N1 Liquidating Trust - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - N1 Liquidating Trust	nsre09302016-ex321.htm
EX-32.2 - EXHIBIT 32.2 - N1 Liquidating Trust	nsre09302016-ex322.htm
EX-31.2 - EXHIBIT 31.2 - N1 Liquidating Trust	nsre09302016-ex312.htm
EX-31.1 - EXHIBIT 31.1 - N1 Liquidating Trust	nsre09302016-ex311.htm

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 September 30, 2016

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, 120,551,952 shares outstanding as of November 4, 2016.

NORTHSTAR REAL ESTATE INCOME TRUST, INC.

FORM 10-Q

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Index		Page

Part I.	Financial Information	5
Item 1.	Financial Statements	5
	Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	5
	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2016 and 2015	6
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2016 and 2015	7
	Consolidated Statements of Equity for the nine months ended September 30, 2016 (unaudited) and for the year ended December 31, 2015	8
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2015	9
	Notes to Consolidated Financial Statements (unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	70
Item 4.	Controls and Procedures	72
Part II.	Other Information	73
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 6.	Exhibits	75
Signatures		76

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FORWARD-LOOKING STATEMENTS

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


•	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 effect of paying distributions to our stockholders from sources other than cash flow provided by operations;


•	the impact of our sponsor’s recently announced merger agreement with NorthStar Realty Finance Corp. and Colony Capital, Inc., including the ability to consummate the merger on the terms contemplated or at all, and whether any of the anticipated benefits to our advisor’s and its affiliates’ platform will be realized in full or at all;


•	our advisor’s and its affiliates’ ability to attract and retain qualified personnel to support our operations and potential changes to key personnel providing management services to us;

•

our reliance on our advisor and its affiliates and sub-advisors/co-venturers in providing management services to us, the payment of substantial fees to our advisor, the allocation of investments by our advisor and its affiliates among us and the other sponsored or managed companies and strategic vehicles of our sponsor and its affiliates, and various potential conflicts of interest in our relationship with our sponsor;


•	a change in the ownership or management of our sponsor;


•	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;


•	the impact of fluctuations in interest rates;


•	our ability to realize current and expected returns over the life of our investments;

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•	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, equity 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;


•	increased rates of loss or default and decreased recovery on our investments;


•	the degree and nature of our competition;


•	the effectiveness of our risk and portfolio management strategies;


•	the potential failure to maintain effective internal controls, disclosure and procedures;


•	regulatory requirements with respect to our business generally, as well as 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, including in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and in Part II, Item 1A of this Quarterly Report on Form 10-Q 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.

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PART I. Financial Information

Item 1. Financial Statements

NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Per Share Data)



	September 30, 2016 (Unaudited)			December 31, 2015
Assets
Cash and cash equivalents	$	117,818		$	127,890
Restricted cash	93,382			75,074
Real estate debt investments, net	825,192			997,836
Operating real estate, net	505,032			365,327
Investments in unconsolidated ventures (refer to Note 5)	111,427			157,843
Real estate securities, available for sale	92,015			83,622
Receivables, net	41,314			48,545
Deferred costs and other assets, net	48,361			37,323
Loan collateral receivable, related party	52,672			54,056
Total assets⁽¹⁾	$	1,887,213		$	1,947,516
Liabilities
Securitization bonds payable, net	$	64,882		$	185,314
Mortgage notes payable, net	384,560			316,402
Credit facilities	323,701			318,000
Accounts payable and accrued expenses (refer to Note 8)	15,025			11,238
Escrow deposits payable	74,755			61,881
Distribution payable	7,942			8,205
Other liabilities	23,972			14,465
Total liabilities⁽¹⁾	894,837			915,505
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 September 30, 2016 and December 31, 2015	—			—
Common stock, $0.01 par value, 400,000,000 shares authorized, 121,139,161 and 120,757,888 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	1,211			1,207
Additional paid-in capital	1,082,201			1,078,154
Retained earnings (accumulated deficit)	(135,286		)	(86,938		)
Accumulated other comprehensive income (loss)	23,233			21,901
Total NorthStar Real Estate Income Trust, Inc. stockholders’ equity	971,359			1,014,324
Non-controlling interests	21,017			17,687
Total equity	992,376			1,032,011
Total liabilities and equity	$	1,887,213		$	1,947,516

_________________________________________________________________________

(1)

Represents the consolidated assets and liabilities of NorthStar Real Estate Income Trust Operating Partnership, LP (the “Operating Partnership”). The Operating Partnership is a consolidated variable interest entity (“VIE”), of which the Company is the sole general partner and owns approximately 99.98%. As of September 30, 2016, the assets and liabilities of the Operating Partnership include $410.0 million and $336.4 million of assets and liabilities, respectively, of certain VIEs that are consolidated by the Operating Partnership. Refer to Note 2, “Summary of Significant Accounting Policies”.

Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net interest income
Interest income	$	18,649		$	24,621		$	59,006		$	74,840
Interest expense	4,003			5,045			13,150			16,195
Net interest income	14,646			19,576			45,856			58,645

Property and other revenues
Rental and other income	21,843			14,637			58,330			44,664
Total property and other revenues	21,843			14,637			58,330			44,664

Expenses
Asset management and other fees - related party	5,410			5,906			18,747			18,303
Mortgage notes interest expense	4,552			3,768			12,895			11,016
Transaction costs	182			—			1,909			577
Property operating expenses	10,918			8,087			27,478			22,857
General and administrative expenses	3,381			3,947			11,553			11,843
Depreciation and amortization	9,481			12,598			21,386			20,115
Total expenses	33,924			34,306			93,968			84,711

Other income (loss)
Unrealized gain (loss) on investments	(33		)	(3,828		)	(3,432		)	(9,414		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	2,532			(3,921		)	6,786			9,184
Equity in earnings (losses) of unconsolidated ventures	5,575			8,133			19,647			27,966
Income tax benefit (expense)	(810		)	1,153			(2,265		)	(366		)
Net income (loss)	7,297			5,365			24,168			36,784
Net (income) loss attributable to non-controlling interests	194			408			(89		)	77
Net income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	7,491		$	5,773		$	24,079		$	36,861
Net income (loss) per share of common stock, basic/diluted	$	0.06		$	0.05		$	0.20		$	0.31
Weighted average number of shares of common stock outstanding, basic/diluted	121,080,070			120,015,384			120,979,224			119,242,349
Distributions declared per share of common stock	$	0.20		$	0.20		$	0.60		$	0.60

Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in Thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss)	$	7,297		$	5,365		$	24,168		$	36,784
Other comprehensive income (loss):
Unrealized gain (loss) on real estate securities, available for sale	(885		)	(4,884		)	1,332			(5,375		)
Total other comprehensive income (loss)	(885		)	(4,884		)	1,332			(5,375		)
Comprehensive income (loss)	6,412			481			25,500			31,409
Comprehensive (income) loss attributable to non-controlling interests	194			408			(89		)	77
Comprehensive income (loss) attributable to NorthStar Real Estate Income Trust, Inc.	$	6,606		$	889		$	25,411		$	31,486

Refer to accompanying notes to consolidated financial statements.

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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			Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Company’s Stockholders’ Equity			Non- controlling Interests			Total Equity
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	—		—			—			—			—			—			268			268
Non-controlling interests - distributions	—		—			—			—			—			—			(1,915		)	(1,915		)
Proceeds from distribution reinvestment plan	4,599		46			43,737			—			—			43,783			—			43,783
Shares redeemed for cash	(1,710	)	(17		)	(16,447		)	—			—			(16,464		)	—			(16,464		)
Issuance and amortization of equity-based compensation	22		—			232			—			—			232			—			232
Other comprehensive income (loss)	—		—			—			—			(6,513		)	(6,513		)	—			(6,513		)
Distributions declared	—		—			—			(95,668		)	—			(95,668		)	—			(95,668		)
Net income (loss)	—		—			—			45,614			—			45,614			(23		)	45,591
Balance as of December 31, 2015	120,758		$	1,207		$	1,078,154		$	(86,938	)	$	21,901		$	1,014,324		$	17,687		$	1,032,011
Non-controlling interests - contributions	—		—			—			—			—			—			4,432			4,432
Non-controlling interests - distributions	—		—			—			—			—			—			(1,191		)	(1,191		)
Proceeds from distribution reinvestment plan	3,393		34			32,916			—			—			32,950			—			32,950
Shares redeemed for cash	(3,040	)	(30		)	(29,004		)	—			—			(29,034		)	—			(29,034		)
Issuance and amortization of equity-based compensation	28		—			135			—			—			135			—			135
Other comprehensive income (loss)	—		—			—			—			1,332			1,332			—			1,332
Distributions declared	—		—			—			(72,427		)	—			(72,427		)	—			(72,427		)
Net income (loss)	—		—			—			24,079			—			24,079			89			24,168
Balance as of September 30, 2016 (unaudited)	121,139		$	1,211		$	1,082,201		$	(135,286	)	$	23,233		$	971,359		$	21,017		$	992,376

Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net income (loss)	$	24,168		$	36,784
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) losses of unconsolidated ventures	(19,647		)	(27,966		)
Depreciation and amortization	21,386			20,115
Straight-line rental income	(1,409		)	(1,303		)
Amortization of capitalized above/below market leases	70			911
Amortization of premium/accretion of discount and fees on investments and borrowings, net	(774		)	2,355
Amortization of deferred financing costs	2,185			3,000
Interest accretion on investments	(5,352		)	(5,320		)
Distributions from unconsolidated ventures (refer to Note 5)	19,647			23,639
Unrealized (gain) loss on investments and other	3,432			9,414
Amortization of equity-based compensation	135			140
Deferred income tax expense	(2,225		)	(1,419		)
Changes in assets and liabilities:
Restricted cash	(2,783		)	5,647
Receivables, net	1,290			808
Deferred costs and other assets	(1,250		)	(2,717		)
Due to related party	334			377
Accounts payable and accrued expenses	5,677			6,865
Other liabilities	2,444			500
Net cash provided by (used in) operating activities	47,328			71,830
Cash flows from investing activities:
Origination of real estate debt investments, net	(130,224		)	(57,031		)
Repayment on real estate debt investments	247,042			168,059
Repayment on loan collateral receivable, related party	1,384			—
Acquisition of operating real estate	(103,384		)	—
Improvements of operating real estate	(4,521		)	(6,563		)
Investments in unconsolidated ventures (refer to Note 5)	(49,743		)	(9,958		)
Proceeds from sale of unconsolidated ventures	59,760			—
Distributions from unconsolidated ventures (refer to Note 5)	41,596			24,512
Acquisition of real estate securities, available for sale	(13,822		)	—
Repayment of real estate securities, available for sale	8,538			—
Change in restricted cash	(415		)	(2,052		)
Net cash provided by (used in) investing activities	56,211			116,967
Cash flows from financing activities:
Proceeds from distribution reinvestment plan	32,950			32,772
Shares redeemed for cash	(29,034		)	(10,006		)
Distributions paid on common stock	(72,690		)	(71,452		)
Borrowings from mortgage notes	70,096			—
Repayment of mortgage notes	(151		)	(132		)
Borrowings from credit facilities	100,080			23,813
Repayment of credit facilities	(94,380		)	(1,460		)
Repayment of securitization bonds	(120,930		)	(142,441		)
Payment of deferred financing costs	(2,793		)	(539		)
Contributions from non-controlling interests	4,432			177
Distributions to non-controlling interests	(1,191		)	(1,291		)
Net cash provided by (used in) financing activities	(113,611		)	(170,559		)
Net increase (decrease) in cash and cash equivalents	(10,072		)	18,238
Cash and cash equivalents - beginning of period	127,890			35,755
Cash and cash equivalents - end of period	$	117,818		$	53,993

Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2016		2015
Supplemental disclosure of non-cash investing and financing activities:
Escrow deposits payable related to real estate debt investments	$	12,874	$	25,513
Distribution payable	7,942		7,908
Non-cash related to PE Investments (refer to Note 5)	1,016		6,945
Real estate acquisition⁽¹⁾	67,493		—
Reduction of CRE debt investment⁽¹⁾	67,493		—
CRE debt investment payoff due from servicer	24,400		—
Reclassification related to measurement-period adjustment	18,674		—

______________________________________________________________


(1)	Non-cash activity occurred in connection with taking title to collateral.

Refer to accompanying notes to consolidated financial statements.

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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, as well as 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 joint ventures. 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, NorthStar Realty Europe Corp. (NYSE: NRE), other sponsored public retail-focused 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.

In June 2016, the Sponsor announced that it entered into a definitive merger agreement with NorthStar Realty and Colony Capital, Inc. (“Colony”), providing for the combination of the Sponsor, NorthStar Realty and Colony into a wholly-owned subsidiary of the Sponsor, as the surviving publicly-traded company for the combined organization that, upon and following the effective time of the mergers, will be named Colony NorthStar, Inc. (“Colony NorthStar”). As a result of the mergers, Colony NorthStar will be an internally-managed equity REIT, with a diversified real estate and investment management platform. In addition, following the mergers, the Advisor will be a subsidiary of Colony NorthStar. This transaction is expected to close in January 2017, subject to customary closing conditions, including regulatory approvals, and approval by the Sponsor’s, NorthStar Realty’s and Colony’s respective shareholders. There is no guarantee this transaction will close on the contemplated terms or within the anticipated timeframe, or at all. The Company does not expect that this transaction will have a material impact on its 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 and a limited partner of the Operating Partnership. The other 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 September 30, 2016 and December 31, 2015. 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 September 30, 2016, 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

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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 an additional registration statement to offer up to 10.0 million shares pursuant to the DRP, the Company continues to offer DRP shares beyond the Total Primary Offering.

The Company raised total gross proceeds of $1.1 billion in the Offering. In addition, from the close of the Primary Offering through November 4, 2016, the Company has raised an additional $0.2 billion in gross proceeds pursuant to the DRP.


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, 2015, which was filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2016.

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 (“VIEs”), if any, 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, if any, to determine whether each investment or financing is 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.

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The Company adopted the new consolidation guidance (refer to Recent Accounting Pronouncements) on January 1, 2016, which resulted in the identification of several VIEs. Prior to the adoption of the standard, these entities were consolidated under the voting interest model. The most significant consolidated VIEs are the Operating Partnership and certain properties that have non-controlling interests. These entities are VIEs because the non-controlling interests do not have substantive kick-out or participating rights. The Company consolidates these entities because it controls all significant business activities.

