N1 Liquidating Trust - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - N1 Liquidating Trust	nsre03312017-ex322.htm
EX-32.1 - EXHIBIT 32.1 - N1 Liquidating Trust	nsre03312017-ex321.htm
EX-31.2 - EXHIBIT 31.2 - N1 Liquidating Trust	nsre03312017-ex312.htm
EX-31.1 - EXHIBIT 31.1 - N1 Liquidating Trust	nsre03312017-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 March 31, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

The Company has one class of common stock, $0.01 par value per share, 119,458,539 shares outstanding as of May 5, 2017.

NORTHSTAR REAL ESTATE INCOME TRUST, INC.

FORM 10-Q

TABLE OF CONTENTS



Index		Page
	PART I
Part I.	Financial Information	5
Item 1.	Financial Statements	5
	Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016	5
	Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2017 and 2016	6
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2017 and 2016	7
	Consolidated Statements of Equity for the three months ended March 31, 2017 (unaudited) and for the year ended December 31, 2016	8
	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2017 and 2016	9
	Notes to Consolidated Financial Statements (unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	59
Part II.	Other Information	60
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 6.	Exhibits	62
Signatures		63

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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 completed merger with NorthStar Realty Finance Corp. and Colony Capital, Inc., 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;


•	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;


•	any failure in our advisor’s and its affiliates’ due diligence to identify relevant facts during our underwriting process or otherwise;

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•	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, 2016 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)



	March 31, 2017 (Unaudited)			December 31, 2016
Assets
Cash and cash equivalents	$	147,594		$	153,039
Restricted cash	42,672			74,195
Real estate debt investments, net	687,351			745,323
Operating real estate, net	484,244			488,839
Investments in unconsolidated ventures (refer to Note 5)	87,358			90,579
Real estate securities, available for sale	106,865			93,975
Receivables, net	9,809			13,956
Deferred costs and other assets, net	53,109			56,370
Loan collateral receivable, related party	51,732			52,204
Total assets⁽¹⁾	$	1,670,734		$	1,768,480
Liabilities
Securitization bonds payable, net	$	—		$	39,762
Mortgage notes payable, net	393,914			393,410
Credit facilities	242,610			249,156
Accounts payable and accrued expenses (refer to Note 8)	7,750			7,930
Escrow deposits payable	27,507			58,453
Distribution payable	7,135			8,192
Other liabilities	18,322			19,191
Loan collateral payable, net, related party (refer to Note 8)	23,309			23,261
Total liabilities⁽¹⁾	720,547			799,355
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 March 31, 2017 and December 31, 2016	—			—
Common stock, $0.01 par value, 400,000,000 shares authorized, 120,003,415 and 120,903,352 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively	1,200			1,209
Additional paid-in capital	1,072,444			1,080,434
Retained earnings (accumulated deficit)	(164,096		)	(151,731		)
Accumulated other comprehensive income (loss)	22,084			20,175
Total NorthStar Real Estate Income Trust, Inc. stockholders’ equity	931,632			950,087
Non-controlling interests	18,555			19,038
Total equity	950,187			969,125
Total liabilities and equity	$	1,670,734		$	1,768,480

_________________________________________________________________________

(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 March 31, 2017, the Operating Partnership includes $398.2 million and $339.9 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 March 31,
	2017			2016
Net interest income
Interest income	$	17,027		$	20,630
Interest expense	2,944			4,735
Net interest income	14,083			15,895

Property and other revenues
Rental and other income	21,965			16,371
Total property and other revenues	21,965			16,371

Expenses
Asset management and other fees, related party	4,695			7,628
Mortgage notes interest expense	4,635			3,710
Transaction costs	—			1,078
Property operating expenses	9,420			7,486
General and administrative expenses	2,654			4,402
Depreciation and amortization	8,689			5,415
Total expenses	30,093			29,719

