Preferred equity interests
 
1
 
72,158

 
3.6
%
Total CRE debt
 
28
 
1,323,917

 
65.2
%
Real estate
 
 
 
 
 
 
Real Estate Properties
 
 
 
 
 
 
Multi-tenant office
 
12
 
252,778

 
12.4
%
Multifamily
 
2
 
114,584

 
5.6
%
Student Housing
 
3
 
67,080

 
3.3
%
Subtotal
 
17
 
434,442

 
21.3
%
PE Investments
 
 
 
 
 
 
PE Investment I
 
1
 
72,198

 
3.6
%
PE Investment II (2)
 
1
 
101,000

 
5.0
%
Subtotal
 
2
 
173,198

 
8.6
%
Total real estate
 
19
 
607,640

 
29.9
%
CRE Securities
 
 
 
 
 
 
CMBS
 
7
 
100,542

 
4.9
%
Total CRE securities
 
7
 
100,542

 
4.9
%
Total
 
54
 
$
2,032,099

 
100.0
%
___________________________________________________
(1)
Based on principal amount for real estate debt and securities investments, fair value for our PE Investments and cost for real estate equity, which includes net purchase price allocation related to net intangibles, deferred costs and other assets.
(2)
Includes for CRE debt, future funding commitments and the deferred purchase price for PE Investment II (as defined below).
For financial information regarding our reportable segments, refer to Note 13. “Segment Reporting” in our accompanying consolidated financial statements included in Part I, Item 1. “Financial Statements.”
The following section describes the major CRE asset classes in which we may invest and actively manage to maximize value and to protect capital.
Commercial Real Estate Debt
Overview
Our CRE debt investment strategy is focused on originating, acquiring and asset managing CRE debt investments, including first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests.
We emphasize direct origination of our debt investments as this allows us a greater degree of control over how they are underwritten and structured and it provides us the opportunity to syndicate senior or subordinate interests in a loan to maximize returns, if desired. Further, it facilitates a more direct relationship with our borrowers which helps us maintain a robust pipeline and provides an opportunity for us to earn origination and other fees.
Our Portfolio
As of June 30, 2015, $1,323.9 million, or 65.2%, of our assets were invested in CRE debt, consisting of 28 loans with an average investment size of $47.3 million. The weighted average extended maturity of our CRE debt portfolio is 4.3 years.

37


The following table presents a summary of our CRE debt investments as of June 30, 2015 (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
Weighted Average
 
Floating Rate
as % of
Principal
Amount
Investment Type:
 
Number
 
Principal
Amount (1)
 
Carrying
Value
 
Allocation by
Investment
Type (2)
 
Fixed
Rate
 
Spread
over
LIBOR (3)
 
Total Unleveraged
Current
Yield
 
First mortgage loans
 
19
 
$
998,221

 
$
972,995

 
75.4
%
 
—

 
6.16
%
 
6.18
%
 
100.0
%
Mezzanine loans (4)
 
7
 
218,877

 
188,995

 
16.5
%
 
10.02
%
 
12.95
%
 
11.92
%
 
65.0
%
Subordinate interests
 
1
 
34,661

 
34,661

 
2.6
%
 
13.11
%
 
—

 
13.24
%
 
—

Preferred equity interests (5)
 
1
 
72,158

 
72,770

 
5.5
%
 
10.00
%
 
—

 
10.00
%
 
—

Total/Weighted average
 
28
 
$
1,323,917

 
$
1,269,421

 
100.0
%
 
10.62
%
 
6.96
%
 
7.45
%
 
90.7
%
___________________________________________________
(1)
Includes future funding commitments of $56.9 million.
(2)
Based on principal amount.
(3)
Includes a fixed minimum LIBOR rate, or LIBOR floor, as applicable. As of June 30, 2015, we had $926.0 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.64%.
(4)
Includes our proportionate interest in a mezzanine loan owned through a joint venture of $69.2 million, including future funding commitments.
(5)
Excludes a $8.0 million proportionate interest in a preferred equity investment owned by a joint venture partner.
The following presents our CRE debt portfolio’s diversity across property type and geographic location based on principal amount:
Debt Investments by Property Type
 
Debt Investments by Geographic Location
 
Real Estate
Our real estate equity investment strategy focuses on direct ownership in commercial real estate, which may be structurally senior to a third-party partner’s equity, with an emphasis on properties with stable cash flow and PE Investments that have the potential to appreciate in value and therefore help overcome our upfront fees and expenses. In addition, we may own investments through a joint venture.
Real Estate Properties
As part of our real estate properties strategy, we explore a variety of real estate investments. Our multi-tenant office portfolio is focused on properties that are well located with strong operating partners. Our multifamily portfolio focuses on properties located in suburban markets that are best suited to capture the formation of new households. Our student housing portfolio represents a sector where we believe both attractive cash flow and attractive returns exist while targeting large campuses with positive fundamentals that intend to attract growing domestic and international student bodies.

38


As of June 30, 2015, $434.4 million, or 21.3%, of our assets were invested in real estate properties and our portfolio was 94% occupied. The following table presents our real estate property investments as of June 30, 2015 (dollars in thousands):
Property Type
 
Number of Properties
 
Capacity
 
Amount (1)
Office
 
12
 
1,446,114
square feet
 
$
252,778

Multifamily
 
2
 
1,422

units
 
114,584

Student Housing
 
3
 
2,166

beds
 
67,080

Total
 
17
 
 
 
 
$
434,442

_____________________________________________
(1)
Based on cost which includes net purchase price allocation related to net intangibles, deferred costs and other assets.
Private Equity Investments
Our real estate equity investment strategy includes PE Investments. We classify our PE Investments as equity investments since the underlying collateral in the funds is primarily real estate.
Our PE Investments own limited partnership interests in real estate private equity funds acquired in the secondary market and managed by institutional-quality sponsors, which we refer to as fund interests. As of June 30, 2015, $173.2 million, or 8.6%, of our assets were invested in PE Investments through unconsolidated ventures.
The following tables present a summary of our PE Investments (dollars in millions):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underlying Fund Interests
 
 
PE Investment (1)
 
Number of Funds
 
Number of General Partners
 
Initial NAV
 
Amount (2)
 
Initial NAV as a Percentage of Cost (3)
 
Reported NAV Growth (4)
 
Assets, at Cost
 
Implied Leverage (5)
 
Expected Future Contributions (6)
PE Investment I (7)
 
49
 
26
 
$
802.4

 
$
72,198

 
66.2%
 
26.9%
 
$
20,400

 
49.1%
 
$
3

PE Investment II (8)
 
24
 
15
 
$
910.0

 
$
101,000

 
73.5%
 
18.4%
 
$
23,300

 
33.5%
 
$
1

_______________________________________________________________
(1)
Based on financial data reported by the underlying funds as of March 31, 2015, which is the most recent financial information from the underlying funds, except as otherwise noted.
(2)
Represents fair value and includes the deferred purchase price for PE Investment II.
(3)
Net cost represents total funded capital less distributions received. For PE Investment I, excludes any distributions in excess of contributions for funds, which represented 4% of reported net asset value, or NAV.
(4)
The annualized inception to date NAV growth is measured from the agreed upon reported NAV at date of acquisition, or Initial NAV.
(5)
Represents implied leverage for funds with investment-level financing, calculated as the underlying borrowing divided by assets at fair value.
(6)
Represents the estimated amount of expected future contributions to funds as of June 30, 2015.
(7)
We, together with NorthStar Realty, have an ownership interest in PE Investment I of 51%, of which we own 29.5% and NorthStar Realty owns 70.5%.
(8)
We, NorthStar Realty and funds managed by Goldman Sachs Asset Management each have an ownership interest in PE Investment II of 15%, 70% and 15%, respectively. PE Investment II paid an initial amount of $505 million and will pay the remaining $411 million, or 45% of the purchase price, or the Deferred Amount, by the last day of the fiscal quarter after the four year anniversary of the applicable closing date of each fund interest. As of June 30, 2015, our share of the Deferred Amount was $52 million.
 
 
Our Proportionate Share of PE Investments
 
 
Income
 
Return of Capital
 
Total Distributions
 
Contributions
 
Net
PE Investment I
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
$
5.2

 
$
8.3

 
$
13.5

 
$
0.2

 
$
13.3

February 15, 2013 to June 30, 2015 (1)
 
$
56.7

 
$
63.6

 
$
120.3

 
$
9.7

 
$
110.6

 
 
 
 
 
 
 
 
 
 
 
PE Investment II
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
$
2.9

 
$
8.2

 
$
11.1

 
$
9.2

 
$
1.9

July 3, 2013 to June 30, 2015 (1)
 
$
23.4

 
$
39.8

 
$
63.2

 
$
13.0

 
$
50.2

______________________________________________________________
(1)
Represents activity from the respective initial closing date through June 30, 2015.

39


The following presents the underlying fund interests in our PE Investments by investment type and geographic location based on NAV as of March 31, 2015:
PE Investments by Underlying Investment Type(1)
 
PE Investments by Underlying Geographic Location(1)
 
_________________________________
(1)
Based on individual fund financial statements.
Real Estate Securities
Our CRE securities investments include CMBS and may include unsecured REIT debt and CDO notes backed primarily by CRE securities and debt. Substantially all of our CRE securities have credit ratings assigned by at least one of the major rating agencies (Moody’s Investors Services, Standard & Poor’s, Fitch Ratings, Morningstar, DBRS and/or Kroll, generally referred to as rating agencies).
As of June 30, 2015, $100.5 million, or 4.9%, of our assets were invested in CRE securities and consisted of seven CMBS investments purchased at an aggregate $51.1 million discount to par and our average investment size was $14.4 million. As of June 30, 2015, the weighted average expected maturity of our CMBS was 6.3 years.
Sources of Operating Revenues and Cash Flows
We primarily generate revenue from net interest income on our CRE debt and securities investments and rental and other income from our real estate properties. Additionally, we record equity in earnings of unconsolidated ventures, including from PE Investments. Our income is primarily derived through the difference between revenue and the cost at which we are able to finance our investments. We may also acquire investments which generate attractive returns without any leverage.
Profitability and Performance Metrics
We calculate Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO, (see “Non-GAAP Financial Measures-Funds from Operations and Modified Funds from Operations” for a description of these metrics), to evaluate the profitability and performance of our business.
Outlook and Recent Trends
Liquidity and capital started to become more available in early 2012 for the commercial real estate markets to stronger sponsors and both Wall Street and commercial banks began to more actively provide credit to real estate borrowers accelerating the pace of investment in real estate. In late 2012, in order to stimulate growth, several of the world’s largest central banks acted in a coordinated effort through massive injections of stimulus in the financial markets, which has facilitated keeping interest rates low since then.
A proxy for the liquidity in the commercial real estate market is non-agency CMBS issuance. Approximately $80 billion and $88 billion of non-agency CMBS was issued in the United States in 2013 and 2014, respectively, with industry experts currently predicting approximately $100 billion of non-agency CMBS issuance in 2015. In the first half of 2015, approximately $50 billion of new CMBS issuance occurred in the United States keeping the market on pace for the current projection of $100 billion for 2015.
We believe the U.S. economy is on a healthy growth path and that the U.S. Federal Reserve is on track to begin raising rates in 2015. However, there are concerns about low inflation in the United States, a stronger U.S. dollar, slow global growth and