The Operating Partnership consolidates certain properties that have non-controlling interests. Included in operating real estate, net on the Company’s consolidated balance sheet as of September 30, 2016 is $356.7 million related to such consolidated VIEs. Included in mortgage notes payable, net on the Company’s consolidated balance sheet as of September 30, 2016 is $316.2 million collateralized by the real estate assets of the related consolidated VIEs.

As of September 30, 2016, the Company identified unconsolidated VIEs related to its securities investments, PE investments and CRE debt investments. Assets of each of the VIEs may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.

The following table presents the Company’s classification, carrying value and maximum exposure of unconsolidated VIEs as of September 30, 2016 (dollars in thousands):



	Carrying Value
	Real Estate Securities, Available for Sale		Investments in Unconsolidated Ventures		Real Estate Debt Investments, Net		Total		Maximum Exposure to Loss
Real estate securities, available for sale	$	92,015	$	—	$	—	$	92,015	$	92,015
Investments in unconsolidated ventures	—		15,570		—		15,570		15,570
Real estate debt investments, net⁽¹⁾	—		—		153,017		153,017		153,017
Total assets	$	92,015	$	15,570	$	153,017	$	260,602	$	260,602

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(1)	Includes loan collateral receivable, related party of $52.7 million .

Based on management’s analysis, the Company determined that it is not the primary beneficiary of the VIEs. Accordingly, the VIEs are not consolidated in the Company’s financial statements as of September 30, 2016. The Company did not provide financial support to the unconsolidated VIEs during the nine months ended September 30, 2016. As of September 30, 2016, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to the unconsolidated VIEs outside of the future funding commitments disclosed above.

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 or a simple majority vote.

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 preferred returns and allocation formulas, 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

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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) of 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.

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 to record certain financial assets and liabilities at fair value 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 has elected the fair value option for PE Investments. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.

Cash and Cash Equivalents

The Company considers all highly-liquid investments with an original maturity date of three months or less to be cash equivalents. Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250,000 per institution. The Company mitigates credit risk by placing cash and cash equivalents with major financial institutions. To date, the Company has not experienced any losses on cash and cash equivalents.

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 and discount. 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.

The Company may syndicate a portion of the CRE debt investments that it originates or sell the CRE debt investments individually. When a transaction meets the criteria for sale accounting, the Company will no longer recognize the CRE debt investment sold as an asset and will recognize gain or loss based on the difference between the sales price and the carrying value of the CRE debt

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investment sold. Any related unamortized deferred origination fees, original issue discounts, loan origination costs, discounts or premiums at the time of sale are recognized as an adjustment to the gain or loss on sale, which is included in interest income on the consolidated statement of operations. Any fees received at the time of sale or syndication are recognized as part of interest income.

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 accounts for purchases of operating real estate that qualify as business combinations using the acquisition method, where the purchase price is allocated to tangible assets such as land, building, 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.

The Company refers to real estate acquired in connection with a foreclosure, deed in lieu of foreclosure or a consensual modification of a loan as real estate owned (“REO”). The Company evaluates whether an REO, herein collectively referred to as taking title to collateral, constitutes a business and whether business combination accounting is appropriate. Any excess upon taking title to collateral between the carrying value of a loan over the estimated fair value of the property is charged to provision for loan losses.

Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:



Category:		Term:
Building		30 to 40 years
Building improvements		Lesser of the useful life or remaining life of the building
Land improvements		10 to 30 years
Tenant improvements		Lesser of the useful life or remaining term of the lease
Furniture, fixtures and equipment		3 to 10 years

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.

Deferred Costs

Deferred costs primarily include deferred financing costs and deferred lease costs. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. Costs related to revolving credit facilities are recorded in deferred costs and other asset, net and are amortized to interest expense using the straight-line basis over the term of the facility. Costs related to other borrowings are recorded net against the carrying value of such borrowings and are amortized to interest expense using the effective interest method. Unamortized deferred financing costs are expensed when the associated facility is repaid before maturity. Costs incurred in seeking financing transactions, which do not close, are expensed in the period in which it is determined that the financing will not occur. Deferred lease costs consist of fees incurred to initiate and renew operating leases, which are amortized on a straight-line basis over the remaining lease term and are recorded to depreciation and amortization in the consolidated statements of operations.

Identified Intangibles

The Company records acquired identified intangibles, which includes intangible assets (such as the value of the above-market leases, in-place leases, and other intangibles) and intangible liabilities (such as the value of below market leases), based on estimated fair value. The value allocated to the identified intangibles are amortized over the remaining lease term. Above/below-market leases are amortized into rental income, below-market ground leases are amortized into real estate properties-operating expense and in-place leases are amortized into depreciation and amortization expense. Identified intangible assets are recorded in deferred costs and other assets, net, and identified intangible liabilities are recorded in other liabilities on the accompanying consolidated balance sheets.

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Deferred Costs and Other Assets, Net and Other Liabilities

The following table presents a summary of deferred costs and other assets, net and other liabilities as of September 30, 2016 and December 31, 2015 (dollars in thousands):



	September 30, 2016 (Unaudited)		December 31, 2015
Deferred costs and other assets, net:
Intangible assets, net⁽¹⁾	$	33,123	$	21,149
Deferred financing costs, net - credit facilities	2,335		2,585
Deferred commissions and leasing costs	10,040		10,955
Deposits	405		405
Prepaid expenses	2,433		1,844
Other	25		385
Total	$	48,361	$	37,323


	September 30, 2016 (Unaudited)		December 31, 2015
Other liabilities:
PE Investments deferred purchase price, net	$	8,630	$	—
Intangible liabilities, net⁽²⁾	8,419		9,624
Prepaid rent and unearned revenue	3,907		2,583
Tenant security deposits	1,419		676
Other	1,597		1,582
Total	$	23,972	$	14,465

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(1)	Represents in-place leases and above-market leases, net.


(2)	Represents below-market leases, net.

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. For the nine months ended September 30, 2016, total acquisition fees and expenses did not exceed the allowed limit for any investment. 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.

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

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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. The Company amortizes any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Other income represents revenue from tenant/operator leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by the Company on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.

In a situation in which a lease(s) associated with a significant tenant have been, or are expected to be, terminated early, the Company evaluates the remaining useful life of depreciable or amortizable assets in the asset group related to the lease that will be terminated (i.e., tenant improvements, above- and below-market lease intangibles, in-place lease value and deferred leasing costs). Based upon consideration of the facts and circumstances surrounding the termination, the Company may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within rental and other income for above- and below-market lease intangibles and depreciation and amortization for the remaining lease related asset groups in the consolidated statements of operations.

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. As of September 30, 2016, the Company did not have any impaired CRE debt investments.

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. As of September 30, 2016, the Company did not have any impaired operating real estate.

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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, 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 equity in earnings (losses) of unconsolidated ventures in the consolidated statements of operations. As of September 30, 2016, the Company did not have any impaired investments in unconsolidated ventures.

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 September 30, 2016, the Company did not have any OTTI recorded on its CRE securities.

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.

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 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.

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If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax and potential interest and penalties, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. The Company’s accounting policy with respect to interest and penalties is to classify these amounts as a component of income tax expense, where applicable.

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.

The Company made a joint election to treat a subsidiary as a taxable REIT subsidiary (“TRS”) which may be subject to U.S. federal, state and local income taxes. In general, a TRS of the Company may perform non-customary services for tenants, hold assets that the REIT cannot hold directly and may engage in most real estate or non-real estate-related business.

Certain subsidiaries of the Company are subject to taxation by federal, state and local authorities for the periods presented. Income taxes are accounted for by the asset/liability approach in accordance with U.S. GAAP. Deferred taxes, if any, represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. Such amounts arise from differences between the financial reporting and tax bases of assets and liabilities and are adjusted for changes in tax laws and tax rates in the period which such changes are enacted. A provision for income tax represents the total of income taxes paid or payable for the current period, plus the change in deferred taxes. Current and deferred taxes are recorded on the portion of earnings (losses) recognized by the Company with respect to its interest in TRSs. 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 and local 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 income tax benefit (expense) in the consolidated statements of operations.

For the three and nine months ended September 30, 2016, the Company recorded income tax expense of $0.8 million and $2.3 million, respectively. For the three months ended September 30, 2015, the Company recorded income tax benefit of $1.2 million and for the nine months ended September 30, 2015, the Company recorded income tax expense of $0.4 million.

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, 2015 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 adopted this guidance in the first quarter 2016 and determined the Company’s Operating Partnership is considered a VIE. The Company is the primary beneficiary of the VIE, the VIE’s assets can be used for purposes other than the settlement of the VIE’s obligations and the Company’s partnership interest is considered a majority voting interest. As such, this standard resulted in the identification of additional VIEs, however it did not have a material impact on the Company’s consolidated financial position or results of operations.

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beginning after December 15, 2017. The Company is currently assessing the impact, if any, of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In February 2016, the FASB issued an accounting update that requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.

In March 2016, the FASB issued guidance which eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The update requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment become qualified for equity method accounting. The update should be applied prospectively upon their effective date to increases in the level of ownership interests or degree of influence that results in the adoption of the equity method. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company has concluded that this guidance will not have any impact on its consolidated financial position, results of operations or financial statement disclosures.

In March 2016, the FASB issued guidance which amends several aspects of the accounting for equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.

In June 2016, the FASB issued guidance which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Additionally, entities will have to disclose significantly more information including information used to track credit quality by year of origination for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.

In September 2016, the FASB issued final amendments to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows as they may have aspects of more than one class of cash flows. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact, if any, that this guidance will have on its consolidated statement of cash flows.

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3.	Real Estate Debt Investments

The following table presents CRE debt investments as of September 30, 2016 (dollars in thousands):



								Weighted Average						Floating Rate as % of Principal Amount
Asset Type:	Count	Principal Amount⁽¹⁾		Carrying Value⁽²⁾		Allocation by Investment Type⁽³⁾		Fixed Rate		Spread over LIBOR⁽⁴⁾		Total Unleveraged Current Yield		Floating Rate as % of Principal Amount
First mortgage loans	13	$	660,413	$	646,397	78.7	%	15.00	%	5.75	%	6.98	%	92.9	%
Mezzanine loans	5	92,306		92,286		11.0	%	12.14	%	9.29	%	11.10	%	47.3	%
Preferred equity interests⁽⁵⁾	1	86,019		86,509		10.3	%	10.00	%	—		10.00	%	—
Total/Weighted average	19	$	838,738	$	825,192	100.0	%	11.84	%	5.99	%	7.76	%	78.1	%

________________________________________________________


(1)	Includes future funding commitments of $15.1 million.


(2)	Certain CRE debt investments serve as collateral for financing transactions including carrying value of $71.0 million for Securitization 2013-1 and $484.9 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 September 30, 2016, the Company had $504.5 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.32%.


(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 $77.4 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, 2015 (dollars in thousands):



								Weighted Average						Floating Rate as % of Principal Amount
Asset Type:	Count	Principal Amount⁽¹⁾		Carrying Value⁽²⁾		Allocation by Investment Type⁽³⁾		Fixed Rate		Spread over LIBOR⁽⁴⁾		Total Unleveraged Current Yield		Floating Rate as % of Principal Amount
First mortgage loans	14	$	829,536	$	806,116	79.8	%	—		6.47	%	6.51	%	100.0	%
Mezzanine loans	5	91,639		72,948		8.8	%	10.10	%	11.76	%	11.62	%	86.9	%
Subordinate interests	1	36,206		36,206		3.5	%	13.11	%	—		13.23	%	—
Preferred equity interests⁽⁵⁾	1	82,003		82,566		7.9	%	10.00	%	—		10.00	%	—
Total/Weighted average	21	$	1,039,384	$	997,836	100.0	%	10.87	%	6.84	%	7.42	%	87.5	%

________________________________________________________


(1)	Includes future funding commitments of $43.6 million.


(2)	Certain CRE debt investments serve as collateral for financing transactions including carrying value of $335.4 million for Securitization 2013-1 and $435.2 million for Term Loan Facilities (refer to Note 7). The remainder is unleveraged.


(3)	Based on principal amount.


(4)	Includes a fixed minimum LIBOR floor, as applicable. As of December 31, 2015, the Company had $749.0 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.37%.


(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 $73.8 million of the carrying value. The Company consolidates the loan and records RXR’s investment as a non-controlling interest.

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The following table presents maturities of CRE debt investments based on principal amount as of September 30, 2016 (dollars in thousands):



	Current Maturity		Maturity Including Extensions⁽¹⁾
October 1 to December 31, 2016	$	76,274	$	—
Years Ending December 31:
2017	318,150		65,124
2018	75,100		130,500
2019	192,950		210,800
2020	—		45,050
Thereafter	176,264		387,264
Total	$	838,738	$	838,738

__________________________________________________________


(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 September 30, 2016, the weighted average maturity, including extensions, of CRE debt investments was 4.1 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 September 30, 2016, all CRE debt investments were performing in accordance with the contractual terms of their governing documents in all material respects and were categorized as performing loans. There were no CRE debt investments with contractual payments past due as of September 30, 2016 and December 31, 2015. For the nine months ended September 30, 2016, two CRE debt investment contributed more than 10% of interest income.

In connection with a pre-negotiated agreement, in May 2016, as a result of a borrower’s inability to pay amounts due under one of the Company’s debt investments, the Company and the borrower agreed to transfer title of the real estate via deed in lieu of foreclosure to the Company. Refer to Note 4. Operating Real Estate.


4.	Operating Real Estate

The following table presents operating real estate, net, as of September 30, 2016 and December 31, 2015 (dollars in thousands):



	September 30, 2016 (Unaudited)			December 31, 2015
Land and improvements	$	93,850		$	56,090
Buildings and improvements	443,384			328,012
Furniture, fixtures and equipment	4,472			4,243
Subtotal	$	541,706		$	388,345
Less: Accumulated depreciation	(36,674		)	(23,018		)
Operating real estate, net	$	505,032		$	365,327

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Summary of Acquisitions

In March 2016, the Company acquired an 88.2% interest in a portfolio of 23 light industrial assets for $103.3 million and obtained a $78.2 million two-year floating rate senior mortgage loan, of which $8.3 million is reserved for future funding. The Company incurred transaction costs of $1.5 million in conjunction with the acquisition.