Other income (loss)
Unrealized gain (loss) on investments	—			(1,579		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	5,955			968
Equity in earnings (losses) of unconsolidated ventures	3,030			7,570
Income tax benefit (expense)	(407		)	(765		)
Net income (loss)	8,578			7,773
Net (income) loss attributable to non-controlling interests	(174		)	(85		)
Net income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	8,404		$	7,688
Net income (loss) per share of common stock, basic/diluted	$	0.07		$	0.06
Weighted average number of shares of common stock outstanding, basic/diluted	120,372,688			120,728,604
Distributions declared per share of common stock	$	0.17		$	0.20

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 March 31,
	2017			2016
Net income (loss)	$	8,578		$	7,773
Other comprehensive income (loss):
Unrealized gain (loss) on real estate securities, available for sale	1,909			(570		)
Total other comprehensive income (loss)	1,909			(570		)
Comprehensive income (loss)	10,487			7,203
Comprehensive (income) loss attributable to non-controlling interests	(174		)	(85		)
Comprehensive income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	10,313		$	7,118

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, 2015	120,758		$	1,207		$	1,078,154		$	(86,938	)	$	21,901		$	1,014,324		$	17,687		$	1,032,011
Non-controlling interests - contributions	—		—			—			—			—			—			4,473			4,473
Non-controlling interests - distributions	—		—			—			—			—			—			(3,377		)	(3,377		)
Proceeds from distribution reinvestment plan	4,467		45			43,501			—			—			43,546			—			43,546
Shares redeemed for cash	(4,349	)	(43		)	(41,412		)	—			—			(41,455		)	—			(41,455		)
Issuance and amortization of equity-based compensation	27		—			191			—			—			191			—			191
Other comprehensive income (loss)	—		—			—			—			(1,726		)	(1,726		)	—			(1,726		)
Distributions declared	—		—			—			(96,745		)	—			(96,745		)	—			(96,745		)
Net income (loss)	—		—			—			31,952			—			31,952			255			32,207
Balance as of December 31, 2016	120,903		$	1,209		$	1,080,434		$	(151,731	)	$	20,175		$	950,087		$	19,038		$	969,125
Non-controlling interests - contributions	—		—			—			—			—			—			24			24
Non-controlling interests - distributions	—		—			—			—			—			—			(681		)	(681		)
Proceeds from distribution reinvestment plan	948		9			9,345			—			—			9,354			—			9,354
Shares redeemed for cash	(1,848	)	(18		)	(17,391		)	—			—			(17,409		)	—			(17,409		)
Amortization of equity-based compensation	—		—			56			—			—			56			—			56
Other comprehensive income (loss)	—		—			—			—			1,909			1,909			—			1,909
Distributions declared	—		—			—			(20,769		)	—			(20,769		)	—			(20,769		)
Net income (loss)	—		—			—			8,404			—			8,404			174			8,578
Balance as of March 31, 2017 (unaudited)	120,003		$	1,200		$	1,072,444		$	(164,096	)	$	22,084		$	931,632		$	18,555		$	950,187

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)