40


international market volatility. Many other global central banks are easing monetary conditions to combat their own problems with low inflation and slow growth.
Valuations in the commercial real estate markets have generally improved since bottoming out in 2009. Robust investor demand in 2014 for commercial real estate increased transaction activity and prices as rent and vacancy fundamentals improved across most property sectors and are forecasted to continue to improve in 2015. However, global economic and political headwinds remain. For instance, global market instability and the risk that maturing CRE debt may have difficulties being refinanced, among other factors, may continue to cause periodic volatility in the CRE market for some time. It is currently estimated that approximately $1.4 trillion of CRE debt in the United States will mature through 2018. While there is an increased supply of liquidity and improved fundamentals in the CRE market, we still anticipate that certain of these loans will not be able to be refinanced, potentially inhibiting growth and contracting credit.
As the capital markets began opening up in 2012, NorthStar Realty began to again access the capital markets as evidenced by two securitization transactions it structured, securitizing $882 million of assets, one on our behalf, with permanent, non-recourse, non-mark-to-market financing. The stimulus in the United States helped to increase demand for new CMBS, as described above, even though current new issue volume is still below historic levels which has contributed to relatively balanced real estate fundamentals.
Virtually all CRE property types were adversely impacted by the credit crisis and subsequent recession, while some such as land, condominium and other commercial property types were more severely impacted. Our CRE debt, equity and securities investments could be negatively impacted by weak real estate markets and economic conditions. While the U.S. economy is stronger today, a return to weak economic conditions in the future could reduce a tenant’s ability to make payments in accordance with the contractual terms and to lease or occupy new space. To the extent that market rental and occupancy rates are reduced, property-level cash flow could be negatively affected.
After showing considerable resiliency during the economic downturn between 2007 and 2010, the non-traded sector experienced strong growth over recent years with approximately $16 billion of equity being raised for programs in this space in 2014 alone. We anticipate that capital raising in 2015 will remain strong as we monitor a variety of trends in this industry including a number of regulatory changes like the implementation of FINRA 15-02 and the Department of Labor’s recent proposal on a fiduciary standard for retirement accounts. Due to generally positive market dynamics and our Advisor’s and its affiliates’ expertise and industry relationships, we continue to see a robust pipeline of investment opportunities. These 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 of opportunities, there is no assurance that will be the case.
Our Strategy
Our primary business objectives are to originate and acquire real estate-related investments, with a focus on CRE debt, that we expect will generate attractive risk-adjusted returns, stable cash flow for distributions and provide downside protection to our stockholders. Some of our CRE debt investments may be considered transitional in nature because the borrower or owner may have a business plan to improve the collateral and, as a result, we generally require the borrower to fund interest or other reserves, whether through loan proceeds or otherwise, to support debt service payments and capital expenditures. We, our borrower or owner, and possibly a guarantor, may be required to refill these reserves should they become deficient during the applicable period for any reason. We will also seek to realize growth in the value of our real estate equity investments through appreciation and/or by timing their sale to maximize value. We believe that our Advisor, and its affiliates, have a platform that derives a potential competitive advantage from the combination of experience, proven track record of successfully managing public companies, deep industry relationships and market leading CRE credit underwriting and capital markets expertise which enables us to manage credit risk across our investments as well as to structure and finance our assets efficiently. We believe that our targeted investment types are complementary to each other due to their overlapping sources of investment opportunities, common reliance on CRE fundamentals and ability to apply similar portfolio management and servicing skills to maximize value and to protect capital. We use the proceeds from our DRP and other financing sources to carry out our primary business objectives of originating and acquiring real estate-related investments.
We began raising capital in late 2010 and completed our Total Primary Offering on July 1, 2013. We have raised total gross proceeds of $1.2 billion. Since the successful completion of our Total Primary Offering, we have only been raising new equity through our DRP. We also entered into term loan facilities that provide up to an aggregate of $350.0 million to finance the origination of CRE first mortgage loans, or our Term Loan Facilities, and our CMBS facilities to make new investments in CMBS, or our CMBS Facilities, and collectively our Credit Facilities. In November 2012 and August 2013, we closed two securitization financing transactions, or our Securitization Financing Transactions, to finance debt investments on a permanent, non-recourse, non-mark-to-market basis. The debt investments had previously been financed on our Term Loan Facilities. Our real estate portfolio is financed with long-term, non-recourse mortgage notes.

41


The following table presents our investment activity from inception through June 30, 2015 (dollars in thousands):
 
 
From Inception Through
 
 
June 30, 2015
Investment Type:
 
Number
 
Principal Amount/Cost (1)
CRE debt
 
48
 
$
1,825,000

Real estate equity
 
17
 
434,442

PE Investments (2)
 
2
 
255,460

CRE securities
 
10
 
133,398

Total
 
77
 
$
2,648,300

____________________________________________________________
(1)
Represents principal amount for real estate debt and securities and cost for real estate equity investments, which includes net purchase price allocation related to net intangibles, deferred costs and other assets.
(2)
Excludes contributions related to future funding commitments.
Financing Strategy
We use asset-level financing as part of our investment strategy and we seek to match-fund our assets and liabilities by having similar maturities and like-kind interest rate benchmarks (fixed or floating) to manage refinancing and interest rate risk and utilize non-recourse liabilities whenever possible. Our Advisor is responsible for managing such refinancing and interest rate risk on our behalf. We intend to pursue a variety of financing arrangements such as securitization financing transactions, credit facilities, mortgage notes and other term borrowings. We continue to seek and prefer long-term, non-recourse financing, including non mark-to-market financing that may be available through securitization.
Although we have a limitation on the maximum leverage for our portfolio, which approximates 75% of the aggregate cost of our investments, excluding indirect leverage held through our unconsolidated venture investments, before deducting loan loss reserves, other non-cash reserves and depreciation, we do not have a targeted debt-to-equity ratio on an asset-by-asset basis, as we believe the appropriate leverage for the particular assets we finance depends on the specific credit characteristics of each asset. We use leverage for the sole purpose of financing our investments and diversifying our equity and we do not employ leverage to speculate on changes in interest rates. Our current overall portfolio leverage is 49%.
Borrowing levels for CRE investments may change depending upon the nature of the assets and the related financing. Our financing strategy for our CRE debt and securities investments is dependent on our ability to obtain match-funded borrowings at rates that provide a positive net spread, generally using credit facilities and securitization financing transactions. Our financing strategy for our real estate is typically to use long-term, non-recourse mortgage notes.
In February 2012, we began using credit facilities provided by major financial institutions to partially finance new investments. Our Credit Facilities currently include two secured Term Loan Facilities that provide for an aggregate of up to $350.0 million to finance the origination of first mortgage loans and senior loan participations secured by commercial real estate and two CMBS Facilities to finance the acquisition of CMBS. In November 2012 and August 2013, we closed Securitization Financing Transactions, which provide permanent, non-recourse, non-mark-to-market financing for our debt investments that were mainly previously financed on our Term Loan Facilities. In January 2015, Securitization 2012-1 was repaid in full. As of June 30, 2015, we had $283.4 million issued as part of Securitization 2013-1, $257.8 million outstanding under our Term Loan Facilities and $11.7 million outstanding under our CMBS Facilities. We currently have $92.2 million of available borrowing under our Term Loan Facilities. Refer to “Liquidity and Capital Resources” for further disclosure regarding our Securitization Financing Transactions.
Portfolio Management
Our Advisor and its affiliates maintain a comprehensive portfolio management process that generally includes day-to-day oversight by the portfolio management and servicing team, regular management meetings and an exhaustive quarterly credit review process. These processes are designed to enable management to evaluate and proactively identify asset-specific credit issues and trends on a portfolio-wide basis. Nevertheless, we cannot be certain that our Advisor’s review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from investments that are not identified during these credit reviews. The portfolio management team, under the direction of the Investment Committee, uses many methods to actively manage our asset base to preserve our income and capital. Credit risk management is the ability to manage our assets in a manner that preserves principal/cost and income and minimizes credit losses that could decrease income and portfolio value. For CRE debt and real estate investments, frequent re-underwriting and dialogue with borrowers/tenants/partners and regular inspections of our

42


collateral and owned properties have proven to be an effective process for identifying issues early. During the quarterly credit review, or more frequently as necessary, investments are put on highly-monitored status and identified for possible loan loss reserves/asset impairment, as appropriate, based upon several factors, including missed or late contractual payments, significant declines in collateral performance and other data which may indicate a potential issue in our ability to recover our invested capital from an investment. Our Advisor uses an experienced portfolio management and servicing team that monitors these factors on our behalf.
Our investments are reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our investments may be impaired or that its carrying value may not be recoverable. In conducting these reviews, we consider macroeconomic factors, including real estate sector conditions, together with asset and market specific circumstances among other factors. To the extent an impairment has occurred, the loss will be measured as compared to the carrying amount of the investment. An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due. Additionally, we establish, on a current basis, allowance for future tenant credit losses on unbilled rents receivable based upon an evaluation of the collectability of such amounts.
Each of our debt investments is secured by CRE collateral and requires customized portfolio management and servicing strategies for dealing with potential credit situations. The complexity of each situation depends on many factors, including the number of properties, the type of property, macro and local market conditions impacting supply/demand, cash flow and the financial condition of our collateral and our borrowers’/tenants’ ability to further support the collateral. Further, many of our investments may be considered transitional in nature because the business plan is to re-position, re-develop or otherwise lease-up the property in order to improve the collateral. At the time of origination or acquisition, the underlying property revenues may not be sufficient to support debt service, lease payments or generate positive net operating income. The business plan may necessitate an interest or lease reserve or other reserves, whether through proceeds from our loans, borrowings, offering proceeds or otherwise, to support debt service or lease payments and capital expenditures during the implementation of the business plan. There may also be a requirement for the borrower, tenant, guarantor or us, to refill these reserves should they become deficient during the applicable period for any reason.
As of June 30, 2015, we had one CRE debt investment that was not performing in accordance with the contractual terms of its governing documents. Subsequent to June 30, 2015, the loan repaid in full. There can be no assurance that our investments will continue to perform in accordance with the contractual terms of the governing documents or underwriting and we may, in the future, record loan loss reserves/asset impairment, as appropriate, if required.
Critical Accounting Policies
Principles of Consolidation
Our consolidated financial statements include the accounts of us, our operating partnership and our consolidated subsidiaries. We consolidate variable interest entities, or VIEs, where we are the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by us. All significant intercompany balances are eliminated in consolidation.
Variable Interest Entities
A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. We base the qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. We reassess the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. We determine whether we are the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for us or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to our business activities and the other interests. We reassess the determination of whether we are the primary beneficiary of a VIE each reporting period. Significant