The following table presents the preliminary allocation of the purchase price of the operating real estate assets acquired and liabilities assumed or issued (including financing entered into contemporaneous with the acquisition), if any, for acquisitions in 2016 (dollars in thousands):



Assets:
Land and improvements	$	24,807
Buildings and improvements⁽¹⁾	59,903
Other assets acquired⁽²⁾	19,210
Total assets acquired	$	103,920
Liabilities:
Mortgage notes payable, net⁽³⁾	$	67,225
Other liabilities assumed⁽⁴⁾	536
Total liabilities	67,761
Total NorthStar Real Estate Income Trust, Inc. stockholders’ equity	31,874
Non-controlling interests	4,285
Total equity	36,159
Total liabilities and equity	$	103,920

____________________________________________________________


(1)	Includes tenant improvements.


(2)	Primarily in place lease intangibles, leasing commissions and above market leases.


(3)	Includes deferred financing costs, net.


(4)	Primarily below market leases.

During the measurement-period, the Company preliminarily determined that certain allocations of operating real estate acquired should be reclassified to deferred costs and other assets, net and other liabilities. The following table presents the effect of such preliminary purchase price reclassifications on the consolidated balance sheet as of September 30, 2016 (dollars in thousands):



	As Previously Determined⁽¹⁾		Measurement Period Adjustments			Revised
Operating real estate, net⁽²⁾	$	103,384	$	(18,674	)	$	84,710
Deferred costs and other intangible assets, net⁽³⁾	—		19,210			19,210
Mortgage notes payable, net⁽⁴⁾	67,225		—			67,225
Other liabilities⁽⁵⁾	—		536			536

____________________________________________________________


(1)	Represents the preliminary allocation of the purchase price of a light industrial portfolio purchased in 2016.


(2)	Includes tenant improvements.


(3)	Primarily in place lease intangibles, leasing commissions and above market leases.


(4)	Includes deferred financing costs, net.


(5)	Primarily below market leases.

During the three and nine months ended September 30, 2016, the Company recorded a measurement-period adjustment to earnings of $3.2 million. The table below shows the details of such adjustments:



Decrease in Rental and other income⁽¹⁾	$	347
Increase in Depreciation and amortization⁽²⁾	2,894
Total measurement-period adjustment	$	3,241

____________________________________________________________


(1)	Represents amortization of above and below market leases.


(2)	Represents depreciation of site and tenant improvements and amortization of in place lease intangibles.

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Real Estate Owned

The following table presents REO acquired by taking title, in connection with a certain CRE debt investment, for the nine months ended September 30, 2016 that is reported on the Company's consolidated balance sheet in operating real estate, net as of September 30, 2016 (dollars in thousands):

Date

Type

Location

Original Loan Balance

Initial REO Value ⁽¹⁾

May 2016

Office

67,493

____________________________________________________________

(1) Initial REO value approximates fair value.

The following table presents a rollforward of REO in operating real estate from the date of acquisition in May 2016 through September 30, 2016 (dollars in thousands):



Beginning balance	$	—
Additions⁽¹⁾	67,493
Depreciation	(494		)
Ending balance	$	66,999

____________________________________________________________


(1)	Represents REO for which the Company took title in May 2016.

The preliminary allocation of the purchase price of the assets acquired and liabilities assumed from the acquisition was allocated 20% to land and 80% to buildings.

Minimum Future Rents

Minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The following table presents approximate future minimum rental income under noncancelable operating leases to be received over the next five years and thereafter as of September 30, 2016 (dollars in thousands):



October 1 to December 31, 2016	$	10,437
Years Ending December 31:
2017	45,151
2018	37,278
2019	32,996
2020	25,288
Thereafter	68,980
Total	$	220,130

The rental properties owned as of September 30, 2016 are leased under operating leases with current expirations ranging from 2016 to 2027, with certain tenant renewal rights. For certain properties, the tenants pay the Company, in addition to the contractual base rent, their pro rata share of real estate taxes and operating expenses. Certain lease agreements provide for periodic rental increases.

Leases at the Company’s multifamily properties and student housing properties are generally for a term of one year or less and are not reflected in the above table.


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”), (“PE Investment IIA”) and (“PE Investment IIB”) or directly (“PE Investment III”). 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. All PE Investments are considered voting

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interest entities, except for PE Investment III. PE Investment I, IIA and IIB 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 does not consolidate the underlying real estate private equity funds owned in PE Investment III as it neither owns a majority voting interest in any such funds nor is it the primary beneficiary of such funds.

Summary

The following tables summarize the Company’s PE Investments as of September 30, 2016 (dollars in millions):



PE Investment	Initial Closing Date	NAV Reference Date⁽¹⁾	Number of Funds	Purchase Price		Expected Future Contributions
PE Investment I	February 15, 2013	June 30, 2012	49	$	118.0	$	0.5
PE Investment IIA	July 3, 2013	September 30, 2012	24	75.7		—
PE Investment IIB	February 9, 2016	September 30, 2015	—	26.5		—
PE Investment III	March 30, 2016	March 31, 2015	2	23.1		—
Total			75	$	243.3	$	0.5

____________________________________________________________


(1)	Represents the net asset value (“NAV”) date on which the Company agreed to acquire the respective PE Investment.



	Carrying Value				Three Months Ended September 30, 2016						Three Months Ended September 30, 2015
PE Investment	September 30, 2016 (Unaudited)		December 31, 2015		Equity in Earnings		Distributions		Contributions		Equity in Earnings		Distributions		Contributions⁽¹⁾
PE Investment I⁽²⁾	$	41.8	$	65.3	$	2.1	$	7.9	$	—	$	4.1	$	3.7	$	0.3
PE Investment IIA⁽³⁾	29.0		33.5		1.4		5.4		—		2.6		8.9		—
PE Investment IIB⁽³⁾	25.0		—		1.8		5.0		—		—		—		—
PE Investment III	15.6		—		0.3		0.1		—		—		—		—
Total	$	111.4	$	98.8	$	5.6	$	18.4	$	—	$	6.7	$	12.6	$	0.3

___________________________________________________________


(1)	Includes initial investments and subsequent contributions.


(2)	The Company recorded an unrealized loss of less than $0.1 million and $3.8 million related to PE Investment I for the three months ended September 30, 2016 and 2015, respectively



	Carrying Value				Nine Months Ended September 30, 2016						Nine Months Ended September 30, 2015
PE Investment	September 30, 2016 (Unaudited)		December 31, 2015		Equity in Earnings		Distributions		Contributions⁽¹⁾		Equity in Earnings		Distributions		Contributions⁽¹⁾
PE Investment I⁽²⁾	$	41.8	$	65.3	$	7.8	$	28.0	$	0.2	$	15.1	$	28.8	$	0.8
PE Investment IIA⁽³⁾	29.0		33.5		4.7		16.9		7.8		8.5		24.8		9.2
PE Investment IIB⁽³⁾	25.0		—		5.5		14.3		33.9		—		—		—
PE Investment III	15.6		—		1.0		2.0		16.5		—		—		—
Total	$	111.4	$	98.8	$	19.0	$	61.2	$	58.4	$	23.6	$	53.6	$	10.0

___________________________________________________________


(1)	Includes initial investments and subsequent contributions.


(2)	For PE Investment I, the Company recorded an unrealized loss of $3.4 million and $9.4 million for the nine months ended September 30, 2016 and 2015, respectively.


(3)	Contributions for the nine months ended September 30, 2016 include a payment of the deferred purchase price for PE Investment IIA and PE Investment IIB.

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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 IIA

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 had an initial ownership interest in PE Investment IIA of 15.0%, 70.0% and 15.0%, respectively. All amounts paid and received are based on each Partner’s proportionate interest.

PE Investment IIA 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. 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 IIA. 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 IIA 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 then outstanding Deferred Amount or 15.0% of the aggregate distributions received by PE Investment IIA 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 IIA will be required to pay to PE II Seller the then outstanding unpaid Deferred Amount. PE Investment IIA will receive 100% of all distributions following the payment of the Deferred Amount.

PE Investment IIB

In February 2016, the Company’s board of directors, including all of its independent directors, approved the purchase of an additional 14.0% of the PE Investment II transaction (“PE Investment IIB”) from a company managed by the Sponsor, NorthStar Realty. The Company purchased PE Investment IIB on the same terms and conditions negotiated by another existing and purchasing co-investor in the transaction. This increased the Company’s total ownership from 15.0% to 29.0%. The Company acquired PE Investment IIB for $26.5 million based on a NAV of $660.6 million as of September 30, 2015, adjusted for distributions and contributions.

With this add-on investment, the Company will be responsible for 29.0% of the Deferred Amount. As of September 30, 2016, the combined Deferred Amount for PE Investment IIA and PE Investment IIB was $85.7 million. In April 2016, PE Investment IIA and PE Investment IIB collectively paid $15.1 million of the Deferred Amount.

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PE Investment III

In March 2016, the Company acquired 5.5% of PE Investment III for $15.1 million based on a NAV of March 31, 2015 (the “Valuation Date”), adjusted for contributions and distributions from such date. At the time of closing, the Company paid $4.2 million, net of a $1.8 million deposit for a total of $6.0 million, or 40.0% of the purchase price adjusted for contributions and distributions. The remaining portion of the purchase price (the “Deferred Purchase Price”), or approximately $8.9 million, will be paid in two installments on December 31, 2016 and December 31, 2017.

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 owned 50.0% of the mezzanine loan, of which the Company’s interest in the joint venture was 78.0%. In January 2016, the Company’s participation was sold at par value of $59.8 million. As of December 31, 2015 the carrying value of the investment was $59.1 million. For the nine months ended September 30, 2016, the Company recognized equity in earnings of $0.7 million. For the three and nine months ended September 30, 2015, the Company recognized equity in earnings of $1.4 million and $4.3 million, respectively.


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:	Count	Principal Amount⁽¹⁾		Amortized Cost		Gain		(Loss)			Fair Value		Coupon⁽²⁾		Unleveraged Current Yield
September 30, 2016 (Unaudited)	11	$	130,974	$	68,782	$	23,433	$	(200	)	$	92,015	3.94	%	6.97	%
December 31, 2015	8	115,849		61,721		22,357		(456		)	83,622		4.43	%	8.52	%

_______________________________________________________________


(1)	Certain CRE securities serve as collateral for financing transactions including carrying value of $26.5 million for the CMBS Facilities (refer to Note 7). The remainder is unleveraged.


(2)	All CMBS are fixed rate.

The Company recorded unrealized losses in OCI for the three months ended September 30, 2016 of $0.9 million and unrealized gains in OCI for the nine months ended September 30, 2016 of $1.3 million, respectively and unrealized losses in OCI for the three and nine months ended September 30, 2015 of $4.9 million and $5.4 million, respectively. As of September 30, 2016, the Company held four securities with an aggregate carrying value of $27.1 million with an unrealized loss of $0.2 million, two 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 September 30, 2016, the weighted average contractual maturity of CRE securities was 32 years with an expected maturity of 6.7 years.

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(Unaudited)


7.	Borrowings

The following table presents borrowings as of September 30, 2016 and December 31, 2015 (dollars in thousands):



							September 30, 2016 (Unaudited)				December 31, 2015
	Capacity ($)		Recourse vs. Non-Recourse	Final Maturity	Contractual Interest Rate		Principal Amount⁽¹⁾		Carrying Value⁽¹⁾		Principal Amount⁽¹⁾		Carrying Value⁽¹⁾
Securitization bonds payable, net
Securitization 2013-1			Non-recourse	Aug-29	LIBOR + 5.00%		$	64,882	$	64,882	$	185,812	$	185,314
Subtotal securitization bonds payable, net							64,882		64,882		185,812		185,314

Mortgage notes payable, net
Multifamily 1			Non-recourse	Dec-23	4.84%		43,500		42,950		43,500		42,902
Multifamily 2			Non-recourse	Dec-23	4.94%		43,000		42,422		43,000		42,370
Office 1			Non-recourse	Oct-24	4.47%		108,850		108,588		108,850		108,569
Office 2			Non-recourse	Jan-25	4.30%		77,700		77,530		77,700		77,512
Student housing 1			Non-recourse	Jan-24	5.15%		16,000		15,765		16,000		15,747
Student housing 2⁽²⁾			Non-recourse	Dec-20	5.27%		12,464		12,711		12,615		12,907
Student housing 3			Non-recourse	Nov-16⁽³⁾	5.84%		16,200		16,217		16,200		16,395
Industrial 1			Non-recourse	Apr-21	LIBOR + 2.50%		70,096		68,377		—		—
Subtotal mortgage notes payable, net							387,810		384,560		317,865		316,402

Term loan facilities
Citibank Facility	$	150,000	Limited Recourse⁽⁴⁾	Oct-19⁽⁵⁾	LIBOR + 2.53%	(6)	85,100		85,100		108,913		108,913
Deutsche Bank Facility	200,000		Limited Recourse⁽⁷⁾	Mar-18⁽⁸⁾	LIBOR + 2.46%	(9)	113,697		113,697		166,697		166,697
Morgan Stanley Facility	200,000		Limited Recourse⁽¹⁰⁾	Oct-18⁽¹¹⁾	LIBOR + 2.56%	(12)	106,923		106,923		31,335		31,335
Subtotal term loan facilities	$	550,000					305,720		305,720		306,945		306,945

CMBS credit facilities
UBS Facility			Recourse	(13)	LIBOR + 1.19%		—		—		6,455		6,455
Morgan Stanley Facility			Recourse	(13)	LIBOR + 1.06%		—		—		4,600		4,600
Citibank Facility⁽¹⁴⁾			Recourse	(13)	LIBOR + 1.55%		11,230		11,230		—		—
Merrill Lynch Facility			Recourse	(13)	LIBOR + 1.50%		3,081		3,081		—		—
JP Morgan Facility			Recourse	(13)	LIBOR + 1.50%		3,670		3,670		—		—
Subtotal CMBS credit facilities							17,981		17,981		11,055		11,055
Subtotal credit facilities							323,701		323,701		318,000		318,000
Total							$	776,393	$	773,143	$	821,677	$	819,716

_____________________________________________________


(1)	Difference between principal amount and carrying value of mortgage notes payable, net is attributable to deferred financing costs, net and premium on a mortgage note payable.


(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)	In October 2016, the Company refinanced the mortgage note payable, increasing the principal balance to $24.8 million, with a maturity date of November 2026.


(4)	Recourse solely with respect to 25.0% of the repurchase price for purchased assets with a lender debt yield equal to or greater than 10.0% at the time of financing plus 100.0% of the repurchase price for purchased assets with a lender debt yield less than 10.0% at the time of financing.


(5)	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. In October 2016, the Company amended the terms of Loan Facility 2, extending the next maturity date to October 2018 with three, one-year extensions.


(6)	Represents the weighted average spread as of September 30, 2016. The contractual interest rate depends upon asset type and characteristics and ranges from one-month LIBOR plus 2.50% to 2.62%.


(7)	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.


(8)	The next maturity date is March 11, 2017, with a one-year extension available at the option of the Company, which may be exercised upon the satisfaction of certain customary conditions set forth in the governing documents.


(9)	Represents the weighted average spread as of September 30, 2016. The contractual interest rate depends upon asset type and characteristics and ranges from one-month LIBOR plus 2.40% to 2.62%.

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(Unaudited)


(10)	Recourse solely with respect to 25.0% of the financed amount.


(11)	The initial maturity date is October 13, 2018, with one-year extensions available at the Company’s option, which are subject to the approval of the global financial institution.


(12)	Represents the weighted average spread as of September 30, 2016. The contractual interest rate depends upon asset type and characteristics and ranges from one-month LIBOR plus 2.25% to 2.75%.


(13)	The maturity dates on the CMBS Facilities are dependent upon asset type and will typically range from two to three months.


(14)	The contractual interest rate represents two separate CMBS investments and ranges from one-month LIBOR plus 1.50% to 1.60%.

The following table presents scheduled principal on borrowings, based on final maturity as of September 30, 2016 (dollars in thousands):



	Total		Securitization Bonds Payable, Net		Mortgage Notes Payable, Net		Credit Facilities
October 1 to December 31, 2016	$	34,181	$	—	$	16,200	$	17,981
Years Ending December 31:
2017	—		—		—		—
2018	220,620		—		—		220,620
2019	85,100		—		—		85,100
2020	12,464		—		12,464		—
Thereafter	424,028		64,882		359,146		—
Total	$	776,393	$	64,882	$	387,810	$	323,701

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. In January 2015, the outstanding obligations with respect to one of the securitizations were repaid in full.

In the event of breaches of certain representations and warranties or a defect in the document of any of the contributed assets to securitization financing transactions provided at the time the Company entered into such securitization financing transactions and contributed the loans that serve as collateral for the securitization, the Company may be required to repurchase certain of those loans or replace the affected contributed asset or make a loss of value payment. These obligations do not relate to the credit performance of the loans contributed to the securitizations, but only to breaches of specific representations and warranties or a defect in the document of any of the contributed assets to the securitization financing transactions. Since inception, the Company has not been required to make any repurchases or replace the affected contributed asset or make a loss of value payment nor has the Company received any notice of assertion of a potential breach of representation and warranty or a defect in the document of any of the contributed assets to the securitization financing transactions. Any payment to repurchase a loan or replace the affected contributed asset or make a loss of value payment would impact the Company’s liquidity. Depending upon the size of any such payment, the impact to liquidity could be material.

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 contributed three senior loans with an aggregate principal amount of $79.1 million at cost to Securitization 2013-1. The Company accounts for such loans transferred by NorthStar Realty, as loan collateral receivable, related party. 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. As of September 30, 2016 the principal amount of the loans contributed by NorthStar Realty was $52.7 million.

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(Unaudited)

Term Loan Facilities

The Company, through subsidiaries, has entered into credit facility agreements with multiple global financial institutions to provide an aggregate principal amount of up to $550.0 million to finance the origination of first mortgage loans and senior loan participations secured by CRE (“Term Loan Facilities”). The Company agreed to guarantee certain obligations under the Term Loan Facilities, which contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. 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 September 30, 2016, the Company was in compliance with all of its financial covenants under the Term Loan Facilities.

As of September 30, 2016, the Company had $484.9 million carrying value of CRE debt investments financed with $305.7 million under the Term Loan Facilities.

CMBS Credit Facilities

For the period from September 2012 through June 2016, the Company entered into five master repurchase agreements (collectively the “CMBS Facilities”) to finance CMBS investments. The CMBS Facilities are on a recourse basis and contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. As of September 30, 2016, the Company had $26.5 million carrying value of CRE securities, financed with $18.0 million under its CMBS Facilities.


8.	Related Party Arrangements

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.

In June 2016, the advisory agreement was renewed for an additional one-year term commencing on June 30, 2016, with terms identical to those in effect through June 30, 2016.

Fees to Advisor

Asset Management Fee

The Advisor 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).

Incentive Fee

The Advisor is entitled to receive distributions equal to 15.0% of net cash flows of the Company, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus an 8.0% cumulative, non-compounded annual pre-tax return on such invested capital.

Acquisition Fee

The Advisor also receives fees for providing structuring, diligence, underwriting advice and related services in connection with real estate acquisitions 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). A fee paid to the Advisor in connection with 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. A fee incurred related to an equity investment will generally be expensed as incurred. A fee paid to the Advisor in connection with 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.

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(Unaudited)

Disposition Fee

For substantial assistance in connection with the sale of investments and based on the services provided, as determined by the Company’s independent directors, the Advisor 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 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 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, travel and entertainment and other general and administrative costs and expenses. However, there is no reimbursement for personnel costs related to executive officers (although there may be reimbursement for certain executive officers of the Advisor) and other personnel involved in activities for which the Advisor receives an acquisition fee or a disposition fee. The Advisor allocates these costs to the Company 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 updates the board of directors on a quarterly basis of any material changes to the expense allocation and provides 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.

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(Unaudited)

Summary of Fees and Reimbursements

The following table presents the fees and reimbursements incurred to the Advisor for the three and nine months ended September 30, 2016 and 2015 and the amount due to related party as of September 30, 2016 and December 31, 2015 (dollars in thousands):



		Three Months Ended September 30,				Nine Months Ended September 30,				Due to Related Party as of⁽¹⁾
Type of Fee or Reimbursement	Financial Statement Location	2016		2015		2016		2015		September 30, 2016 (Unaudited)		December 31, 2015
Fees to Advisor
Asset management	Asset management and other fees- related party	$	5,410	$	5,906	$	16,318	$	18,303	$	—	$	—
Acquisition⁽²⁾	Real estate debt investments, net / Investments in unconsolidated ventures / Asset management and other fees- related party	165		451		2,889		451		—		—
Disposition⁽²⁾	Real estate debt investments, net / Asset management and other fees - related party	1,179		626		3,510		1,862		335		—
Reimbursements to Advisor
Operating costs⁽³⁾	General and administrative expenses	2,961		3,681		10,127		10,058		—		—
Total		$	9,715	$	10,664	$	32,844	$	30,674	$	335	$	—

____________________________________________________


(1)	As of September 30, 2016, the balance is included in accounts payable and accrued expenses on the Company’s consolidated balance sheet.

(2)

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 September 30, 2016, the Advisor waived $0.8 million of acquisition fees and $0.4 million of disposition fees related to CRE securities.


(3)	As of September 30, 2016, the Advisor has incurred unreimbursed operating costs on behalf of the Company of $6.7 million that remain eligible to allocate to the Company.

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. 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 agreement 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.

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(Unaudited)

PE Investment IIB

In February 2016, the Company’s board of directors, including all of its independent directors, approved the purchase of an additional 14.0% of the PE Investment IIA transaction (“PE Investment IIB”) from a company managed by the Sponsor, NorthStar Realty. The Company purchased PE Investment IIB on the same terms and conditions negotiated by another existing and purchasing unrelated co-investor in the transaction. This increased the Company’s total ownership from 15.0% to 29.0%. The Company acquired PE Investment IIB for $26.5 million based on a NAV of $660.6 million as of September 30, 2015, adjusted for distributions and contributions. With this add-on investment, the Company will be responsible for 29.0% of the Deferred Amount, or $85.7 million as of September 30, 2016.


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 September 30, 2016, the Company’s independent and non-management directors were granted a total of 101,204 shares of restricted common stock for an aggregate $1.0 million, based on the share price on the date of each grant. The restricted stock granted prior to 2013 generally vests quarterly over four years and the restricted stock granted in and subsequent to 2013 generally vests quarterly over two years. However, the stock will become fully vested on the earlier occurrence of: (i) the termination of the independent or non-management 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 $56,250 and $36,563 for the three months ended September 30, 2016 and 2015, respectively, and $134,528 and $140,342 for the nine months ended September 30, 2016 and 2015, respectively, related to the issuance of restricted stock to the independent and non-management directors, which was recorded in general and administrative expenses in the consolidated statements of operations. Unvested shares totaled 26,114 and 17,687, as of September 30, 2016 and December 31, 2015, respectively.


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 $1.1 billion.

Distribution Reinvestment Plan

The Company adopted the 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. Following the termination of the Primary Offering in July 2013, the Company continues to offer shares pursuant to the DRP pursuant to an effective registration statement for up to 15 million shares.

In April 2016, the DRP was amended and restated to provide that, effective on ten days’ notice, the price per share purchased pursuant to the DRP was $9.87, which is equal to the estimated value per share of the Company’s common stock as of December 31, 2015, until such time as the Company establishes a new estimated per share value, at which time the purchase price will adjust to 100% of such estimated value per share. The Company expects that the next estimated value per share will be based upon assets and liabilities as of December 31, 2016.

Prior to the April 2016 amendment, shares issued pursuant to the DRP were priced at 95.0% of the Company’s estimated value per share as of October 31, 2014, or $9.52. Prior to 2015, shares issued pursuant to the DRP were priced at $9.50 per share.

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.

For the nine months ended September 30, 2016, the Company issued 3.4 million shares totaling $33.0 million of proceeds pursuant to the DRP. For the year ended December 31, 2015, the Company issued 4.6 million shares totaling $43.8 million of proceeds pursuant to the DRP. From inception through September 30, 2016, the Company issued 17.2 million shares totaling $163.9 million of proceeds pursuant to the DRP.

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(Unaudited)

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 nine months ended September 30, 2016 (dollars in thousands):



	Distributions⁽¹⁾
Period	Cash		DRP		Total
January	$	4,455	$	3,746	$	8,201
February	4,139		3,504		7,643
March	4,458		3,737		8,195
April	4,358		3,594		7,952
May	4,469		3,698		8,167
June	4,357		3,572		7,929
July	4,542		3,673		8,215
August	4,526		3,657		8,183
September	4,414		3,528		7,942
Total	$	39,718	$	32,709	$	72,427

_________________________________________________


(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 (as amended, the “Share Repurchase Program”). The Company may not repurchase shares unless a stockholder has held shares for one year. However, the Company may repurchase shares held for less than one year in connection with a stockholder’s death or qualifying disability. The Company is not obligated to repurchase shares under the Share Repurchase Program. 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 nine months ended September 30, 2016, the Company repurchased 3.0 million shares of common stock for a total of $29.0 million or a price of $9.55 per share. For the year ended December 31, 2015, the Company repurchased 1.7 million shares of common stock for a total of $16.5 million or a weighted average price of $9.63 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 September 30, 2016, 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 nine months ended September 30, 2016 and 2015 was a de minimis amount.

Other

Other non-controlling interests represent third-party equity interests in ventures that are consolidated with the Company’s financial statements. Net loss attributable to other non-controlling interest for the three months ended September 30, 2016 was $0.2 million and net income for the nine months ended September 30, 2016 was $0.1 million. Net loss attributable to the other non-controlling interests for the three and nine months ended September 30, 2015 was $0.4 million and $0.1 million, respectively.

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(Unaudited)


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.

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.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 September 30, 2016 and December 31, 2015 by level within the fair value hierarchy (dollars in thousands):



	September 30, 2016 (Unaudited)								December 31, 2015
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Investments in private equity funds, at fair value	$	—	$	—	$	111,427	$	111,427	$	—	$	—	$	98,754	$	98,754
Real estate securities, available for sale	—		92,015		—		92,015		—		83,622		—		83,622

The following table presents additional information about PE Investments which are measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 for which the Company has used Level 3 inputs to determine fair value (dollars in thousands):



	Nine Months Ended			Year Ended
	September 30, 2016 (Unaudited)			December 31, 2015
Beginning balance	$	98,754		$	141,091
Contributions⁽¹⁾	58,373			10,040
Distributions	(61,243		)	(70,487		)
Equity in earnings	18,975			30,218
Unrealized gain (loss)	(3,432		)	(12,108		)
Ending balance	$	111,427		$	98,754

_____________________________________________________


(1)	Represents initial investments and subsequent contributions.

For the nine months ended September 30, 2016, 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 which had a weighted average of 16.2% as of September 30, 2016 and includes timing and amount of expected future cash flow. Significant increases or decreases in any one of the inputs described above in isolation may result in significantly different fair value of the financial assets and liabilities using such Level 3 inputs.

As of September 30, 2016 and December 31, 2015, the Company had no financial assets and liabilities that were accounted for at fair value on a non-recurring basis.

For the three and nine months ended September 30, 2016, the Company recorded an unrealized loss of less than $0.1 million and $3.4 million, respectively, for financial assets for which the fair value option was elected. For the three and nine months ended September 30, 2015, the Company recorded an unrealized loss of $3.8 million and $9.4 million, respectively, 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.

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.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 September 30, 2016 and December 31, 2015 (dollars in thousands):



	September 30, 2016 (Unaudited)							December 31, 2015
	Principal Amount			Carrying Value		Fair Value		Principal Amount			Carrying Value		Fair Value
Financial assets:⁽¹⁾
Real estate debt investments, net	$	823,623	⁽²⁾	$	825,192	$	845,886	$	995,769	⁽²⁾	$	997,836	$	1,054,743
Real estate securities, available for sale⁽³⁾	130,974			92,015		92,015		115,849			83,622		83,622
Financial liabilities:⁽¹⁾
Securitization bonds payable, net	$	64,882		$	64,882	$	64,233	$	185,812		$	185,314	$	185,387
Mortgage notes payable, net	387,810			384,560		366,348		317,865			316,402		317,138
Credit facilities	323,701			323,701		323,701		318,000			318,000		318,000

______________________________________________


(1)	The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.


(2)	Excludes future funding commitments of $15.1 million and $43.6 million, as of September 30, 2016 and December 31, 2015, 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, Net

Securitization bonds payable, net 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.

Mortgage Notes Payable, Net

For mortgage notes payable, net, 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.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Credit Facilities

The Company has amounts outstanding under six 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.


•	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 PE Investments since the underlying collateral in the funds is primarily real estate. May include REO where the Company takes title to collateral in connection with a CRE debt investment.