43


judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.
We evaluate our investments and financings, including investments in unconsolidated ventures and securitization financing transactions to determine whether they are a VIE. We analyze new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.
Voting Interest Entities
A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If we have a majority voting interest in a voting interest entity, the entity will generally be consolidated. We do not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party.
We perform on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.
Investments in Unconsolidated Ventures
A non-controlling, unconsolidated ownership interest in an entity may be accounted for using the equity method, at fair value or the cost method.
Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity’s net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents. Equity method investments are recognized using a cost accumulation model in which the investment is recognized based on the cost to the investor, which includes acquisition fees. We record as an expense certain acquisition costs and fees associated with consolidated investments deemed to be business combinations and capitalizes these costs for investments deemed to be acquisitions of an asset, including an equity method investment.
We may account for an investment in an unconsolidated entity at fair value by electing the fair value option. We elected the fair value option for PE Investments. We record the change in fair value for our share of the projected future cash flow of such investments from one period to another in equity in earnings (losses) from unconsolidated ventures in the consolidated statements of operations. Any change in fair value attributed to market related assumptions is considered unrealized gain (loss).
We may account for an investment that does not qualify for equity method accounting or for which the fair value option was not elected using the cost method if we determine the investment in the unconsolidated entity is insignificant. Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment.
Fair Value Option
The fair value option provides an election that allows a company to irrevocably elect fair value for certain financial assets and liabilities on an instrument-by-instrument basis at initial recognition. We will generally not elect the fair value option for our assets and liabilities. However, we may elect to apply the fair value option for certain investments. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.
Real Estate Debt Investments
CRE debt investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium, discount and unfunded commitments. CRE debt investments that are deemed to be impaired are carried at amortized cost less a loan loss reserve, if deemed appropriate, which approximates fair value. CRE debt investments where we do not have the intent to hold the loan for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or estimated value.
Operating Real Estate
Operating real estate is carried at historical cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life. We follow the purchase method for an acquisition of operating real estate, where the purchase price is

44


allocated to tangible assets such as land, building, tenant and land improvements and other identified intangibles. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in our consolidated statements of operations.
Real Estate Securities
We classify our CRE securities investments as available for sale on the acquisition date, which are carried at fair value. Unrealized gains (losses) are recorded as a component of accumulated other comprehensive income, or OCI, in our consolidated statements of equity. However, we may elect the fair value option for certain of our available for sale securities, and as a result, any unrealized gains (losses) on such securities are recorded in unrealized gain (loss) on investments and other in our consolidated statements of operations. As of June 30, 2015, we did not have any CRE securities investments for which we elected the fair value option.
Fair Value Measurement
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded at fair value on our consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1.
Quoted prices for identical assets or liabilities in an active market.
Level 2.
Financial assets and liabilities whose values are based on the following:
a)
Quoted prices for similar assets or liabilities in active markets.
b)
Quoted prices for identical or similar assets or liabilities in non-active markets.
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
Level 3.
Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
Financial assets and liabilities recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as our knowledge and experience of the market.
With respect to valuation for CRE securities, we generally obtain at least one quote from a pricing service or broker. Furthermore, we may use internal pricing models to establish arm’s length prices. Generally, the quote from the pricing service is used to determine fair value for the securities. The quotes are not adjusted. The pricing service uses market-based measurements based on valuation techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including prices for similar assets, benchmark yield curves and market corroborated inputs such as contractual terms, discount rates for similar securities and credit (such as credit support and delinquency rates). We believe such broker quote is generally based on a market transaction of comparable securities.
To determine the fair value of CRE securities, we maintain a comprehensive quarterly process that includes a valuation committee comprised of senior members of the investment and accounting teams that is designed to enable management to ensure the prices used are representative of fair value and the instruments are properly classified pursuant to the fair value hierarchy.
Initially, a member of the investment team on the valuation committee reviews the prices at quarter end to ensure current market conditions are fairly presented. The investment team is able to assess these values because they are actively engaged in the market, reviewing bid lists, recent sales and frequently have discussions with various banks and other financial institutions regarding the state of the market. We then perform a variety of analyses to ensure the quotes are in a range which we believe to be representative of fair value and to validate the quotes obtained and used in determining the ultimate value used in the

45


financial statements. At the portfolio level, we evaluate the overall change in fair value versus the overall change in the market. We review significant changes in fair value for individual instruments, both positive and negative, from the prior period. We perform back testing on any securities sold to validate the quotes used for the prior quarter. Where multiple quotes are available, we evaluate any large variance between the high and low price. We obtain any available market data that provides insight into the price through recent or comparable security trades, multiple broker bids and other pertinent information. This data may be available through the pricing service or based on data directly available to us. If as part of any of these processes, we are aware of data which we believe better supports the fair value, we challenge the quote provided by either the pricing service or broker. Any discrepancy identified from our processes are reviewed and resolved. The valuation committee approves the final prices. We believe these procedures are designed to enable us to estimate fair value.
Once we determine fair value of CRE securities, we review to ensure the instrument is properly classified pursuant to the fair value hierarchy consistent with accounting principles generally accepted in the United States, or U.S. GAAP, through our understanding of the valuation methodologies used by the pricing service via discussion with representatives of the pricing service and review of any documentation describing its valuation methodology.
Generally, when fair value is based on the pricing service or multiple broker quotes, we believe, based on our analysis, such quotes are based on observable inputs and are therefore classified as Level 2. Where the price is based on either a single broker quote or an internal pricing model, we generally consider such price to be based on less observable data and therefore classify such instruments as Level 3.
Revenue Recognition
Real Estate Debt Investments
Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in our consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such loan is reclassified to held for sale.
Operating Real Estate
Rental and other income from operating real estate is derived from leasing of space to various types of tenants. The leases are for fixed terms of varying length and generally provide for annual rentals and expense reimbursements to be paid in monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rent recognized over the amount contractually due pursuant to the underlying leases is included in receivables on the consolidated balance sheets. 
Real Estate Securities
Interest income is recognized using the effective interest method with any premium or discount amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expected cash flow may result in a change to the yield which is then applied retrospectively for high-credit quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment or prospectively for all other securities to recognize interest income.
Credit Losses and Impairment on Investments
Real Estate Debt Investments
Loans are considered impaired when, based on current information and events, it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis or more frequently as necessary. Significant judgment of management is required in this analysis. We consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each loan is maintained at a level that is determined to be adequate by management to absorb probable losses.
Income recognition is suspended for a loan at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the

46


principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.
Operating Real Estate
Our real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if management’s estimate of the aggregate expected future undiscounted cash flow generated by the property is less than the carrying value. In conducting this review, management considers U.S. macroeconomic factors, real estate sector conditions and asset specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value and recorded in impairment on operating real estate in our consolidated statements of operations.
An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due. Additionally, we establish, on a current basis, an allowance for future tenant credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts.
Investments in Unconsolidated Ventures
We review our investments in unconsolidated ventures for which we did not elect the fair value option on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value may be impaired or that its carrying value may not be recoverable. An investment is considered impaired if the projected net recoverable amount over the expected holding period is less than the carrying value. In conducting this review, management considers U.S. macroeconomic factors, including real estate sector conditions, together with investment specific and other factors. To the extent an impairment has occurred and is considered to be other than temporary, the loss is measured as the excess of the carrying value of the investment over the estimated fair value and recorded in provision for loss on equity investment in our consolidated statements of operations.
Real Estate Securities
CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment, or OTTI, as any change in fair value is recorded in our consolidated statements of operations. Realized losses on such securities are reclassified to realized gain (loss) on investments and other as losses occur.
CRE securities for which the fair value option is not elected are evaluated for OTTI quarterly. Impairment of a security is considered to be other-than-temporary when: (i) the holder has the intent to sell the impaired security; (ii) it is more likely than not the holder will be required to sell the security; or (iii) the holder does not expect to recover the entire amortized cost of the security. When a CRE security has been deemed to be other-than-temporarily impaired due to (i) or (ii), the security is written down to its fair value and an OTTI is recognized in the consolidated statements of operations. In the case of (iii), the security is written down to its fair value and the amount of OTTI is then bifurcated into: (a) the amount related to expected credit losses; and (b) the amount related to fair value adjustments in excess of expected credit losses. The portion of OTTI related to expected credit losses is recognized in our consolidated statements of operations. The remaining OTTI related to the valuation adjustment is recognized as a component of accumulated OCI in our consolidated statements of equity. The portion of OTTI recognized through earnings is accreted back to the amortized cost basis of the security through interest income, while amounts recognized through OCI are amortized over the life of the security with no impact on earnings. CRE securities which are not high-credit quality are considered to have an OTTI if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of OTTI is then bifurcated as discussed above. As of June 30, 2015, we did not have any OTTI recorded on our CRE securities.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers.  The accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP.  In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year.  The effective date of the new revenue standard for us will be January 1, 2018. We are in the process of evaluating the impact, if any, of the update on our consolidated financial position, results of operations and financial statement disclosures.

47


In February 2015, the FASB issued updated guidance that changes the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. We are currently assessing the impact of the guidance on our consolidated financial position, results of operations and financial statement disclosures.
In April 2015, the FASB issued an accounting update changing the presentation of financing costs in financial statements. Under the new guidance, an entity would present these costs in the balance sheet as a direct deduction from the related liability rather than as an asset.  Amortization of the costs would continue to be reported as interest expense.  The new guidance is effective for annual periods and interim periods beginning after December 15, 2015, with early adoption permitted. We are currently assessing the impact of the guidance on our consolidated financial position, results of operations and financial statement disclosures.
Results of Operations
Comparison of the Three Months Ended June 30, 2015 to June 30, 2014 (Dollars in Thousands):
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2015
 
2014
 
Amount
 
%
Net interest income
 
 
 
 
 
 
 
Interest income
$
24,598

 
$
26,901

 
$
(2,303
)
 
(8.6
)%
Interest expense
5,326

 
5,710

 
(384
)
 
(6.7
)%
Net interest income
19,272

 
21,191

 
(1,919
)
 
(9.1
)%
 
 
 
 
 
 
 
 
Property and other revenues
 
 
 
 
 
 
 
Rental and other income
15,027

 
5,634

 
9,393

 
166.7
 %
Total property and other revenues
15,027

 
5,634

 
9,393

 
166.7
 %
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Asset management and other fees - related party
6,031

 
5,723

 
308

 
5.4
 %
Mortgage notes interest expense
3,737

 
1,519

 
2,218

 
146.0
 %
Transaction costs
443

 
758

 
(315
)
 
(41.6
)%
Property operating expenses
7,524

 
2,787

 
4,737

 
170.0
 %
General and administrative expenses
4,106

 
3,529

 
577

 
16.4
 %
Depreciation and amortization
3,262

 
1,420

 
1,842

 
129.7
 %
Total expenses
25,103

 
15,736

 
9,367

 
59.5
 %
 
 
 
 
 
 
 
 
Other income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on investments and other
(3,731
)
 
—

 
(3,731
)
 
100.0
 %
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
5,465

 
11,089

 
(5,624
)
 
(50.7
)%
Equity in earnings (losses) of unconsolidated ventures
9,509

 
9,740

 
(231
)
 
(2.4
)%
Income tax benefit (expense)
(779
)
 
(779
)
 
—

 
—
 %
Net income (loss)
$
14,195

 
$
20,050

 
$
(5,855
)
 
(29.2
)%
Net Interest Income
Net interest income is interest income generated on our interest-earning assets less interest expense on our related interest-bearing liabilities.

48


The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the three months ended June 30, 2015 and 2014. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):
 
Three Months Ended June 30,
 
2015
 
2014
 
Average
Carrying
Value (1)
 
Interest
Income/
Expense (2)
 
WA Yield/
Financing
Cost (3)
 
Average
Carrying
Value (1)
 
Interest
Income/
Expense (2)
 
WA Yield/
Financing
Cost (3)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
CRE debt investments
$
1,224,525

 
$
23,142

 
7.56
%
 
$
1,173,219

 
$
25,405

 
8.66
%
CRE securities investments
51,656

 
1,456

 
11.27
%
 
53,854

 
1,496

 
11.11
%
 
$
1,276,181

 
$
24,598

 
7.71
%
 
$
1,227,073

 
$
26,901

 
8.77
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Securitization bonds payable
$
294,994

 
$
2,346

 
3.18
%
 
$
487,421

 
$
4,601

 
3.78
%
Credit facilities
269,483

 
2,980

 
4.42
%
 
98,803

 
1,109

 
4.49
%
 
$
564,477

 
$
5,326

 
3.77
%
 
$
586,224

 
$
5,710

 
3.90
%
Net interest income
 
 
$
19,272

 
 
 
 
 
$
21,191

 
 
_____________________________________________
(1)
Based on amortized cost for CRE debt and securities investments and principal amount for securitization bonds payable and credit facilities. All amounts are calculated based on quarterly averages.
(2)
Includes the effect of amortization of premium or accretion of discount and deferred fees.
(3)
Calculated as interest income or expense divided by average carrying value.
Interest income decrease of $2.3 million was primarily attributable to a decrease in income of $8.2 million for loans that paid off during or subsequent to the second quarter 2014, partially offset by an increase in income of $5.5 million on new loans originated and prepayment fees on loans that paid off in the second quarter 2015.
Interest expense decrease of $0.4 million was primarily attributable to a decrease in expense for our Securitization Financing Transactions due to repayments, partially offset by an increase in expense on our Credit Facilities due to new borrowings.
Other Revenues
Rental and Other Income
Rental and other income increase of $9.4 million was attributable to real estate equity investments acquired subsequent to the first quarter 2014.
Expenses
Asset Management and Other Fees - Related Party
Asset management and other fees - related party increase of $0.3 million was primarily due to an increase in asset management fees driven by an increase in average invested assets.
Mortgage Notes Interest Expense
Mortgage notes interest expense increase of $2.2 million was attributable to real estate equity investments acquired subsequent to the first quarter 2014.
Transaction Costs
Transaction costs represent costs such as professional fees associated with the acquisition of real estate equity investments.
Property Operating Expenses
Property operating expenses increase of $4.7 million was attributable to real estate equity investments acquired subsequent to the first quarter 2014.
General and Administrative Expenses
General and administrative expenses are incurred at the corporate level. General and administrative expenses include auditing and professional fees, director fees and other costs associated with operating our business. General and administrative expenses increase of $0.6 million was primarily attributable to an increase in average invested assets of $450.0 million, driven

49


by an increase in operating real estate of $250.0 million and debt investments of $200.0 million, resulting in a $0.6 million increase in expense.
Depreciation and Amortization
Depreciation and amortization expense increase of $1.8 million was attributable to real estate equity investments acquired subsequent to the first quarter 2014.
Unrealized Gain (Loss) on Investments and Other
For the three months ended June 30, 2015, we recorded an unrealized loss of $3.7 million on PE Investment I, representing a partial reversal of an unrealized gain recorded in the fourth quarter 2014. We did not record any unrealized gain (loss) in the three months ended June 30, 2014.
Equity in Earnings (Losses) of Unconsolidated Ventures
Equity in earnings (losses) of unconsolidated ventures decrease of $0.2 million was primarily attributable to a decrease in earnings from PE Investments partially offset by an increase in earnings from a joint venture entered into in the second quarter 2014.
Income Tax Benefit (Expense)
For the three months ended June 30, 2015 and 2014, we recorded income tax expense of $0.8 million related to PE Investments.
Comparison of the Six Months Ended June 30, 2015 to June 30, 2014 (Dollars in Thousands):
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2015
 
2014
 
Amount
 
%
Net interest income
 
 
 
 
 
 
 
Interest income
$
50,219

 
$
51,002

 
$
(783
)
 
(1.5
)%
Interest expense
11,150

 
11,294

 
(144
)
 
(1.3
)%
Net interest income
39,069

 
39,708

 
(639
)
 
(1.6
)%
 
 
 
 
 
 
 
 
Property and other revenues
 
 
 
 
 
 
 
Rental and other income
30,027

 
10,478

 
19,549

 
186.6
 %
Total property and other revenues
30,027

 
10,478

 
19,549

 
186.6
 %
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Asset management and other fees - related party
12,397

 
10,642

 
1,755

 
16.5
 %
Mortgage notes interest expense
7,248

 
2,805

 
4,443

 
158.4
 %
Transaction costs
577

 
770

 
(193
)
 
(25.1
)%
Property operating expenses
14,770

 
5,245

 
9,525

 
181.6
 %
General and administrative expenses
7,897

 
6,090

 
1,807

 
29.7
 %
Depreciation and amortization
7,517

 
2,603

 
4,914

 
188.8
 %
Total expenses
50,406

 
28,155

 
22,251

 
79.0
 %
 
 
 
 
 
 
 
 
Other income (loss)
 
 
 
 
 
 
 
Realized gain (loss) on investments and other
—

 
(175
)
 
175

 
100.0
 %
Unrealized gain (loss) on investments and other
(5,586
)
 
—

 
(5,586
)
 
(100.0
)%
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
13,104

 
21,856

 
(8,752
)
 
(40.0
)%
Equity in earnings (losses) of unconsolidated ventures
19,833

 
19,591

 
242

 
1.2
 %
Income tax benefit (expense)
(1,520
)
 
(1,493
)
 
(27
)
 
1.8
 %
Net income (loss)
$
31,417

 
$
39,954

 
$
(8,537
)
 
(21.4
)%

50


Net Interest Income
Net interest income is interest income generated on our interest-earning assets less interest expense on our related interest-bearing liabilities.
The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the six months ended June 30, 2015 and 2014. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):
 
Six Months Ended June 30,
 
2015
 
2014
 
Average
Carrying
Value (1)
 
Interest
Income/
Expense (2)
 
WA Yield/
Financing
Cost (3)
 
Average
Carrying
Value (1)
 
Interest
Income/
Expense (2)
 
WA Yield/
Financing
Cost (3)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
CRE debt investments
$
1,258,992

 
$
47,300

 
7.51
%
 
$
1,146,237

 
$
48,032

 
8.38
%
CRE securities investments
51,511

 
2,919

 
11.33
%
 
53,705

 
2,970

 
11.06
%
 
$
1,310,503

 
$
50,219

 
7.66
%
 
$
1,199,942

 
$
51,002

 
8.50
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Securitization bonds payable
$
334,624

 
$
4,401

 
2.63
%
 
$
494,067

 
$
9,354

 
3.79
%
Credit facilities
269,483

 
6,749

 
5.01
%
 
75,309

 
1,940

 
5.15
%
 
$
604,107

 
$
11,150

 
3.69
%
 
$
569,376

 
$
11,294

 
3.97
%
Net interest income
 
 
$
39,069

 
 
 
 
 
$
39,708

 
 
_____________________________________________
(1)
Based on amortized cost for CRE debt and securities investments and principal amount for securitization bonds payable and credit facilities. All amounts are calculated based on quarterly averages.
(2)
Includes the effect of amortization of premium or accretion of discount and deferred fees.
(3)
Calculated as interest income or expense divided by average carrying value.
Interest income decrease of $0.8 million was primarily attributable to a decrease in income of $14.9 million for loans that paid off during or subsequent to the second quarter 2014, partially offset by an increase in income of $13.4 million on new loans originated and $0.7 million on additional funding on existing loans.
Interest expense decrease of $0.1 million was primarily attributable to a decrease in expense for our Securitization Financing Transactions due to repayments, partially offset by an increase in expense on our Credit Facilities due to new borrowings.
Other Revenues
Rental and Other Income
Rental and other income increase of $19.5 million was attributable to real estate equity investments acquired subsequent to the first quarter 2014.
Expenses
Asset Management and Other Fees - Related Party
Asset management and other fees - related party increase of $1.8 million was primarily due to an increase in asset management fees driven by an increase in average invested assets.
Mortgage Notes Interest Expense
Mortgage notes interest expense increase of $4.4 million was attributable to real estate equity investments acquired subsequent to the first quarter 2014.
Transaction Costs
Transaction costs represent costs such as professional fees associated with new real estate equity investments.
Property Operating Expenses
Property operating expenses increase of $9.5 million was attributable to real estate equity investments acquired subsequent to the first quarter 2014.