•	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.

The following tables present segment reporting for the three and nine months ended September 30, 2016 and 2015 (dollars in thousands):



Three Months Ended September 30, 2016	Real Estate Debt			Real Estate Equity			Real Estate Securities		Corporate			Total
Net interest income	$	12,691		$	—		$	1,955	$	—		$	14,646
Rental and other income	—			21,843			—		—			21,843
Asset management and other fees - related party	—			—			—		(5,410		)	(5,410		)
Mortgage notes interest expense	—			(4,552		)	—		—			(4,552		)
Transaction costs	—			(182		)	—		—			(182		)
Property operating expenses	—			(10,918		)	—		—			(10,918		)
General and administrative expenses	(195		)	(49		)	—		(3,137		)	(3,381		)
Depreciation and amortization	—			(9,481		)	—		—			(9,481		)
Unrealized gain (loss) on investments and other	—			(33		)	—		—			(33		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	12,496			(3,372		)	1,955		(8,547		)	2,532
Equity in earnings (losses) of unconsolidated ventures	—			5,575			—		—			5,575
Income tax benefit (expense)	—			(810		)	—		—			(810		)
Net income (loss)	$	12,496		$	1,393		$	1,955	$	(8,547	)	$	7,297

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



Three Months Ended September 30, 2015	Real Estate Debt			Real Estate Equity			Real Estate Securities			Corporate			Total
Net interest income	$	18,163		$	—		$	1,413		$	—		$	19,576
Rental and other income	—			14,637			—			—			14,637
Asset management and other fees - related party	—			—			—			(5,906		)	(5,906		)
Mortgage notes interest expense	—			(3,768		)	—			—			(3,768		)
Transaction costs	—			—			—			—			—
Property operating expenses	—			(8,087		)	—			—			(8,087		)
General and administrative expenses	(140		)	—			(21		)	(3,786		)	(3,947		)
Depreciation and amortization	—			(12,598		)	—			—			(12,598		)
Unrealized gain (loss) on investments and other	—			(3,828		)	—			—			(3,828		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	18,023			(13,644		)	1,392			(9,692		)	(3,921		)
Equity in earnings (losses) of unconsolidated ventures	1,437			6,696			—			—			8,133
Income tax benefit (expense)	—			1,153			—			—			1,153
Net income (loss)	$	19,460		$	(5,795	)	$	1,392		$	(9,692	)	$	5,365



Nine months ended September 30, 2016	Real Estate Debt			Real Estate Equity			Real Estate Securities		Corporate			Total
Net interest income	$	40,454		$	—		$	5,402	$	—		$	45,856
Rental and other income	—			58,330			—		—			58,330
Asset management and other fees - related party	—			—			—		(18,747		)	(18,747		)
Mortgage notes interest expense	—			(12,895		)	—		—			(12,895		)
Transaction costs	—			(1,698		)	—		(211		)	(1,909		)
Property operating expenses	—			(27,478		)	—		—			(27,478		)
General and administrative expenses	(576		)	(114		)	—		(10,863		)	(11,553		)
Depreciation and amortization	—			(21,386		)	—		—			(21,386		)
Unrealized gain (loss) on investments and other	—			(3,432		)	—		—			(3,432		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	39,878			(8,673		)	5,402		(29,821		)	6,786
Equity in earnings (losses) of unconsolidated ventures	672			18,975			—		—			19,647
Income tax benefit (expense)	—			(2,265		)	—		—			(2,265		)
Net income (loss)	$	40,550		$	8,037		$	5,402	$	(29,821	)	$	24,168

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



Nine Months Ended September 30, 2015	Real Estate Debt			Real Estate Equity			Real Estate Securities			Corporate			Total
Net interest income	$	54,398		$	—		$	4,247		$	—		$	58,645
Rental and other income	—			44,664			—			—			44,664
Asset management and other fees - related party	—			—			—			(18,303		)	(18,303		)
Mortgage notes interest expense	—			(11,016		)	—			—			(11,016		)
Transaction costs	(491		)	(86		)	—			—			(577		)
Property operating expenses	—			(22,857		)	—			—			(22,857		)
General and administrative expenses	(562		)	(78		)	(46		)	(11,157		)	(11,843		)
Depreciation and amortization	—			(20,115		)	—			—			(20,115		)
Unrealized gain (loss) on investments and other	—			(9,414		)	—			—			(9,414		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	53,345			(18,902		)	4,201			(29,460		)	9,184
Equity in earnings (losses) of unconsolidated ventures	4,327			23,639			—			—			27,966
Income tax benefit (expense)	—			(366		)	—			—			(366		)
Net income (loss)	$	57,672		$	4,371		$	4,201		$	(29,460	)	$	36,784

The following table presents total assets by segment as of September 30, 2016 and December 31, 2015 (dollars in thousands):



Total Assets	Real Estate Debt		Real Estate Equity		Real Estate Securities		Corporate⁽¹⁾		Total
September 30, 2016 (Unaudited)	$	999,406	$	699,658	$	97,734	$	90,415	$	1,887,213
December 31, 2015	1,198,020		525,178		84,887		139,431		1,947,516

__________________________________________________


(1)	Includes cash, unallocated receivables and deferred costs and other assets, net.


14.	Subsequent Events

Distribution Reinvestment Plan

From October 1, 2016 through November 4, 2016, the Company issued 0.7 million shares of common stock pursuant to the DRP, raising proceeds of $7.1 million. As of November 4, 2016, 10.0 million shares were available to be issued pursuant to the DRP.

Distributions

On November 9, 2016, the board of directors of the Company approved a daily cash distribution of $0.001917808 per share of common stock for each of the three months ended March 31, 2017. 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 October 1, 2016 through November 4, 2016, the Company repurchased 1.3 million shares for a total of $12.4 million or a weighted average price of $9.49 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.

New Investments

Commercial Real Estate Debt

In October 2016, the Company upsized its future funding commitments by $17.0 million on a CRE debt investment.

Real Estate Securities Investments

In October 2016, the Company purchased a CMBS with a face value of $10.0 million at a discount of $3.2 million.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Repayments

Commercial Real Estate Debt

In October 2016, the Company received $97.6 million related to the repayment of a CRE debt investment.

Securitization 2016-1

In November 2016, the Company bifurcated three first mortgage loans with an aggregate principal amount of $44.4 million into senior loans of $29.5 million and subordinate mortgage interests of $14.9 million to facilitate the financing of the senior loans into Securitization 2016-1, a securitization financing transaction entered into by NorthStar Real Estate Income II, Inc. (“NorthStar Income II”), a company managed by an affiliate of the Sponsor. The Company transferred the three senior loans at cost to Securitization 2016-1. The Company did not retain any interest in the senior loans and retained the subordinate mortgage interests on an unleveraged basis. The Company will use the proceeds to, among other things, repay borrowings on its term loan facilities.

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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, as well as 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 obligations, or CDO, notes and other securities. In addition, we may own investments through joint ventures. 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, NorthStar Realty Europe Corp. (NYSE: NRE), other sponsored public retail-focused 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 September 30, 2016, NSAM has an aggregate of $39.3 billion of assets under management, adjusted for commitments to acquire or sell certain investments by NSAM and the NSAM Managed Companies. 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.

In June 2016, our Sponsor announced that it entered into a definitive merger agreement with NorthStar Realty and Colony Capital, Inc. or Colony, providing for the combination of the Sponsor, NorthStar Realty and Colony into a wholly-owned subsidiary of the Sponsor, as the surviving publicly-traded company for the combined organization that, upon and following the effective time of the mergers, will be named Colony NorthStar, Inc. or Colony NorthStar. As a result of the mergers, Colony NorthStar will be an internally-managed equity REIT, with a diversified real estate and investment management platform. In addition, following the mergers, our Advisor will be a subsidiary of Colony NorthStar. This transaction is expected to close in January 2017, subject to customary closing conditions, including regulatory approvals, and approval by our Sponsor’s, NorthStar Realty’s and Colony’s respective shareholders. There is no guarantee this transaction will close on the contemplated terms or within the anticipated timeframe, or at all. We do not expect that this transaction will have a material 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.

•

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. May include real estate owned, or REO, where we take title to collateral in connection with a CRE debt investment.


•	Commercial Real Estate Securities - Our CRE securities investments may include CMBS, unsecured REIT debt, CDO notes and other securities.

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 shareholder capital. We believe our Advisor’s platform and experience provide us the flexibility to invest across the real estate capital structure.

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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, which we refer to collectively as the Offering. 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 an additional registration statement to offer up to 10.0 million shares pursuant to our DRP, we continue to offer DRP shares beyond our Total Primary Offering.

We have raised total gross proceeds of $1.1 billion in the Offering. In addition, from the close of the Primary Offering through November 4, 2016, we have raised an additional $0.2 billion in gross proceeds pursuant to the DRP.

Our Investments

The following table presents our investments as of September 30, 2016, which may be adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 4, 2016 (dollars in thousands):



Investment Type:	Count	Principal Amount/Cost⁽¹⁾		% of Total
CRE Debt	Loans
First mortgage loans⁽²⁾	12	$	560,330	33.0	%
Mezzanine loans⁽²⁾	5	109,306		6.4	%
Preferred equity interests	1	77,417		4.6	%
Total CRE debt	18	747,053		44.0	%
Real estate
Operating Real Estate⁽³⁾	Properties
Industrial	23	107,131		6.3	%
Multi-tenant office	14	319,414		18.8	%
Multifamily	2	119,961		7.1	%
Student Housing	3	68,436		4.0	%
Subtotal	42	614,942		36.2	%
PE Investments⁽²⁾
PE Investment I	1	41,814		2.5	%
PE Investment IIA	1	73,373		4.3	%
PE Investment IIB	1	66,354		3.9	%
PE Investment III	1	15,570		0.9	%
Subtotal	4	197,111		11.6	%
Total real estate	46	812,053		47.8	%
CRE Securities
CMBS	11	138,664		8.2	%
Total CRE securities	11	138,664		8.2	%
Total	75	$	1,697,770	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 purchase price allocations related to net intangibles, deferred costs and other assets.


(2)	Includes future funding commitments on CRE debt and the deferred purchase price for PE Investment IIA, PE Investment IIB and PE Investment III (as defined below).


(3)	Includes REO of $67.5 million.

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.”

Underwriting Process

We use a rigorous investment and underwriting process that has been developed and utilized by our Advisor’s and its affiliates’ senior management teams leveraging their extensive commercial real estate expertise over many years and real estate cycles which focuses on some or all of the following factors designed to ensure each investment is evaluated appropriately: (i) macroeconomic conditions that may influence operating performance; (ii) fundamental analysis of underlying real estate, including tenant rosters,

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lease terms, zoning, necessary licensing, operating costs and the asset’s overall competitive position in its market; (iii) real estate market factors that may influence the economic performance of the investment, including leasing conditions and overall competition; (iv) the operating expertise and financial strength and reputation of a tenant, operator, partner or borrower; (v) the cash flow in place and projected to be in place over the term of the investment and potential return; (vi) the appropriateness of the business plan and estimated costs associated with tenant buildout, repositioning or capital improvements; (vii) an internal and third-party valuation of a property, investment basis relative to the competitive set and the ability to liquidate an investment through a sale or refinancing; (viii) review of third-party reports including appraisals, engineering and environmental reports; (ix) physical inspections of properties and markets; (x) the overall legal structure of the investment, contractual implications and the lenders’ rights; and (xi) the tax and accounting impact.

Consistent with our investment strategy, a majority of our diversified portfolio is comprised of CRE debt investments and CRE securities. The remainder of the portfolio consists of real estate equity investments, including PE investments.

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 all or portions of the loan (senior or subordinate interests) 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 September 30, 2016, which may be adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 4, 2016, $747.1 million, or 44.0%, of our assets were invested in CRE debt, consisting of 18 loans with an average investment size of $41.5 million. The weighted average extended maturity of our CRE debt portfolio is 4.1 years.

The following table presents a summary of our CRE debt investments as of September 30, 2016, which may be adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 4, 2016 (refer to the below and “Recent Developments”) (dollars in thousands):



								Weighted Average						Floating Rate as % of Principal Amount
Investment Type:	Count	Principal Amount⁽¹⁾		Carrying Value		Allocation by Investment Type⁽²⁾		Fixed Rate		Spread over LIBOR⁽³⁾		Total Unleveraged Current Yield		Floating Rate as % of Principal Amount
First mortgage loans	12	$	560,330	$	549,813	75.0	%	15.00	%	5.84	%	6.11	%	91.7	%
Mezzanine loans	5	109,306		109,286		14.6	%	12.14	%	9.29	%	11.10	%	47.3	%
Preferred equity interests⁽⁴⁾	1	77,417		77,417		10.4	%	10.00	%	—		10.00	%	—
Total/Weighted average	18	$	747,053	$	736,516	100.0	%	11.84	%	6.12	%	7.08	%	75.2	%

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(1)	Includes future funding commitments of $28.3 million.


(2)	Based on principal amount.


(3)	Includes a fixed minimum LIBOR rate, or LIBOR floor, as applicable. As of November 4, 2016, we had $505.9 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.32%.


(4)	Excludes an $8.6 million proportionate interest in a preferred equity investment owned by a joint venture partner.

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The following presents our CRE debt portfolio’s diversity across investment type, property type and geographic location based on principal amount:

Debt Investments by Investments Type



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 with an emphasis on properties, which may be structurally senior to a third-party partner’s equity, and PE Investments, both of which have stable cash flow and/or the potential to appreciate in value and therefore help overcome our upfront fees and expenses. In addition, we may own investments through joint ventures with one or more partners and REO where we have taken title to collateral.

Real Estate Properties

As part of our real estate properties strategy, we explore a variety of real estate investments including multi-tenant office, multifamily, student housing and industrial. These properties are typically well-located with strong operating partners and we believe offer both attractive cash flow and returns.

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As of September 30, 2016, which may be adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 4, 2016, $614.9 million, or 36.2%, of our assets were invested in real estate properties and our portfolio was 92% occupied. The following table presents our real estate property investments as of September 30, 2016, which may be adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 4, 2016 (refer to the below and “Recent Developments”) (dollars in thousands):



Property Type	Number of Portfolios	Number of Properties	Capacity		Amount⁽¹⁾
Multi-tenant office⁽²⁾	3	14	1,878,968	square feet	$	319,414
Multifamily	2	2	1,422	units	119,961
Industrial	1	23	2,077,743	square feet	107,131
Student Housing	1	3	2,166	beds	68,436
Total	7	42			$	614,942

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(1)	Based on cost which includes purchase price allocations related to net intangibles, deferred costs and other assets.