51


General and Administrative Expenses
General and administrative expenses are incurred at the corporate level. General and administrative expenses include auditing and professional fees, director fees and other costs associated with operating our business. General and administrative expenses increase of $1.8 million was primarily attributable to an increase in average invested assets of $450.0 million, driven by an increase in debt investments of $250.0 million and operating real estate of $200.0 million, resulting in a $1.8 million increase in expense.
Depreciation and Amortization
Depreciation and amortization expense increase of $4.9 million was attributable to real estate equity investments acquired subsequent to the first quarter 2014.
Realized Gain (Loss) on Investments and Other
In the first quarter 2014, we recognized a realized loss of $0.2 million from the sale of a mezzanine loan participation. There were no sales of investments in the six months ended June 30, 2015.
Unrealized Gain (Loss) on Investments and Other
For the six months ended June 30, 2015, we recorded an unrealized loss of $5.6 million on PE Investment I, representing a partial reversal of an unrealized gain recorded in the fourth quarter 2014. We did not record any unrealized gain (loss) in the six months ended June 30, 2014.
Equity in Earnings (Losses) of Unconsolidated Ventures
Equity in earnings (losses) of unconsolidated ventures increase of $0.2 million was primarily attributable to earnings from a joint venture entered into in the second quarter 2014 partially offset by a decrease in earnings from PE Investments.
Income Tax Benefit (Expense)
For the six months ended June 30, 2015 and 2014, we recorded income tax expense of $1.5 million related to PE Investments.
Liquidity and Capital Resources
We require capital to fund our investment activities, operating expenses and to make distributions. Our capital sources may include cash flow from operations, net proceeds from asset repayments and sales, securitization financing transactions, borrowings under our Credit Facilities, mortgage notes and other term borrowings and proceeds from our DRP.
Securitization Financing Transactions
We entered into two Securitization Financing Transactions in 2012 and 2013 that provide permanent, non-recourse, non-mark-to-market financing for a portion of our CRE debt investments that were generally initially financed on our Term Loan Facilities. In the future, we expect to execute similar transactions to finance our newly-originated debt investments that might initially be financed on our Term Loan Facilities, although there is no assurance that will be the case. As of June 30, 2015, we had $431.8 million carrying value of CRE debt investments financed with $283.6 million of securitization bonds.
Securitization 2013-1
In August 2013, we closed our $531.5 million Securitization 2013-1. We, through our subsidiaries, initially contributed eight CRE debt investments with a $346.1 million aggregate principal amount and NorthStar Realty, through its subsidiaries, transferred three senior loans with an aggregate principal amount of $79.1 million at cost to Securitization 2013-1. NorthStar Realty did not retain any interest in such senior loans. Subsequent to the closing of Securitization 2013-1, we contributed four additional CRE debt investments with a $105.5 million aggregate principal balance. A total of $382.7 million of permanent, non-recourse, non-mark-to-market investment-grade securitization bonds were issued, representing an advance rate of 72.0% at a weighted average coupon of LIBOR plus 2.72%. We retained all of the below investment-grade bonds in Securitization 2013-1. The documents that govern Securitization 2013-1 require that the underlying assets meet a collateral value coverage test, or OC test, and an interest coverage test, or IC test (as defined by each applicable governing document) in order for us to receive regular cash flow distributions and defaults in our CRE debt investments, among other things, can negatively impact the OC and IC tests. Failing such tests means that cash flow that would normally be distributed to us would be used to amortize the investment-grade securitization bonds until the tests are back in compliance. In such cases, this could decrease cash available to pay our distributions and affect compliance with REIT requirements.

52


The following table presents the OC and IC cushion as of the closing date of the transaction and the remittance report dated closest to June 30, 2015 (dollars in thousands):
 
 
OC
 
IC
Cushion at closing date of transaction
 
$
91,431

 
$
799

Cushion at remittance report dated closest to June 30, 2015
 
106,253

 
1,310

While our Advisor devotes a significant amount of resources to managing our existing investments, including assets collateralizing Securitization 2013-1, maintaining compliance with these tests is not a certainty.
Securitization 2012-1
In November 2012, we closed our Securitization 2012-1 which was collateralized by $351.4 million of directly originated CRE debt by us and NorthStar Realty. We, through our subsidiaries, contributed nine CRE debt investments with a $199.2 million aggregate principal amount to our Securitization 2012-1 and NorthStar Realty, through its subsidiaries, contributed five CRE debt investments with a $152.2 million aggregate principal amount. A total of $227.5 million of permanent, non-recourse, non-mark-to-market investment-grade securitization bonds were issued. We and NorthStar Realty retained all of the below investment-grade securitization bonds in Securitization 2012-1. In January 2015, all of the original bonds were repaid in full.
Credit Facilities
We currently have four Credit Facilities including two Term Loan Facilities that provide up to an aggregate of $350.0 million to finance the origination of first mortgage loans and senior loan participations secured by commercial real estate and two CMBS Facilities. The interest rate and advance rate depend on asset type and characteristic. Maturity dates of our Term Loan Facilities range from March 2016 to October 2016 and all have extensions available at our option, subject to the satisfaction of certain customary conditions, with maturity dates extending through October 2019. The advance rate and maturity date of our CMBS Facilities depend upon asset type. Our Credit Facilities contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. We are currently in compliance with all of our financial covenants under our Credit Facilities.
In July 2012, a subsidiary of the Company entered into a credit and security agreement (“Loan Facility 3”) which had an initial maturity date of July 30, 2015. The Company did not elect to exercise its extension option as set forth in the governing documents and as of the date of election there were no assets financed under this facility.
Offering
We have raised total gross proceeds of $1.2 billion.
We are no longer raising capital from our Primary Offering and we have invested substantially all of the net proceeds from our Primary Offering. Since the successful completion of our Primary Offering, we have only been raising new equity capital through our DRP, and as such, do not expect significant new investment activity. However, as investments are repaid or sold, we expect that those proceeds will be reinvested. Our inability to invest these proceeds could reduce our net income and limit our ability to make distributions. Further, we have certain fixed direct and indirect operating expenses, including certain expenses as a publicly-registered REIT. We expect our net income from operations will be sufficient to cover such expenses.
Our charter limits us from incurring borrowings that would exceed 300% of our net assets. We cannot exceed this limit unless any excess in borrowing over such level is approved by our stockholders. An approximation of this leverage calculation is 75% of the cost of our investments, excluding indirect leverage held through our unconsolidated venture investments. As of June 30, 2015, our leverage as a percentage of our cost of investments was 49%.
In addition to making investments in accordance with our investment objectives, we use or have used our capital resources to make certain payments to our Advisor, our Prior Advisor and NorthStar Securities, LLC, or our Dealer Manager. During our organization and offering stage, these payments included payments to our Dealer Manager for selling commissions and dealer manager fees and payments to our Prior Advisor, or its affiliates, as applicable, for reimbursement of certain organization and offering costs. Total selling commissions, dealer manager fees and reimbursable organization and offering expenses through the completion of our Total Primary Offering was 10.7% of total proceeds raised from our Total Primary Offering, below the 15.0% maximum allowed. We expect to continue to make payments to our Advisor, or its affiliates, as applicable, 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. On June 30, 2014, we entered into a new advisory agreement with our Advisor, on terms substantially similar to those set forth in our prior advisory agreement with our Prior Advisor, which 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

53


board of directors, including a majority of our independent directors. On June 25, 2015, our board of directors approved the renewal of the advisory agreement for an additional one-year term, on terms identical to those previously in effect.
Cash Flows
The following presents a summary of our consolidated statements of cash flows for the six months ended June 30, 2015 and 2014 (dollars in thousands):
 
 
Six Months Ended June 30,
Cash flow provided by (used in):
 
2015
 
2014
Operating activities
 
$
47,432

 
$
46,160

Investing activities
 
114,266

 
(198,734
)
Financing activities
 
(157,159
)
 
130,708

Net increase (decrease) in cash
 
$
4,539

 
$
(21,866
)
Six Months Ended June 30, 2015 Compared to June 30, 2014
Net cash provided by operating activities was $47.4 million for the six months ended June 30, 2015 compared to $46.2 million for the six months ended June 30, 2014. Net cash provided by operating activities related to net interest income and rental income generated from our investments and distributions from PE Investments, partially offset by fees paid to our Advisor for the management of our investments, interest expense on borrowings, payment of property operating expenses and general and administrative expenses.
Net cash provided by investing activities was $114.3 million for the six months ended June 30, 2015 compared to net cash used of $198.7 million for the six months ended June 30, 2014. Net cash provided by investing activities for the six months ended June 30, 2015 related to repayments from CRE debt investments and distributions from PE Investments, partially offset by additional fundings on CRE debt investments and improvements of operating real estate. Net cash used in investing activities for the six months ended June 30, 2014 related to the origination of CRE debt investments, investments in unconsolidated ventures and the acquisition of operating real estate, partially offset by repayments from CRE debt investments, distributions from PE Investments and proceeds from the sale of a CRE debt investment.
Net cash used in financing activities was $157.2 million for the six months ended June 30, 2015 compared to net cash provided by financing activities of $130.7 million for the six months ended June 30, 2014. Net cash used in financing activities for the six months ended June 30, 2015 related to the repayment of securitization bonds, distributions paid on our common stock and share repurchases, partially offset by proceeds from our DRP. Net cash provided by financing activities for the six months ended June 30, 2014 related to net borrowings from Credit Facilities, a decrease in restricted cash at Securitization 2013-1 and proceeds from our DRP, partially offset by distributions paid on our common stock, repayment of securitization bonds, share repurchases and the payment of deferred financing costs.
Off-Balance Sheet Arrangements
We have certain arrangements which do not meet the definition of off-balance sheet arrangements, but do have some of the characteristics of off-balance sheet arrangements. We have made investments in unconsolidated ventures. Refer to Note 5. “Investments in Unconsolidated Ventures” in Item 1. “Financial Statements” for a discussion of such unconsolidated ventures in our consolidated financial statements. In each case, our exposure to loss is limited to the carrying value of our investment.
Related Party Arrangements
Advisor
In connection with the completion of NorthStar Realty’s spin-off of its asset management business into our Sponsor, on June 30, 2014, we entered into a new advisory agreement with our Advisor, an affiliate of our Sponsor, on terms substantially similar to those set forth in the prior advisory agreement, and terminated the advisory agreement with our Prior Advisor. For periods prior to June 30, 2014, the information below regarding fees and reimbursements incurred and accrued but not yet paid relates to our Prior Advisor.
Subject to certain restrictions and limitations, our Advisor is responsible for managing our affairs on a day-to-day basis and for identifying, originating, acquiring and asset managing investments on our behalf. Our Advisor may delegate certain of its obligations to affiliated entities, which may be organized under the laws of the United States or foreign jurisdictions.

54


References to our Advisor include our Advisor and any such affiliated entities. For such services, to the extent permitted by law and regulations, our Advisor receives fees and reimbursement from us. Below is a description and table of the fees and reimbursements incurred to our Advisor.
Fees to Advisor
Asset Management Fee
Our Advisor, or its affiliates, receives a monthly asset management fee equal to one-twelfth of 1.25% of the sum of the amount funded or allocated for CRE investments, including expenses and any financing attributable to such investments, less any principal received on debt and securities investments (or our proportionate share thereof in the case of an investment made through a joint venture).
Acquisition Fee
Our Advisor, or its affiliates, also receives an acquisition fee equal to 1.0% of the amount funded or allocated by us to originate or acquire investments, including acquisition costs and any financing attributable to such investments (or our proportionate share thereof in the case of an investment made through a joint venture). An acquisition fee paid to our Advisor related to the origination or acquisition of CRE debt investments is included in CRE debt investments, net on our consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method. An acquisition fee incurred related to an equity investment will generally be expensed as incurred. An acquisition fee paid to our Advisor related to the acquisition of an equity or debt investment in an unconsolidated joint venture is included in investments in unconsolidated ventures on our consolidated balance sheets.
Disposition Fee
For substantial assistance in connection with the sale of investments and based on the services provided, our Advisor, or its affiliates, receives a disposition fee of 1.0% of the contract sales price of each CRE investment sold. We do not pay a disposition fee upon the maturity, prepayment, workout, modification or extension of a CRE debt investment unless there is a corresponding fee paid by our borrower, in which case the disposition fee is the lesser of: (i) 1.0% of the principal amount of the CRE debt investment prior to such transaction; or (ii) the amount of the fee paid by our borrower in connection with such transaction. If we take ownership of a property as a result of a workout or foreclosure of a CRE debt investment, we will pay a disposition fee upon the sale of such property. A disposition fee from the sale of an investment is generally expensed and included in asset management and other fees - related party in our consolidated statements of operations. A disposition fee for a CRE debt investment incurred in a transaction other than a sale is included in CRE debt investments, net on our consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method.
Reimbursements to Advisor
Operating Costs
Our Advisor, or its affiliates, is entitled to receive reimbursement for direct and indirect operating costs incurred by our Advisor in connection with administrative services provided to us. Our Advisor allocates, in good faith, indirect costs to us related to our Advisor’s and its affiliates’ employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the advisory agreement with our Advisor. The indirect costs include our allocable share of our Advisor’s compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing our affairs, based upon the percentage of time devoted by such personnel to our affairs. The indirect costs also include rental and occupancy, technology, office supplies and other general and administrative costs and expenses. However, there is no reimbursement for personnel costs related to executive officers and other personnel involved in activities for which our Advisor receives an acquisition fee or a disposition fee. Our Advisor allocates these costs to us relative to its and its affiliates’ other managed companies in good faith and has reviewed the allocation with our board of directors, including its independent directors. Our Advisor will update the board of directors on a quarterly basis of any material changes to the expense allocation and will provide a detailed review to the board of directors, at least annually, and as otherwise requested by the board of directors. We reimburse our Advisor quarterly for operating costs (including the asset management fee) based on a calculation for the four preceding fiscal quarters not to exceed the greater of: (i) 2.0% of our average invested assets; or (ii) 25.0% of our net income determined without reduction for any additions to reserves for depreciation, loan losses or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Notwithstanding the above, we may reimburse our Advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. We calculate the expense reimbursement quarterly based upon the trailing twelve-month period.

55


Organization and Offering Costs
Our Prior Advisor, or its affiliates, was entitled to receive reimbursement for organization and offering costs paid on behalf of us in connection with our Offering. We were obligated to reimburse our Prior Advisor, or its affiliates, as applicable, for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs did not exceed 15.0% of gross proceeds from our Primary Offering. Our Prior Advisor initially expected cumulative organization and offering costs, excluding selling commissions and dealer manager fees, would not exceed $15.0 million, or 1.5% of the proceeds expected to be raised from our Total Primary Offering. Based on gross proceeds raised of $1,072.9 million from our Total Primary Offering, we incurred reimbursable organization and offering costs, excluding selling commissions and dealer manager fees, of 1.0%, which was less than the 1.5% expected. The Company’s independent directors did not determine that any of the organization and offering costs were unfair or commercially unreasonable. Total underwriting compensation through the completion of our Total Primary Offering, including selling commissions, the dealer manager fee and amounts reimbursed to participating broker-dealers and investment advisors, did not exceed the 10.0% of gross Total Primary Offering proceeds limitation prescribed by the Financial Industry Regulatory Authority, Inc.
Dealer Manager
Selling Commissions and Dealer Manager Fees
Pursuant to the dealer manager agreement, we paid our Dealer Manager selling commissions of up to 7.0% of gross proceeds from our Total Primary Offering, all of which were reallowed to participating broker-dealers. In addition, we paid our Dealer Manager a dealer manager fee of up to 3.0% of gross proceeds from our Total Primary Offering, a portion of which was reallowed to participating broker-dealers and paid to certain employees of our Dealer Manager. No selling commissions or dealer manager fees are paid for sales pursuant to our DRP.
Summary of Fees and Reimbursements
The following table presents the fees and reimbursements incurred to our Advisor for the three and six months ended June 30, 2015 and 2014 (dollars in thousands):
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Type of Fee or Reimbursement
 
Financial Statement Location
 
2015
 
2014
 
2015
 
2014
Fees to Advisor
 
 
 
 
 
 
 
 
 
 
Asset management
 
Asset management and other fees-related party
 
$
6,031

 
$
5,379

 
$
12,397

 
$
10,123

Acquisition (1)
 
Real estate debt investments, net / Investments in unconsolidated ventures / Asset management and other fees- related party
 
—

 
3,369

 
—

 
3,489

Disposition (1)
 
Real estate debt investments, net / Asset management and other fees- related party
 
220

 
632

 
1,236

 
807

Reimbursements to Advisor
 
 
 
 
 
 
 
 
 
 
Operating costs (2)
 
General and administrative expenses
 
3,624

 
3,007

 
6,378

 
5,262

____________________________________
(1)
Acquisition/disposition fees incurred to our Advisor related to CRE debt investments are generally offset by origination/exit fees paid to us by borrowers if such fees are required from the borrower. Acquisition fees related to equity investments are included in asset management and other fees - related party in our consolidated statements of operations. Acquisition fees related to investments in unconsolidated joint ventures are included in investments in unconsolidated ventures on our consolidated balance sheets. Our Advisor may determine to defer fees or seek reimbursement. From inception through June 30, 2015, our Advisor deferred $0.5 million of acquisition fees and $0.4 million of disposition fees related to CRE securities.
(2)
As of June 30, 2015, our Advisor has incurred unreimbursed operating costs on our behalf of $7.0 million, that remain eligible to allocate to us.
NorthStar Realty Purchase of Common Stock
Pursuant to the Second Amended and Restated Distribution Support Agreement, as amended, or our Distribution Support Agreement, NorthStar Realty committed to purchase up to an aggregate of $10.0 million in shares of our common stock at a price of $9.00 per share if cash distributions exceed MFFO to provide additional funds to support distributions to stockholders. From inception through the expiration of our Distribution Support Agreement in July 2013, NorthStar Realty purchased 507,980 shares of our common stock for $4.6 million under such commitment.

56


Securitization 2012-1
We entered into an agreement with NorthStar Realty that provided that both we and NorthStar Realty receive the economic benefit and bear the economic risk associated with the investments we and NorthStar Realty each contributed into Securitization 2012-1. In January 2015, all of the original bonds were repaid in full.
Securitization 2013-1
In August 2013, we closed Securitization 2013-1. We initially contributed eight CRE debt investments with a $346.1 million aggregate principal amount. NorthStar Realty transferred three senior loans with an aggregate principal amount of $79.1 million at cost to Securitization 2013-1. NorthStar Realty did not retain any interest in such senior loans. An affiliate of our Sponsor was named special servicer of Securitization 2013-1.
PE Investments
In connection with PE Investments, we guaranteed all of our funding obligations that may be due and owed under the governing documents indirectly through an indemnification with NorthStar Realty, which in turn guaranteed the obligations directly to the PE Investment entities. We and NorthStar Realty each agreed to indemnify the other proportionately for any losses that may arise in connection with the funding and other obligations as set forth in the governing documents in the case of a joint default by us and NorthStar Realty. We and NorthStar Realty further agreed to indemnify each other for all of the losses that may arise as a result of a default that was solely caused by us or NorthStar Realty, as the case may be.
PE Investment I
In connection with PE Investment I, we assumed the rights to subscribe to 29.5% of PE Investment I from NorthStar Realty. We and NorthStar Realty contributed cash of $400.1 million, of which we and NorthStar Realty contributed $118.0 million and $282.1 million, respectively.
Recent Developments
Distribution Reinvestment Plan
From July 1, 2015 through August 11, 2015, we issued 0.8 million shares of common stock pursuant to our DRP raising proceeds of $7.3 million. As of August 11, 2015, 5.7 million shares were available to be issued pursuant to our DRP.
Distributions
On August 11, 2015, 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, 2015. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution was accrued.
Share Repurchases
From July 1, 2015 through August 11, 2015, we repurchased 0.5 million shares for a total of $4.8 million or a weighted average price of $9.58 per share under a share repurchase program, or our Share Repurchase Program, that enables stockholders to sell their shares to us in certain circumstances, including death or a qualifying disability. We fund repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from our DRP.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance significantly more than inflation does. A change in interest rates may correlate with the inflation rate. Substantially all of the leases at our multifamily and student housing properties allow for monthly or annual rent increases which provide us with the opportunity to achieve increases, where justified by the market, as each lease matures. Such types of leases generally minimize the risks of inflation on our multifamily and student housing properties.
Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for additional details.