(2)	Includes REO of $67.5 million.

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. We believe the investments provide diversity and have the potential to appreciate in value and therefore help overcome our upfront fees and expenses.

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 September 30, 2016, which may be adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 4, 2016, $197.1 million, or 11.6%, 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	Fair Value⁽²⁾		Assets, at Cost		Implied Underlying Leverage⁽³⁾		Expected Future Contributions
PE Investment I⁽⁴⁾	49	26	$	41.8	$	14,100	42.5	%	$	0.5
PE Investment IIA⁽⁵⁾⁽⁶⁾	24	15	73.4		17,500		35.7	%	—
PE Investment IIB⁽⁶⁾	24	15	66.3		17,500		35.7	%	—
PE Investment III⁽⁷⁾	2	1	15.6		1,000		—		—
			$	197.1					$	0.5

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(1)	Based on financial data reported by the underlying funds as of June 30, 2016, which is the most recent financial information from the underlying funds, except as otherwise noted.


(2)	Includes the deferred purchase price for PE Investment IIA, PE Investment IIB and PE Investment III.


(3)	Represents implied leverage for funds with investment-level financing, calculated as the underlying borrowing divided by assets at fair value.


(4)	We, together with NorthStar Realty, have an ownership interest in PE Investment I of 51.0%, of which we own 29.5% and NorthStar Realty owns 70.5%.

(5)

We, NorthStar Realty and funds managed by Goldman Sachs Asset Management each had an initial ownership interest in PE Investment IIA of 15.0%, 70.0% and 15.0%, respectively. PE Investment IIA paid an initial amount of $504.8 million and will pay the remaining $411.4 million, or 45.0% 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 September 30, 2016, our share of the Deferred Amount was $44.3 million.

(6)

In February 2016, we purchased an additional 14.0% of NorthStar Realty’s interest in PE Investment IIA. We acquired PE Investment IIB for $26.5 million based on a net asset value, or NAV, of $660.6 million as of September 30, 2015, adjusted for distributions and contributions. This add-on investment increased our total ownership in PE Investment II from 15.0% to 29.0% and as of September 30, 2016, we are responsible for 29.0% of the Deferred Amount, or $85.7 million.

(7)

In March 2016, we acquired PE Investment III for $15.1 million based on a NAV of March 31, 2015, adjusted for contributions and distributions from such date. At the time of closing, we paid $4.2 million, net of a $1.8 million deposit for a total of $6.0 million, or 40% of the purchase price adjusted for contributions and distributions. The remaining portion of the Deferred Purchase Price, or approximately $8.9 million, will be paid in two installments on December 31, 2016 and December 31, 2017.

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	Our Proportionate Share of PE Investments
	Income		Return of Capital		Distributions		Contributions⁽¹⁾		Net
PE Investment I
Three Months Ended September 30, 2016	$	2.1	$	5.8	$	7.9	$	—	$	7.9
Nine Months Ended September 30, 2016	7.8		20.2		28.0		0.2		27.8
February 15, 2013 to September 30, 2016⁽²⁾	73.0		92.5		165.5		10.2		155.3

PE Investment IIA
Three Months Ended September 30, 2016	$	1.4	$	4.0	$	5.4	$	—	$	5.4
Nine Months Ended September 30, 2016	4.7		12.2		16.9		7.8		9.1
July 3, 2013 to September 30, 2016⁽²⁾	32.9		66.8		99.7		20.7		79.0

PE Investment IIB
Three Months Ended September 30, 2016	$	1.8	$	3.2	$	5.0	$	—	$	5.0
Nine Months Ended September 30, 2016	5.5		8.8		14.3		33.9		(19.6		)
February 9, 2016 to September 30, 2016⁽²⁾	5.5		8.8		14.3		33.9		(19.6		)

PE Investment III
Three Months Ended September 30, 2016	$	0.3	$	—	$	0.1	$	—	$	0.1
Nine Months Ended September 30, 2016	1.0		1.0		2.0		16.5		(14.5		)
March 30, 2016 to September 30, 2016⁽²⁾	1.0		1.0		2.0		16.5		(14.5		)

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(1)	Represents initial investments and subsequent contributions.


(2)	Represents activity from the respective initial closing date through September 30, 2016.

The following presents the underlying fund interests in our PE Investments by investment type and geographic location based on NAV as of June 30, 2016:



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).

As of September 30, 2016, which may be adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 4, 2016, $138.7 million, or 8.2%, of our assets were invested in CRE securities and consisted of eleven CMBS investments purchased at an aggregate $65.1 million discount to par and our average investment size was $12.6 million. As of November 4, 2016, the weighted average expected maturity of our CMBS was 6.8 years.

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Sources of Operating Revenues and Cash Flows

We primarily generate revenue from net interest income on our CRE debt and securities investments and net rental and other operating 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 net 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

The U.S. economy demonstrated improvement in 2015, which prompted the Federal Reserve in December 2015 to raise the Federal Funds Rate for the first time in nine years. The U.S. economy has continued to show strength throughout 2016 with approximately 5% unemployment and positive trends in the housing market. Despite this, concerns still remain regarding low inflation in the United States, a stronger U.S. dollar, oil price instability, slow gross domestic product and global growth, the U.S. Presidential election and increasing international market volatility. Many other global central banks have been easing monetary policy to combat low inflation and stagnant growth and the Federal Reserve is signaling that it may further adjust the Federal Funds Rate in 2016, especially in light of certain global events described below.

In June 2016, a non-binding referendum was passed in the United Kingdom supporting the exit from the European Union which in turn resulted in considerable instability to global markets and currencies, especially European markets, the U.K.’s economy and the British Pound Sterling which has continued to devalue. In addition, dramatic political change in the United Kingdom has resulted including the election of a new Prime Minister in July 2016. Much uncertainty remains as to the process for a potential March 2017 start to “Brexit” and the long-term impacts to the global, European and British economies. Sovereign banks have been actively easing monetary policy resulting in sustained low-to-negative interest rate environments, while several key global economies, including England, Germany and Japan, have recently reached positive interest rate territory in the benchmark 10-year paper. The Bank of England and other central banks remain poised for further monetary and financial policy action should the U.K.’s economy enter a downturn or as a tool to encourage positive economic growth. Despite the unexpected result of the referendum, markets have generally continued to function properly and in some cases recovered from the initial shock (e.g., U.S. equity markets). The potential for ongoing volatility and uncertainty resulting from “Brexit” and other geopolitical or financial unrest may have a significant impact on the overall global economic environment.

CRE fundamentals remain relatively healthy across U.S. property types. Investor demand in 2015 for commercial real estate increased transaction activity and prices as rent and vacancy fundamentals improved across most property sectors. Private capital investment remained aggressive throughout 2015 and, although public markets slowed at the beginning of 2016, continued to remain aggressive throughout 2016, leading to continued appreciation in real estate values. However, property price appreciation has slowed and there is speculation that certain markets may be entering the late stage of the current real estate cycle and, in some markets, rent growth and capitalization rate compression has started to slow. One of the factors that may contribute to periodic volatility in the commercial real estate market is the large amount of maturing commercial real estate debt that may have difficulties being refinanced. Approximately $1.4 trillion of commercial real estate debt in the United States is scheduled to mature through 2018. While there appears to be a supply of available liquidity to satisfy many of these maturities, 2016 private-label CMBS year-to-date is 43% compared to the same period in 2015 and industry experts estimate a projected total origination volume of approximately $65 billion for 2016 versus volume of $95 billion in 2015. Despite non-traditional lenders significantly increasing loan origination volumes, this trend is potentially one symptom that could point to broader difficulties in the ability of the market to refinance the large amount of maturing real estate debt and may lead to a negative impact on the overall real estate market.

Non-traded REIT capital raising was down year over year by 20% in 2014 (with approximately $16 billion in equity raised) and 36% in 2015. We were able to gain market share with our non-traded REITs during this time, having a 7% market share in 2014 increasing to 13% in 2015. In April 2016, the retail industry experienced the implementation of FINRA 15-02 related to disclosure on broker-dealer account statements and the final ruling of the U.S. Department of Labor’s “fiduciary” standard for retirement accounts. Although the final fiduciary rule was more favorable to both sponsors and broker-dealers in the retail industry than initial proposals, the impact of both of these events has been a sharp decline in capital raising in the retail market as evidenced by the overall non-traded REIT capital raising being down 55% year-to-date through September 2016 compared to the same period in 2015. Our Sponsor has seen sales and its market share decline in 2016 as a result. However, we anticipate the overall market and opportunity for retail products to improve as it adapts to these changes.

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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 opportunistic sales 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. In addition, we believe that such platform, and our Advisor’s and its affiliates’ capabilities, will be strengthened and enhanced as a result of the pending mergers of our Sponsor, Colony and NorthStar Realty as discussed above. 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. 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 $550.0 million to finance the origination of CRE first mortgage loans, 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 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.

The following table presents our investment activity for the nine months ended September 30, 2016 and from inception through September 30, 2016, adjusted for our acquisitions and commitments through November 4, 2016 (dollars in thousands):



	Nine Months Ended			From Inception Through
	September 30, 2016			November 4, 2016
Investment Type:	Count	Principal Amount/Cost		Count	Principal Amount/Cost⁽¹⁾
CRE debt	5	$	105,850	50	$	1,913,805
Operating Real Estate⁽²⁾	25	174,624		42	614,942
PE Investments⁽³⁾	2	98,224		4	353,684
CRE securities	3	23,664		15	183,175
Total	35	$	402,362	111	$	3,065,606

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(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)	Includes REO for which we took title in May 2016.


(3)	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 48%.

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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.

Our credit facilities currently include three secured term loan facilities, or our Term Loan Facilities, that provide for an aggregate of up to $550.0 million to finance the origination of first mortgage loans and senior loan participations secured by commercial real estate and five 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, the outstanding obligations with respect to one of the securitizations were repaid in full. As of September 30, 2016, we had $64.9 million issued as part of Securitization 2013-1 (as described below), $305.7 million outstanding under our Term Loan Facilities and $18.0 million outstanding under our CMBS Facilities. As of November 4, 2016, we have $308.0 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 our Advisor’s 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 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 September 30, 2016, each of our CRE debt investments was performing in accordance with the contractual terms of its governing documents in all material respects. 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.

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Critical Accounting Policies

Principles of Consolidation

Our consolidated financial statements include the accounts of us, our operating partnership, or Operating Partnership, and our consolidated subsidiaries. We consolidate variable interest entities, or VIEs, if any, where we are the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by us. All significant intercompany balances are eliminated in consolidation.

Variable Interest Entities

A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. We base the qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. We reassess the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. We determine whether we are the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for us or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to our business activities and the other interests. We reassess the determination of whether we are the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.

We evaluate our investments and financings, including investments in unconsolidated ventures and securitization financing transactions, if any, to determine whether each investment or financing is 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 or a simple majority vote.

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 preferred returns and allocation formulas, 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.

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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) of 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 to record certain financial assets and liabilities at fair value 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 have elected the fair value option for PE 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 and discount. 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.

We may syndicate a portion of the CRE debt investments that we originate or sell the CRE debt investments individually. When a transaction meets the criteria for sale accounting, we will no longer recognize the CRE debt investment sold as an asset and will recognize gain or loss based on the difference between the sales price and the carrying value of the CRE debt investment sold. Any related unamortized deferred origination fees, original issue discounts, loan origination costs, discounts or premiums at the time of sale are recognized as an adjustment to the gain or loss on sale, which is included in interest income on the consolidated statement of operations. Any fees received at the time of sale or syndication are recognized as part of interest income.

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 account for purchases of operating real estate that qualify as business combinations using the acquisition method, where the purchase price is allocated to tangible assets such as land, building, 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.

We refer to real estate acquired in connection with a foreclosure, deed in lieu of foreclosure or a consensual modification of a loan as REO. We evaluate whether an REO, herein collectively referred to as taking title to collateral, constitutes a business and whether business combination accounting is appropriate. Any excess upon taking title to collateral between the carrying value of a loan over the estimated fair value of the property is charged to provision for loan losses.

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.

Fair Value Measurement

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.

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Level 2.	Financial assets and liabilities whose values are based on the following:


a)	Quoted prices for similar assets or liabilities in active markets.


b)	Quoted prices for identical or similar assets or liabilities in non-active markets.


c)	Pricing models whose inputs are observable for substantially the full term of the asset or liability.


d)	Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.


Level 3.	Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Financial assets and liabilities recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as our knowledge and experience of the market.

With respect to valuation for CRE securities, we generally obtain at least one quote from a pricing service or broker. Furthermore, we may use internal pricing models to establish arm’s length prices. Generally, the quote from the pricing service is used to determine fair value for the securities. The quotes are not adjusted. The pricing service uses market-based measurements based on valuation techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including prices for similar assets, benchmark yield curves and market corroborated inputs such as contractual terms, discount rates for similar securities and credit (such as credit support and delinquency rates). We believe such broker quote is generally based on a market transaction of comparable securities.

To determine the fair value of CRE securities, we maintain a comprehensive quarterly process that includes a valuation committee comprised of senior members of the investment and accounting teams that is designed to enable management to ensure the prices used are representative of fair value and the instruments are properly classified pursuant to the fair value hierarchy.

Initially, a member of the investment team on the valuation committee reviews the prices at quarter end to ensure current market conditions are fairly presented. The investment team is able to assess these values because they are actively engaged in the market, reviewing bid lists, recent sales and frequently have discussions with various banks and other financial institutions regarding the state of the market. We then perform a variety of analyses to ensure the quotes are in a range which we believe to be representative of fair value and to validate the quotes obtained and used in determining the ultimate value used in the financial statements. At the portfolio level, we evaluate the overall change in fair value versus the overall change in the market. We review significant changes in fair value for individual instruments, both positive and negative, from the prior period. We perform back testing on any securities sold to validate the quotes used for the prior quarter. Where multiple quotes are available, we evaluate any large variance between the high and low price. We obtain any available market data that provides insight into the price through recent or comparable security trades, multiple broker bids and other pertinent information. This data may be available through the pricing service or based on data directly available to us. If as part of any of these processes, we are aware of data which we believe better supports the fair value, we challenge the quote provided by either the pricing service or broker. Any discrepancy identified from our processes are reviewed and resolved. The valuation committee approves the final prices. We believe these procedures are designed to enable us to estimate fair value.