57


Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
We believe that FFO and MFFO, both of which are a non-GAAP measure, are additional appropriate measures of the operating performance of a REIT and of us 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 (loss) (computed in accordance with U.S. GAAP), excluding gains (losses) from sales of depreciable property, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, impairment on depreciable property owned directly or indirectly and after adjustments for unconsolidated ventures.
Changes in the accounting and reporting rules under U.S. GAAP that have been put into effect since the establishment of NAREIT’s definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. For instance, the accounting treatment for acquisition fees related to business combinations has changed from being capitalized to being expensed. Additionally, publicly registered, non-traded REITs are typically different from traded REITs because they generally have a limited life followed by a liquidity event or other targeted exit strategy. Non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation as compared to later years when the proceeds from their initial public offering have been fully invested and when they may seek to implement a liquidity event or other exit strategy. However, we continue to make investments past the acquisition and development stage, albeit at a substantially lower pace.
Acquisition fees paid to our Advisor in connection with the origination and acquisition of debt investments are amortized over the life of the investment as an adjustment to interest income under U.S. GAAP and are therefore included in the computation of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures, both of which are performance measures under U.S. GAAP. Such acquisition fees are paid in cash that would otherwise be available to distribute to our stockholders. We believe that acquisition fees incurred by us negatively impact our operating performance during the period in which such investments are originated or acquired by reducing cash flow and therefore the potential distributions to our stockholders. However, in general, we earn origination fees for debt investments from our borrowers in an amount equal to the acquisition fees paid to our Advisor, and as a result, the impact of acquisition fees to our operating performance and cash flow would be minimal.
Acquisition fees and expenses paid to our Advisor and third parties in connection with the acquisition of equity investments are considered expenses and are included in the determination of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense), both of which are performance measures under U.S. GAAP. Such fees and expenses will not be reimbursed by our Advisor or its affiliates and third parties, and therefore if there are no further proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operating earnings, cash flow or net proceeds from the sale of investments or properties. All paid and accrued acquisition fees and expenses will have negative effects on future distributions to stockholders and cash flow generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.
The origination and acquisition of debt investments and the corresponding acquisition fees paid to our Advisor (and any offsetting origination fees received from our borrowers) associated with such activity is a key operating feature of our business plan that results in generating income and cash flow in order to make distributions to our stockholders. Therefore, the exclusion for acquisition fees may be of limited value in calculating operating performance because acquisition fees affect our overall long-term operating performance and may be recurring in nature as part of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense) over our life.
Due to certain of the unique features of publicly-registered, non-traded REITs, the Investment Program Association, or the IPA, an industry trade group, standardized a performance measure known as MFFO and recommends the use of MFFO for such REITs. Management believes MFFO is a useful performance measure to evaluate our business and further believes it is important to disclose MFFO in order to be consistent with the IPA recommendation and other non-traded REITs. MFFO that adjusts for items such as acquisition fees would only be comparable to non-traded REITs that have completed the majority of their acquisition activity and have other similar operating characteristics as us. Neither the Securities and Exchange Commission, or the SEC, nor any other regulatory body has approved the acceptability of the adjustments that we use to calculate MFFO. In the future, the SEC or another regulatory body may decide to standardize permitted adjustments across the non-listed REIT industry and we may need to adjust our calculation and characterization of MFFO.
MFFO is a metric used by management to evaluate our future operating performance once our organization and offering and acquisition and development stages are complete and is not intended to be used as a liquidity measure. Although management

58


uses the MFFO metric to evaluate future operating performance, this metric excludes certain key operating items and other adjustments that may affect our overall operating performance. MFFO is not equivalent to net income (loss) as determined under U.S. GAAP. In addition, MFFO is not a useful measure in evaluating net asset value, since an impairment is taken into account in determining net asset value but not in determining MFFO.
We define MFFO in accordance with the concepts established by the IPA and adjust for certain items, such as accretion of a discount and amortization of a premium on borrowings and related deferred financing costs, as such adjustments are comparable to adjustments for debt investments and will be helpful in assessing our operating performance. We also adjust MFFO for deferred tax benefit or expense, as applicable, as such items are not indicative of our operating performance. Our computation of MFFO may not be comparable to other REITs that do not calculate MFFO using the same method. MFFO is calculated using FFO. FFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company’s cash flow generated by operations. MFFO excludes from FFO the following items:
•
acquisition fees and expenses;
•
non-cash amounts related to straight-line rent and the amortization of above or below market and in-place intangible lease assets and liabilities (which are adjusted in order to reflect such payments from an accrual basis of accounting under U.S. GAAP to a cash basis of accounting);
•
amortization of a premium and accretion of a discount on debt investments;
•
non-recurring impairment of real estate-related investments;
•
realized gains (losses) from the early extinguishment of debt;
•
realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business;
•
unrealized gains (losses) from fair value adjustments on real estate securities, including CMBS and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings;
•
unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting;
•
adjustments related to contingent purchase price obligations; and
•
adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above.
Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.
MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves/impairment on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. With respect to debt investments, we consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business. Fair value is typically estimated based on discounting expected future cash flow of the underlying collateral taking into consideration the discount rate, capitalization rate, occupancy, creditworthiness of major tenants and many other factors. This requires significant judgment and because it is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If the estimated fair value of the underlying collateral for the debt investment is less than its net carrying value, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. With respect to a real estate investment, a property’s value is considered impaired if our estimate of the aggregate future undiscounted cash flow to be generated by the property is less than the carrying value of the property. The value of our investments may be impaired and their carrying values may not be recoverable due to our limited life. Investors should note that while impairment charges are excluded from the calculation of MFFO, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flow and the relatively limited term of a non-traded REIT’s anticipated operations, it could be difficult to recover any impairment charges through operational net revenues or cash flow prior to any liquidity event.
We believe that MFFO is a useful non-GAAP measure for non-traded REITs. It is helpful to management and stockholders in assessing our future operating performance once our organization and offering and acquisition and development stages are complete, because it eliminates from net income non-cash fair value adjustments on our real estate securities and acquisition

59


fees and expenses that are incurred as part of our investment activities. However, MFFO may not be a useful measure of our operating performance or as a comparable measure to other typical non-traded REITs if we do not continue to operate in a similar manner to other non-traded REITs, including if we were to extend our acquisition and development stage or if we determined not to pursue an exit strategy.
However, MFFO does have certain limitations. For instance, the effect of any amortization or accretion on debt investments originated or acquired at a premium or discount, respectively, is not reported in MFFO. In addition, realized gains (losses) from acquisitions and dispositions and other adjustments listed above are not reported in MFFO, even though such realized gains (losses) and other adjustments could affect our operating performance and cash available for distribution. Stockholders should note that any cash gains generated from the sale of investments would generally be used to fund new investments. Any mark-to-market or fair value adjustments may be based on many factors, including current operational or individual property issues or general market or overall industry conditions.
Neither FFO nor MFFO is equivalent to net income (loss) or cash flow provided by operating activities determined in accordance with U.S. GAAP and should not be construed to be more relevant or accurate than the U.S. GAAP methodology in evaluating our operating performance. Neither FFO nor MFFO is necessarily indicative of cash flow available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Furthermore, neither FFO nor MFFO should be considered as an alternative to net income (loss) as an indicator of our operating performance.
The following table presents a reconciliation of FFO and MFFO to net income (loss) attributable to common stockholders (dollars in thousands):

Three Months Ended June 30,
 
Six Months Ended June 30,

2015
 
2014
 
2015
 
2014
Funds from operations:



 
 
 
 
Net income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders
$
13,943


$
20,228

 
$
31,087

 
$
40,159

Adjustments:



 
 
 
 
Depreciation and amortization
3,262


1,420

 
7,517

 
2,603

Depreciation and amortization related to non-controlling interests
(402
)
 
(221
)
 
(1,012
)
 
(397
)
Funds from operations
$
16,803


$
21,427

 
$
37,592

 
$
42,365

Modified funds from operations:



 
 
 
 
Funds from operations
$
16,803


$
21,427

 
$
37,592

 
$
42,365

Adjustments:
 
 
 
 
 
 
 
Amortization of premiums, discounts and fees on investments and borrowings, net
1,679


2,181

 
3,647

 
4,799

Acquisition fees and transaction costs on investments
443


1,102

 
577

 
1,114

Straight-line rental (income) loss
(421
)
 
—

 
(992
)
 
—

Realized (gain) loss on investments and other
—


—

 
—

 
175

Unrealized (gain) loss on investments and other
3,731

 
—

 
5,586

 
—

Adjustments related to non-controlling interests
26

 
(159
)
 
(70
)
 
(164
)
Deferred tax (benefit) expense
97

 
420

 
97

 
775

Modified funds from operations
$
22,358


$
24,971

 
$
46,437

 
$
49,064

Distributions Declared and Paid
We generally pay distributions on a monthly basis based on daily record dates. From the commencement of our operations on October 18, 2010 through June 30, 2015, we paid distributions at an annualized distribution rate of $0.80 per share of our common stock. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution has accrued.

60


The following table presents distributions declared for the six months ended June 30, 2015 and for the year ended December 31, 2014 (dollars in thousands):
 
 
Six Months Ended June 30, 2015
 
Year Ended December 31, 2014
Distributions Declared (1)
 
 
 
 
 
 
   Cash
 
$
25,551



 
$
50,252



   DRP
 
21,601



 
42,870



Total
 
$
47,152



 
$
93,122



 
 
 
 
 
 
 
Sources of Distributions (1)
 
 
 
 
 
 
   Funds from Operations (2)
 
$
37,592

80
%
 
$
93,122

100
%
   Distribution support proceeds
 
—

—

 
—

—

   Offering proceeds
 
9,560

20
%
 
—

—

Total
 
$
47,152

100
%
 
$
93,122

100
%
 
 
 
 
 
 
 
Cash Flow Provided by (Used in) Operations
 
$
47,432

 
 
$
93,392

 
__________________________________________________
(1)
Represents distributions declared for such period, even though such distributions are actually paid to stockholders the month following such period.
(2)
From inception through June 30, 2015, we declared distributions of $253.6 million, of which 84% was paid from FFO, 14% was paid from offering proceeds and 2% was paid from distribution support proceeds. From inception through June 30, 2015, the difference between total distributions paid (including cash distributions and shares issued in connection with our DRP) and cash flow provided by operations was $24.0 million, of which $4.6 million related to shares purchased by NorthStar Realty pursuant to our Distribution Support Agreement and the remainder related to shares issued pursuant to our DRP.
Distributions in excess of our cash flow provided by operations were paid using Offering proceeds, including from the purchase of additional shares by NorthStar Realty. Over the long-term, we expect that our distributions will be paid entirely from cash flow provided by operations. However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial performance of our investments in the current real estate and financial environment, the type and mix of our investments and accounting of our investments in accordance with U.S. GAAP. Future distributions declared and paid may exceed cash flow provided by operations.
As of June 30, 2015, our portfolio generated a 12.8% current yield on invested equity before expenses and excluding uninvested cash (our portfolio generated a current yield on invested equity of 7.5%, net of expenses and including uninvested cash, as a result of the lag time in deploying capital from repayments).  There is no assurance we will realize the expected returns on invested equity over the term of these investments. Our actual return on invested equity could vary significantly from our expectations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are primarily subject to interest rate risk and credit risk. These risks are dependent on various factors beyond our control, including monetary and fiscal policies, domestic and international economic conditions and political considerations. Our market risk sensitive assets, liabilities and related derivative positions are held for investment and not for trading purposes.
Interest Rate Risk
Changes in interest rates affect our net income, which is the difference between the income earned on our investments and the interest expense incurred in connection with our borrowings and derivatives.
Our CRE debt and securities investments bear interest at either a floating or fixed-rate. The interest rate on our floating-rate assets is a fixed spread over an index such as LIBOR and typically reprices every 30 days based on LIBOR in effect at the time. Currently, most of our floating-rate CRE debt investments have a fixed minimum LIBOR rate that is in excess of current LIBOR. We will not benefit from an increase in LIBOR until it is in excess of the LIBOR floors. Given the frequent and periodic repricing of our floating-rate assets, changes in benchmark interest rates are unlikely to materially affect the value of our floating-rate portfolio. Changes in short-term rates will, however, affect income from our investments.

61


A change in interest rates could affect the value of our fixed-rate CRE debt and securities investments. For instance, an increase in interest rates would result in a higher required yield on investments, which would decrease the value on existing fixed-rate investments in order to adjust their yields to current market levels.
Our general financing strategy has focused on the use of “match-funded” structures. This means that we seek to align the maturities of our liabilities with the maturities on our assets as closely as possible in order to manage the risks of being forced to refinance our liabilities prior to the maturities of our assets. In addition, we seek to match the interest rate on our assets with like-kind borrowings, so fixed-rate investments are financed with fixed-rate borrowings and floating-rate assets are financed with floating-rate borrowings, directly or indirectly, through the use of interest rate swaps, caps and other financial instruments or through a combination of these strategies. We are subject to interest rate risk because on certain investments, we maintain a net floating-rate asset position, and, therefore, our income will increase with increases in interest rates and decrease with declines in interest rates. As of June 30, 2015, most of our floating-rate investments had LIBOR floors in excess of the current LIBOR rate and our CRE securities were fixed rate, so a hypothetical 100 basis point increase in interest rates (including the effect of the interest rate floor) would increase income by $1.4 million annually.
Credit Spread Risk
The value of our fixed and floating-rate investments also changes with market credit spreads. This means that when market-demanded risk premium, or credit spread, increases, the value of our fixed and floating-rate assets decrease and vice versa. Fixed-rate assets are valued based on a market credit spread over the rate payable on fixed-rate U.S. Treasury of like maturity. This means that their value is dependent on the yield demanded on such assets by the market, based on their credit relative to U.S. Treasuries. The floating-rate CRE debt and securities investments are valued based on a market credit spread over the applicable LIBOR. Demand for a higher yield on investments results in higher or “wider” spread over the benchmark rate (usually the applicable U.S. Treasury yield) to value these assets. Under these conditions, the value of our portfolio should decrease. Conversely, if the spread used to value these assets were to decrease or “tighten,” the value of these assets should increase.
Credit Risk
Credit risk in our CRE debt and securities investments relates to each individual borrower’s ability to make required interest and principal payments on scheduled due dates. We seek to manage credit risk through our Advisor’s comprehensive credit analysis prior to making an investment, actively monitoring our portfolio and the underlying credit quality, including subordination and diversification of our portfolio. Our analysis is based on a broad range of real estate, financial, economic and borrower-related factors which we believe are critical to the evaluation of credit risk inherent in a transaction. For the six months ended June 30, 2015, no CRE debt investment contributed more than 10% of interest income.
We are subject to the credit risk of the borrower when we make CRE debt and securities investments and the credit risk of our tenants in our real estate properties. We seek to undertake a rigorous credit evaluation of each borrower/tenant prior to making an investment. This analysis includes an extensive due diligence investigation of the borrowers/tenant’s creditworthiness and business as well as an assessment of the strategic importance of the underlying real estate to the borrowers/tenant’s core business operations.
Item 4.  Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, management conducted an evaluation as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended, or Exchange Act, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Internal Control over Financial Reporting
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. Other Information
Item 1. Legal Proceedings
We may be involved in various litigation matters arising in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, any legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.
Item 1A. Risk Factors
There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 as filed with the SEC on March 27, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We adopted our Share Repurchase Program effective July 19, 2010, which enables stockholders to sell their shares to us in limited circumstances. We may not repurchase shares unless a stockholder has held shares for one year. However, we may repurchase shares held for less than one year in connection with a stockholder’s death or disability, if the disability is deemed qualifying by our board of directors, in their sole discretion, and after receiving written notice from the stockholder or the stockholder’s estate. We are not obligated to repurchase shares under our Share Repurchase Program. We fund repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from our DRP. However, to the extent that the aggregate DRP proceeds are not sufficient to fund repurchase requests, our board of directors may, in its sole discretion, choose to use other sources of funds. Our board of directors may, in its sole discretion, amend, suspend or terminate our Share Repurchase Program at any time upon ten days’ notice except that changes in the number of shares that can be repurchased during any calendar year will take effect only upon ten business days’ prior written notice. In addition, our Share Repurchase Program will terminate in the event a secondary market develops for our shares or until our shares are listed on a national exchange or included for quotation in a national securities market.
For the three months ended June 30, 2015, we repurchased shares of our common stock as follows:
Period
Total Number of
Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
 
Maximum Approximate
Dollar Value of Shares
that May Yet Be Purchased
Under the Plan or Program
April 1 to April 30
259,387

 
$
9.66

 
259,387

 
(1) 
May 1 to May 31
—

 
—

 
—

 
(1) 
June 1 to June 30
—

 
—

 
—

 
(1) 
Total
259,387

 
$
9.66

 
259,387

 
 
________________________
(1)
Subject to funds being available, we will limit the number of shares redeemed pursuant to our Share Repurchase Program to: (i) 5.0% of the weighted average number of shares of our common stock outstanding during the prior calendar year; and (ii) those that could be funded from the net DRP proceeds in the prior calendar year plus such additional funds as may be reserved for that purpose by our board of directors; provided, however, that the above volume limitations shall not apply to repurchases requested within two years after the death or qualifying disability of a stockholder.
As of June 30, 2015, we had no unfulfilled repurchase requests.
Unregistered Sales of Equity Securities
On June 26, 2015, we granted 4,990 shares of restricted common stock at $10.02 per share to each of our independent directors for an aggregate of 14,970 shares of restricted common stock, pursuant to our independent director compensation plan. These shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act for transactions not involving a public offering.


63


Item 5. Other
On August 11, 2015, the board of directors (the “Board”) of NorthStar Real Estate Income Trust, Inc. (“NorthStar Income”) appointed Daniel R. Gilbert as Chairman and a member of the Board, in addition to his existing role as Chief Executive Officer and President of NorthStar Income. To facilitate this change, on August 11, 2015, David T. Hamamoto resigned as Chairman and as a member of the Board of NorthStar Income, effective immediately. Mr. Hamamoto will continue to provide investment and other strategic services to NorthStar Income as a member of its advisor’s investment committee, as well as through his leadership role as Executive Chairman of NorthStar Asset Management Group Inc. (“NSAM”), NorthStar Income’s sponsor.
Concurrently with Mr. Gilbert’s appointment, Frank V. Saracino was appointed as NorthStar Income’s Chief Financial Officer and Treasurer, effective on August 17, 2015. In addition, Mr. Saracino was appointed as Chief Financial Officer and Treasurer of each of NorthStar Real Estate Income II, Inc. (“NorthStar Income II”) and NorthStar/RXR New York Metro Income, Inc. (“NorthStar/RXR”), effective on August 17, 2015. Prior to his appointment, Mr. Saracino, age 49, was with Prospect Capital Corporation (“Prospect”) from July 2012 to December 2014. In addition, during his tenure at Prospect, Mr. Saracino served as Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary of each of Priority Senior Secured Income Fund, Inc. and Pathway Energy Infrastructure Fund, Inc. and their respective investment advisers and served as a Managing Director of Prospect Administration, LLC. Prior to joining Prospect, Mr. Saracino was a Managing Director at Macquarie Group and Head of Finance from August 2008 to June 2012 for its Americas non-trading businesses. From 2004 to 2008, he served first as Controller and then as Chief Accounting Officer of eSpeed, Inc. (now BGC Partners, Inc.), a publicly-traded subsidiary of Cantor Fitzgerald. Prior to that, Mr. Saracino worked as an investment banker at Deutsche Bank advising clients in the telecom industry. Mr. Saracino started his career in public accounting at Coopers & Lybrand (now PricewaterhouseCoopers) where he earned a CPA and subsequently worked in internal auditing for The Dun & Bradstreet Corporation. He holds a Bachelor of Science degree from Syracuse University.
In addition, concurrently with the foregoing appointments, Jenny B. Neslin was appointed to serve as General Counsel and Secretary of NorthStar Income, effective on August 17, 2015. Ms. Neslin, age 33, also serves as Associate General Counsel and Assistant Secretary of NSAM, a position she has held since January 2014. Ms. Neslin joined NorthStar Realty Finance Corp. in July 2013, where she continues to serve as its Associate General Counsel and, since April 2014, Assistant Secretary. Prior to her new role at NorthStar Income, since April 2014, Ms. Neslin served as its Associate General Counsel and Assistant Secretary. Ms. Neslin also serves as Associate General Counsel and Assistant Secretary of each of NorthStar Healthcare Income, Inc., NorthStar Income II and NorthStar/RXR, positions she has held since April 2014. Effective on August 17, 2015, Ms. Neslin will serve as General Counsel and Secretary of NorthStar Income II. Ms. Neslin began her legal career at Clifford Chance US LLP, a global law firm, where she was an associate in its Capital Markets group from October 2007 to July 2013. During her tenure at Clifford Chance, Ms. Neslin primarily advised REITs and investment banks in public and private capital markets transactions. This experience included advising non-traded REITs and other direct participation programs in continuous offerings, ongoing disclosure and reporting obligations under U.S. federal securities laws and other corporate governance matters. Ms. Neslin holds a Bachelor of Music in Music Business from New York University in New York, New York and a Juris Doctor from Benjamin N. Cardozo School of Law in New York, New York.
To facilitate Mr. Saracino’s and Ms. Neslin’s respective appointments, on August 11, 2015, Debra A. Hess and Ronald J. Lieberman resigned as Chief Financial Officer and Treasurer and Executive Vice President, General Counsel and Secretary, respectively, effective on August 17, 2015. Ms. Hess and Mr. Lieberman will continue to provide financial, accounting and/or legal services to NorthStar Income through their respective roles as Chief Financial Officer and Executive Vice President, General Counsel and Secretary of NSAM.


64


Item 6.    Exhibits
Exhibit
Number
 
Description of Exhibit
3.1

 
Second Articles of Amendment and Restatement of NorthStar Real Estate Income Trust, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 26, 2010 and incorporated herein by reference)
3.2

 
Amended and Restated Bylaws of NorthStar Real Estate Income Trust, Inc. (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 and incorporated herein by reference)
31.1*


Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*

 
Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*

 
Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*

 
Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*

 
The following materials from the NorthStar Real Estate Income Trust, Inc. Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014; (ii) Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2015 and 2014; (iv) Consolidated Statements of Equity for the six months ended June 30, 2015(unaudited) and year ended December 31, 2014; (v) Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements (unaudited)
______________________________________________________
*
Filed herewith

65


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 12, 2015
By:
 
/s/ DANIEL R. GILBERT
 
 
 
 
Name:
 
Daniel R. Gilbert
 
 
 
 
Title:
 
Chief Executive Officer and President
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Date:
August 12, 2015
By:
 
/s/ DEBRA A. HESS
 
 
 
 
Name:
 
Debra A. Hess
 
 
 
 
Title:
 
Chief Financial Officer and Treasurer
 
 
 
 
 
 
 


66

N1 Liquidating Trust Reports