Once we determine fair value of CRE securities, we review to ensure the instrument is properly classified pursuant to the fair value hierarchy consistent with 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

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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 the leasing of space to various types of tenants. Rental revenue recognition commences when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. 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 our consolidated balance sheets. We amortize any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Other income represents revenue from tenant/operator leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by us on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.

In a situation in which a lease(s) associated with a significant tenant have been, or are expected to be, terminated early, we evaluate the remaining useful life of depreciable or amortizable assets in the asset group related to the lease that will be terminated (i.e., tenant improvements, above- and below-market lease intangibles, in-place lease value and deferred leasing costs). Based upon consideration of the facts and circumstances surrounding the termination, we may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within rental and other income for above- and below-market lease intangibles and depreciation and amortization for the remaining lease related asset groups in the consolidated statements of operations.

Real Estate Securities

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 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. As of September 30, 2016, we did not have any impaired CRE debt investments.

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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. As of September 30, 2016, we did not have any impaired operating real estate.

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 equity in earnings (losses) of unconsolidated ventures in our consolidated statements of operations. As of September 30, 2016, we did not have any impaired investments in unconsolidated ventures.

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 our 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 September 30, 2016, 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.

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 adopted this guidance in the first quarter 2016 and determined our Operating Partnership is considered a VIE. We are the primary beneficiary of the VIE, the VIE’s assets can be used for purposes other than the settlement of the VIE’s obligations and our partnership interest is considered a majority voting interest. As such, this standard resulted in

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the identification of additional VIEs, however it did not have a material impact on our consolidated financial position or results of operations.

In January 2016, the FASB issued an accounting update that addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We are currently assessing the impact, if any, of the guidance on our consolidated financial position, results of operations and financial statement disclosures.

In February 2016, the FASB issued an accounting update that requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact, if any, that this guidance will have on our consolidated financial position, results of operations and financial statement disclosures.

In March 2016, the FASB issued guidance which eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The update requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment become qualified for equity method accounting. The update should be applied prospectively upon their effective date to increases in the level of ownership interests or degree of influence that results in the adoption of the equity method. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. We concluded that this guidance will not have any impact on our consolidated financial position, results of operations or financial statement disclosures.

In March 2016, the FASB issued guidance which amends several aspects of the accounting for equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption is permitted. We are evaluating the impact, if any, that this guidance will have on our consolidated financial position, results of operations and financial statement disclosures.

In June 2016, the FASB issued guidance which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Additionally, entities will have to disclose significantly more information including information used to track credit quality by year of origination for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. We are evaluating the impact, if any, that this guidance will have on our consolidated financial position, results of operations and financial statement disclosures.

In September 2016, the FASB issued final amendments to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows as they may have aspects of more than one class of cash flows. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We are evaluating the impact, if any, that this guidance will have on our consolidated statement of cash flows.

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Results of Operations

Comparison of the Three Months Ended September 30, 2016 to September 30, 2015 (Dollars in Thousands):



	Three Months Ended September 30,						Increase (Decrease)
	2016			2015			Amount			%
Net interest income
Interest income	$	18,649		$	24,621		$	(5,972	)	(24.3	)%
Interest expense	4,003			5,045			(1,042		)	(20.7	)%
Net interest income	14,646			19,576			(4,930		)	(25.2	)%

Property and other revenues
Rental and other income	21,843			14,637			7,206			49.2	%
Total property and other revenues	21,843			14,637			7,206			49.2	%

Expenses
Asset management and other fees - related party	5,410			5,906			(496		)	(8.4	)%
Mortgage notes interest expense	4,552			3,768			784			20.8	%
Transaction costs	182			—			182			100.0	%
Property operating expenses	10,918			8,087			2,831			35.0	%
General and administrative expenses	3,381			3,947			(566		)	(14.3	)%
Depreciation and amortization	9,481			12,598			(3,117		)	(24.7	)%
Total expenses	33,924			34,306			(382		)	(1.1	)%

Other income (loss)
Unrealized gain (loss) on investments and other	(33		)	(3,828		)	3,795			(99.1	)%
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	2,532			(3,921		)	6,453			(164.6	)%
Equity in earnings (losses) of unconsolidated ventures	5,575			8,133			(2,558		)	(31.5	)%
Income tax benefit (expense)	(810		)	1,153			(1,963		)	(170.3	)%
Net income (loss)	$	7,297		$	5,365		$	1,932		36.0	%

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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 three months ended September 30, 2016 and 2015. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):



	Three Months Ended September 30,
	2016						2015
	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	$	868,327	$	16,895	7.78	%	$	1,220,518	$	23,162	7.59	%
CRE securities investments	68,911		1,754		10.18	%	51,967		1,459		11.23	%
	$	937,238	$	18,649	7.96	%	$	1,272,485	$	24,621	7.74	%
Interest-bearing liabilities:
Securitization bonds payable, net	$	73,273	$	996	5.44	%	$	277,542	$	2,871	4.14	%
Credit facilities	324,907		3,007		3.70	%	280,659		2,174		3.10	%
	$	398,180	$	4,003	4.02	%	$	558,201	$	5,045	3.62	%
Net interest income			$	14,646					$	19,576

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(1)	Based on amortized cost for CRE debt and securities investments and principal amount for securitization bonds payable, net 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 decreased $6.0 million primarily as a result of the repayment of 12 CRE debt investments and one CRE debt investment where title was transferred via deed-in-lieu to operating real estate, partially offset by the origination of five new CRE debt investments subsequent to September 30, 2015. Interest expense decreased $1.0 million primarily as a result of the repayment of securitization bonds.

Other Revenues

Rental and Other Income

Rental and other income increased $7.2 million primarily as a result of the acquisition of an operating real estate portfolio in March 2016 and REO acquired by taking title in May 2016.

Expenses

Asset Management and Other Fees - Related Party

Asset management and other fees - related party decreased $0.5 million to $5.4 million during the three months ended September 30, 2016 compared to $5.9 million during the three months ended September 30, 2015 primarily as a result of lower invested assets during the period.

Mortgage Notes Interest Expense

Mortgage notes interest expense increased $0.8 million primarily as a result of a mortgage note obtained in connection with the acquisition of an operating real estate portfolio in March 2016.

Transaction Costs

Transaction costs represent costs such as professional fees associated with new investments. Transaction costs for the three months ended September 30, 2016 of $0.2 million are associated with operating real estate equity investments. There were no transaction costs incurred for the three months ended September 30, 2015.

Property Operating Expenses

Property operating expenses increased $2.8 million primarily as a result of the acquisition of an operating real estate portfolio in March 2016 and REO acquired by taking title in May 2016.

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General and Administrative Expenses

General and administrative expenses are incurred at the corporate level and include auditing and professional fees, director fees, and other costs associated with operating our business which are primarily paid by our Advisor on our behalf in accordance with our advisory agreement. General and administrative expenses decreased $0.6 million during the three months ended September 30, 2016 as a result of lower operating expenses reimbursed to our Advisor.

Depreciation and Amortization

Depreciation and amortization expense decreased $3.1 million as a result of the final purchase price allocation in the third quarter of 2015 related to the completion of two purchase price allocations for operating real estate acquired in 2015. This decrease was partially offset by a preliminary purchase price allocation related to an operating real estate portfolio acquired in 2016.

Unrealized Gain (Loss) on Investments

For the three months ended September 30, 2016 and 2015, we recorded an unrealized loss of less than $0.1 million and $3.8 million, respectively, related to our PE Investments.

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) of unconsolidated ventures decreased $2.6 million as a result of a decrease in earnings from PE Investments and the sale of a loan held in a joint venture in January 2016.

Income Tax Benefit (Expense)

For the three months ended September 30, 2016 and 2015, we recorded income tax expense of $0.8 million and benefit of $1.2 million, respectively, related to our PE Investments.

Comparison of the Nine Months Ended September 30, 2016 to September 30, 2015 (Dollars in Thousands):



	Nine Months Ended September 30,						Increase (Decrease)
	2016			2015			Amount			%
Net interest income
Interest income	$	59,006		$	74,840		$	(15,834	)	(21.2	)%
Interest expense	13,150			16,195			(3,045		)	(18.8	)%
Net interest income	45,856			58,645			(12,789		)	(21.8	)%

Property and other revenues
Rental and other income	58,330			44,664			13,666			30.6	%
Total property and other revenues	58,330			44,664			13,666			30.6	%

Expenses
Asset management and other fees - related party	18,747			18,303			444			2.4	%
Mortgage notes interest expense	12,895			11,016			1,879			17.1	%
Transaction costs	1,909			577			1,332			230.8	%
Property operating expenses	27,478			22,857			4,621			20.2	%
General and administrative expenses	11,553			11,843			(290		)	(2.4	)%
Depreciation and amortization	21,386			20,115			1,271			6.3	%
Total expenses	93,968			84,711			9,257			10.9	%

Other income (loss)
Unrealized gain (loss) on investments and other	(3,432		)	(9,414		)	5,982			(63.5	)%
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	6,786			9,184			(2,398		)	(26.1	)%
Equity in earnings (losses) of unconsolidated ventures	19,647			27,966			(8,319		)	(29.7	)%
Income tax benefit (expense)	(2,265		)	(366		)	(1,899		)	518.9	%
Net income (loss)	$	24,168		$	36,784		$	(12,616	)	(34.3	)%

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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 nine months ended September 30, 2016 and 2015. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):



	Nine Months Ended September 30,
	2016						2015
	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	$	916,549	$	53,635	7.80	%	$	1,249,558	$	70,462	7.52	%
CRE securities investments	66,341		5,371		10.79	%	51,663		4,378		11.30	%
	$	982,890	$	59,006	8.00	%	$	1,301,221	$	74,840	7.67	%
Interest-bearing liabilities:
Securitization bonds payable, net	$	122,415	$	4,576	4.98	%	$	318,829	$	9,621	4.02	%
Credit facilities	321,679		8,574		3.55	%	275,071		6,574		3.19	%
	$	444,094	$	13,150	3.95	%	$	593,900	$	16,195	3.64	%
Net interest income			$	45,856					$	58,645

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(1)	Based on amortized cost for CRE debt and securities investments and principal amount for securitization bonds payable, net 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 decreased $15.8 million primarily as a result of the repayment of 12 CRE debt investments and one CRE debt investment where title was transferred via deed-in-lieu to operating real estate, partially offset by the origination of five new CRE debt investments subsequent to September 30, 2015. Interest expense decreased $3.0 million primarily as a result of the repayment of securitization bonds.

Other Revenues

Rental and Other Income

Rental and other income increased $13.7 million primarily as a result of the acquisition of an operating real estate portfolio in March 2016 and REO acquired by taking title in May 2016.

Expenses

Asset Management and Other Fees - Related Party

Asset management and other fees - related party increased $0.4 million to $18.7 million during the nine months ended September 30, 2016 compared to $18.3 million during the nine months ended September 30, 2015. Although there were lower invested assets period over period, the increase was a result of acquisition and disposition fees incurred during 2016.

Mortgage Notes Interest Expense

Mortgage notes interest expense increased $1.9 million primarily as a result of a mortgage note obtained in connection with the acquisition of an operating real estate portfolio in March 2016.

Transaction Costs

Transaction costs represent costs such as professional fees associated with new investments. Transaction costs for the nine months ended September 30, 2016 of $1.9 million are primarily related to the acquisition of an operating real estate portfolio in March 2016. Transaction costs for the nine months ended September 30, 2015 of $0.6 million are associated with debt investments.

Property Operating Expenses

Property operating expenses increased $4.6 million primarily as a result of the acquisition of an operating real estate portfolio in March 2016 and REO acquired by taking title in May 2016.

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General and Administrative Expenses

General and administrative expenses are incurred at the corporate level and include auditing and professional fees, director fees, and other costs associated with operating our business which are primarily paid by our Advisor on our behalf in accordance with our advisory agreement. General and administrative expenses decreased $0.3 million during the nine months ended September 30, 2016 as a result of lower operating expenses reimbursed to our Advisor.

Depreciation and Amortization

Depreciation and amortization expense increased $1.3 million as a result of the final purchase price allocation in the third quarter of 2015 related to the completion of two purchase price allocations for operating real estate acquired in 2015. This increase was partially offset by a preliminary purchase price allocation related to an operating real estate portfolio acquired in 2016.

Unrealized Gain (Loss) on Investments

For the nine months ended September 30, 2016 and 2015, we recorded an unrealized loss of $3.4 million and $9.4 million, respectively, related to our PE Investments.

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) of unconsolidated ventures decreased $8.3 million as a result of a decrease in earnings from PE Investments and the sale of a loan held in a joint venture in January 2016.

Income Tax Benefit (Expense)

For the nine months ended September 30, 2016 and 2015, we recorded income tax expense of $2.3 million and $0.4 million, respectively, related to our PE Investments.

Liquidity and Capital Resources

We require capital to fund our investment activities, pay 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. As of November 4, 2016, we had current investable cash (excluding property level and liquidity requirements) of $115.3 million.

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 January 2015, the outstanding obligations with respect to one of the securitizations were repaid in full. 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 September 30, 2016, we had $71.0 million carrying value of CRE debt investments financed with $64.9 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. We account for such loans transferred by NorthStar Realty, as a loan collateral receivable, related party. 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.

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The following table presents the OC and IC cushion as of the closing date of the transaction and the remittance report dated closest to September 30, 2016 (dollars in thousands):



	OC		IC
Cushion at closing date of transaction	$	91,431	$	799
Cushion at remittance report dated closest to September 30, 2016	139,073		549

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.

Credit Facilities

We currently have eight Credit Facilities including three Term Loan Facilities that provide up to an aggregate of $550.0 million to finance the origination of first mortgage loans and senior loan participations secured by commercial real estate and four CMBS Facilities. The interest rate and advance rate depend on asset type and characteristic. Maturity dates of our Term Loan Facilities range from March 2017 to October 2018 and all have extensions available at our option, subject to the satisfaction of certain customary conditions, with maturity dates ranging from March 2018 to October 2021. 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.

Offering

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 75.0% of the cost of our investments, excluding indirect leverage held through our unconsolidated venture investments. As of September 30, 2016, our leverage as a percentage of our cost of investments was 48.0%.

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 were, in the aggregate, 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 board of directors, including a majority of our independent directors.

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Cash Flows

The following presents a summary of our consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 (dollars in thousands):



	Nine Months Ended September 30,
Cash flow provided by (used in):	2016			2015			Change
Operating activities	$	47,328		$	71,830		$	(24,502	)
Investing activities	56,211			116,967			(60,756		)
Financing activities	(113,611		)	(170,559		)	56,948
Net increase (decrease) in cash and cash equivalents	$	(10,072	)	$	18,238		$	(28,310	)

Nine Months Ended September 30, 2016 Compared to September 30, 2015

Operating Activities

Our cash flows from operating activities depends on numerous factors including the changes to net interest income and net operating income generated from our real estate investments, distributions from PE Investments, fees paid to our Advisor for the management of our investments, transaction costs on new investments, and general and administrative expenses. Our net cash provided by operating activities decreased by $24.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily as a result of lower invested assets generating lower net interest income and equity in earnings period over period.

Investing Activities

Our cash flows from investing activities are generally used to fund debt investment originations and investment acquisitions, net of proceeds received from dispositions or repayments of real estate assets. Our net cash provided by investing activities decreased by $60.8 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Cash flows provided by investing activities for the nine months ended September 30, 2016 was primarily a result of CRE debt investment repayments, proceeds from sale of an unconsolidated venture, and distributions from PE Investments, offset by CRE debt investment originations, CMBS purchases, and acquisition of operating real estate. Cash flows provided by investing activities for the nine months ended September 30, 2015 was primarily a result of CRE debt investment repayments and distributions from PE Investments, offset by CRE debt investment originations.

Financing Activities

Our cash flows from financing activities are principally impacted by our distributions paid on common stock, borrowings on credit facilities, and mortgage notes payable, net. Our net cash used in financing activities decreased by $56.9 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily as a result of increased borrowings from our mortgage notes and lower repayments of securitization bonds, partially offset by increased share repurchases.

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.

In June 2016, 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.

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

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obligations to affiliated entities, which may be organized under the laws of the United States or foreign jurisdictions. 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 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).

Incentive Fee

Our Advisor is entitled to receive distributions equal to 15.0% of net cash flows of us, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus an 8.0% cumulative, non-compounded annual pre-tax return on such invested capital.

Acquisition Fee

Our Advisor also receives fees for providing structuring, diligence, underwriting advice and related services in connection with real estate acquisitions 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). A fee paid to our Advisor in connection with 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. A fee incurred related to an equity investment will generally be expensed as incurred. A fee paid to our Advisor in connection with 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, as determined by our Company’s independent directors, our Advisor 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 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, travel and entertainment and other general and administrative costs and expenses. However, there is no reimbursement for personnel costs related to executive officers (although there may be reimbursement for certain executive officers of our Advisor) 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 updates the board of directors on a quarterly basis of any material changes to the expense allocation and provides 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

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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.

Summary of Fees and Reimbursements

The following table presents the fees and reimbursements incurred to our Advisor for the three and nine months ended September 30, 2016 and 2015 and the amount due to related party as of September 30, 2016 and December 31, 2015 (dollars in thousands):



		Three Months Ended September 30,				Nine Months Ended September 30,				Due to Related Party as of⁽¹⁾
Type of Fee or Reimbursement	Financial Statement Location	2016		2015		2016		2015		September 30, 2016		December 31, 2015
Fees to Advisor
Asset management	Asset management and other fees-related party	$	5,410	$	5,906	$	16,318	$	18,303	$	—	$	—
Acquisition⁽²⁾	Real estate debt investments, net / Investments in unconsolidated ventures / Asset management and other fees- related party	165		451		2,889		451		—		—
Disposition⁽²⁾	Real estate debt investments, net / Asset management and other fees- related party	1,179		626		3,510		1,862		335		—
Reimbursements to Advisor
Operating costs⁽³⁾	General and administrative expenses	2,961		3,681		10,127		10,058		—		—
Total		$	9,715	$	10,664	$	32,844	$	30,674	$	335	$	—

______________________________________________________________________________________


(1)	As of September 30, 2016, the balance is included in accounts payable and accrued expenses on our consolidated balance sheet.

(2)

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 September 30, 2016, our Advisor waived $0.8 million of acquisition fees and $0.4 million of disposition fees related to CRE securities.


(3)	As of September 30, 2016, our Advisor has incurred unreimbursed operating costs on our behalf of $6.7 million that remain eligible to allocate to us.

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 contributed three senior loans with an aggregate principal amount of $79.1 million at cost to Securitization 2013-1. 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 agreement 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.

PE Investment IIB

In February 2016, our board of directors, including all of our independent directors, approved the purchase of an additional 14.0% of the PE Investment IIA transaction from a company managed by our Sponsor, NorthStar Realty, or PE Investment IIB. We

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purchased PE Investment IIB on the same terms and conditions negotiated by another existing and purchasing co-investor in the transaction. This increased our total ownership from 15% to 29%. We acquired PE Investment IIB for $26.5 million based on a NAV of $660.6 million as of September 30, 2015, adjusted for distributions and contributions. With this add-on investment, we are responsible for 29% of the Deferred Amount, or $85.7 million as of September 30, 2016.

Recent Developments

Distribution Reinvestment Plan

From October 1, 2016 through November 4, 2016, we issued 0.7 million shares of common stock pursuant to our DRP, raising proceeds of $7.1 million. As of November 4, 2016, 10.0 million shares were available to be issued pursuant to our DRP.

Distributions

On November 9, 2016, our board of directors approved a daily cash distribution of $0.001917808 per share of common stock for each of the three months ended March 31, 2017. 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 October 1, 2016 through November 4, 2016, we repurchased 1.3 million shares for a total of $12.4 million or a weighted average price of $9.49 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.

New Investments

Commercial Real Estate Debt

In October 2016, we upsized our future funding commitments by $17.0 million on a CRE debt investment.

Real Estate Securities Investments

In October 2016, we purchased a CMBS with a face value of $10.0 million at a discount of $3.2 million.

Repayments

Commercial Real Estate Debt

In October 2016, we received $97.6 million related to the repayment of a CRE debt investment.

Securitization 2016-1

In November 2016, we bifurcated three first mortgage loans with an aggregate principal amount of $44.4 million into senior loans of $29.5 million and subordinate mortgage interests of $14.9 million to facilitate the financing of the senior loans into Securitization 2016-1, a securitization financing transaction entered into by NorthStar Real Estate Income II, Inc. (“NorthStar Income II”), a company managed by an affiliate of the Sponsor. We transferred the three senior loans at cost to Securitization 2016-1. We did not retain any interest in the senior loans and retained the subordinate mortgage interests on an unleveraged basis. We will use the proceeds to, among other things, repay borrowings on its term loan facilities.

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.

Non-GAAP Financial Measures

Funds from Operations and Modified Funds from Operations

We believe that FFO and MFFO, both of which are non-GAAP measures, 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

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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 and income tax benefit (expense), both of which are performance measures under U.S. GAAP. We adjust MFFO for the amortization of acquisition fees in the period when such amortization is recognized under U.S. GAAP. 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 generally 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 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 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, or NAV, since an impairment is taken into account in determining NAV but not in determining MFFO.

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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 the non-recurring impact of the non-cash effect of deferred income tax benefits or expenses, as applicable, as such items are not indicative of our operating performance. Similarly, we adjust for the non-cash effect of unrealized gains or losses on unconsolidated ventures. 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 operating performance. The IPA’s definition of 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 that meet the specified criteria identified in the rules and regulations of the SEC;


•	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 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.

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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.

We typically purchase CMBS at a premium or discount to par value, and in accordance with U.S. GAAP, record the amortization of premium/accretion of the discount to interest income (the “CMBS effective yield”). We believe that reporting the CMBS effective yield in MFFO provides better insight to the expected contractual cash flows and is more consistent with our review of operating performance.

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 net income (loss) attributable to common stockholders to FFO and MFFO attributable to common stockholders (dollars in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015⁽¹⁾			2016			2015⁽¹⁾
Funds from operations:
Net income (loss) attributable to NorthStar Real Estate Income Trust Inc. common stockholders	$	7,491		$	5,773		$	24,079		$	36,861
Adjustments:
Depreciation and amortization	9,481			12,598			21,386			20,115
Depreciation and amortization related to non-controlling interests	(978		)	(989		)	(2,172		)	(2,001		)
FFO attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	15,994		$	17,382		$	43,293		$	54,975
Modified funds from operations:
FFO attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	15,994		$	17,382		$	43,293		$	54,975
Adjustments:
Amortization of premiums, discounts and fees on investments and borrowings, net	1,011			2,013			3,193			6,253
Amortization of capitalized above/below market leases	250			911			70			911
Acquisition fees and transaction costs on investments	182			—			4,338			577
Straight-line rental (income) loss	(522		)	(311		)	(1,418		)	(1,303		)
Unrealized (gain) loss on investments and other	33			3,828			3,432			9,414
Adjustments related to non-controlling interests	(10		)	(55		)	(89		)	(125		)
MFFO attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	16,938		$	23,768		$	52,819		$	70,702

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(1) Prior periods have been adjusted to conform to current period presentations.

Distributions Declared and Paid

We generally pay distributions on a monthly basis based on daily record dates. Based on our estimated net asset value per share of $9.87, our annualized distribution amount represents an effective current yield of 8.1%. From the commencement of our operations on October 18, 2010 through September 30, 2016, 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.

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The following table presents distributions declared for the nine months ended September 30, 2016 and for the year ended December 31, 2015 (dollars in thousands):



	Nine Months Ended September 30, 2016				Year Ended December 31, 2015
Distributions Declared⁽¹⁾
Cash	$	39,718			$	51,826
DRP	32,709				43,842
Total	$	72,427			$	95,668

Sources of Distributions⁽¹⁾
Funds from Operations⁽²⁾	$	43,293	60	%	$	69,008	72	%
Offering proceeds	29,134		40	%	26,660		28	%
Total	$	72,427	100	%	$	95,668	100	%

Cash Flow Provided by (Used in) Operations	$	47,328			$	84,995

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(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 September 30, 2016, we declared distributions of $374.6 million, of which 77% was paid from FFO, 22% was paid from Offering proceeds and 1% was paid from distribution support proceeds. From inception through September 30, 2016, the difference between total distributions paid (including cash distributions and shares issued in connection with our DRP) and cash flow provided by operations was $60.0 million, of which $4.6 million related to shares purchased by NorthStar Realty pursuant to our Distribution Support Agreement, which terminated in July 2013, 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. 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 November 4, 2016, our portfolio is generating a 12.3% current yield on invested equity before expenses and excluding uninvested cash. 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

We may be subject to interest rate changes as a result of long-term borrowings used to acquire real estate equity investments and may also be exposed to changes in net interest income of our real estate debt investments, which is the difference between the income earned and the interest expense incurred in connection with our borrowings and derivatives.

Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs by borrowing primarily at fixed rates or variable rates with the lowest margins available and by evaluating hedging opportunities.

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 floor. 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.

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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 September 30, 2016, 78.5% of our debt investments were floating rate investments and 59.1% of our total borrowings were floating rate liabilities. Of the floating rate liabilities, 2.3% related to the use of our CMBS facilities. As of September 30, 2016, most of our floating-rate investments had LIBOR floors below 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 $3.7 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 nine months ended September 30, 2016, two 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.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company’s 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.

Except as set forth below, 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.

We acquired a portfolio of 23 light industrial assets during the first quarter 2016 and a portfolio of two multi-tenant office buildings through deed in lieu of foreclosure during the second quarter 2016. SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. We are in the process of evaluating the existing controls and procedures of the acquired portfolios and, accordingly, we have not assessed the portfolios’ internal control over financial reporting as of September 30, 2016.

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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 current 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, 2015 as filed with the SEC on March 17, 2016 except as noted below.

We have paid and may continue to pay distributions from sources other than our cash flow provided by operations, and as a result we will have less cash available for investments and stockholders’ overall return may be reduced.

Our organizational documents permit us to pay distributions from any source, including Offering proceeds, borrowings, our Advisor’s agreement to defer, reduce or waive fees (or accept, in lieu of cash, shares of our common stock) or sales of assets or we may make distributions in the form of taxable stock dividends. We have not established a limit on the amount of proceeds we may use to fund distributions. We have funded our cash distributions paid to date using net proceeds from our Offering, including our DRP, and we may do so in the future. During the course of our existence, we may not generate sufficient cash flow from operations to fund distributions and, as a result, distributions declared may be paid using proceeds from our DRP. For the nine months ended September 30, 2016, we declared distributions of $72.4 million compared to cash provided by operating activities of $47.3 million with $29.1 million, or 40%, of the distributions declared during this period being paid using proceeds from our DRP. For the year ended December 31, 2015, we declared distributions of $95.7 million compared to cash provided by operating activities of $85.0 million with $26.7 million, or 28%, of the distributions declared during this period being paid using proceeds from our DRP.

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 and as amended on June 25, 2015, 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 qualifying disability. We 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 our 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. We are not obligated to repurchase shares under our 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 is 95% of the most recently disclosed estimated value per share.

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, 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). 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 securities exchange or included for quotation in a national securities market.

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For the three months ended September 30, 2016, 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
July 1 to July 31	897,473	$	9.50	897,473	⁽¹⁾
August 1 to August 31	—	—		—	⁽¹⁾
September 1 to September 30	—	—		—	⁽¹⁾
Total	897,473	$	9.50	897,473

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(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 September 30, 2016, we had no unfulfilled repurchase requests.

Unregistered Sales of Equity Securities

All prior sales of unregistered securities have been previously reported on our quarterly reports on Form 10-Q.

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PART IV

Item 6. Exhibits

(a)3. Exhibit Index



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)
4.1			Amended and Restated Distribution Reinvestment Plan (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 8, 2016 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 September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015; (ii) Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2016 and 2015; (iv) Consolidated Statements of Equity for the nine months ended September 30, 2016 (unaudited) and year ended December 31, 2015; (v) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2015; and (vi) Notes to Consolidated Financial Statements (unaudited)

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*	Filed herewith

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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:	November 9, 2016	By:	/s/ DANIEL R. GILBERT
			Name:	Daniel R. Gilbert
			Title:	Chief Executive Officer and President





Date:	November 9, 2016	By:	/s/ FRANK V. SARACINO
			Name:	Frank V. Saracino
			Title:	Chief Financial Officer and Treasurer

N1 Liquidating Trust - FORM 10-Q - November 9, 2016

Attached files

N1 Liquidating Trust Reports