	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	8,578		$	7,773
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) losses of unconsolidated ventures	(3,030		)	(7,570		)
Depreciation and amortization	8,689			5,415
Straight-line rental income	(343		)	(700		)
Amortization of capitalized above/below market leases	290			(123		)
Amortization of premium/accretion of discount and fees on investments and borrowings, net	(710		)	(423		)
Amortization of deferred financing costs	930			651
Interest accretion on investments	(2,311		)	(1,709		)
Distributions of cumulative earnings from unconsolidated ventures (refer to Note 5)	3,030			7,570
Unrealized (gain) loss on investments and other	—			1,579
Amortization of equity-based compensation	56			36
Deferred income tax expense	173			301
Changes in assets and liabilities:
Restricted cash	(797		)	(994		)
Receivables, net	4,491			2,414
Deferred costs and other assets	(1,221		)	(161		)
Due to related party	(39		)	—
Accounts payable and accrued expenses	(314		)	(226		)
Other liabilities	(542		)	1,419
Net cash provided by (used in) operating activities	16,930			15,252
Cash flows from investing activities:
Origination and funding of real estate debt investments, net	(12,904		)	(35,380		)
Repayment on real estate debt investments	73,054			59,799
Repayment on loan collateral receivable, related party	472			461
Acquisition of operating real estate	—			(103,384		)
Improvements of operating real estate	(364		)	(1,084		)
Investments in unconsolidated ventures (refer to Note 5)	(83		)	(34,316		)
Proceeds from sale of unconsolidated ventures	—			59,760
Distributions in excess of cumulative earnings from unconsolidated ventures (refer to Note 5)	3,372			13,919
Acquisition of real estate securities, available for sale	(14,815		)	(4,388		)
Repayment of real estate securities, available for sale	4,694			796
Change in restricted cash	1,374			(576		)
Net cash provided by (used in) investing activities	54,800			(44,393		)
Cash flows from financing activities:
Proceeds from distribution reinvestment plan	9,354			11,019
Shares redeemed for cash	(17,409		)	(9,313		)
Distributions paid on common stock	(21,826		)	(24,049		)
Borrowings from mortgage notes	227			69,917
Repayment of mortgage notes	(55		)	(51		)
Borrowings from credit facilities	10,826			24,715
Repayment of credit facilities	(17,372		)	(23,813		)
Repayment of securitization bonds	(39,762		)	(28,509		)
Payment of deferred financing costs	(501		)	(3,191		)
Contributions from non-controlling interests	24			4,406
Distributions to non-controlling interests	(681		)	(308		)
Net cash provided by (used in) financing activities	(77,175		)	20,823
Net increase (decrease) in cash and cash equivalents	(5,445		)	(8,318		)
Cash and cash equivalents - beginning of period	153,039			127,890
Cash and cash equivalents - end of period	$	147,594		$	119,572

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)



	Three Months Ended March 31,
	2017		2016
Supplemental disclosure of non-cash investing and financing activities:
Escrow deposits payable related to real estate debt investments	$	30,946	$	5,306
Distribution payable	7,135		8,195
Non-cash related to PE Investments (refer to Note 5)	3,347		1,353
CRE debt investment payoff due from servicer	—		74,930

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 in the future 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 January 11, 2017, the Company was managed by an affiliate of NorthStar Asset Management Group Inc. (NYSE: NSAM) (“NSAM”). Effective January 10, 2017, NSAM completed its previously announced merger with Colony Capital, Inc. (“Colony”), NorthStar Realty Finance Corp. (“NorthStar Realty”), and Colony NorthStar, Inc. (“Colony NorthStar”), a wholly-owned subsidiary of NSAM, which the Company refers to as the mergers, with Colony NorthStar surviving the mergers and succeeding NSAM as the Company’s sponsor (the “Sponsor”). As a result of the mergers, the Sponsor became an internally-managed equity REIT, with a diversified real estate and investment management platform and publicly-traded on the NYSE under the ticker symbol “CLNS.” In addition, following the mergers, CNI NSI Advisors, LLC (formerly known as NSAM J-NSI Ltd), an affiliate of NSAM (the “Advisor”), became a subsidiary of Colony NorthStar. The Advisor manages the Company’s day-to-day operations pursuant to an advisory agreement. The mergers had no material impact on the Company’s operations.

Colony NorthStar manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, non-traded and traded REITs and registered investment companies.

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 NS Real Estate Income Trust Advisor, LLC (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 March 31, 2017 and December 31, 2016. 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 March 31, 2017, the Company’s limited partnership interest in the Operating Partnership was 99.98%.

The Company’s charter authorizes the issuance of up to 400,000,000 shares of common stock with a par value of $0.01 per share and up to 50,000,000 shares of preferred stock with a par value of $0.01 per share. The board of directors of the Company is authorized to amend its charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue.

The Company initially registered to offer up to 100,000,000 shares pursuant to its primary offering to the public (the “Primary Offering”) and up to 10,526,315 shares pursuant to its distribution reinvestment plan (the “DRP”), which are herein collectively referred to as the Offering. 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 May 5, 2017, the Company has raised an additional $0.2 billion in gross proceeds pursuant to the DRP.

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


2.	Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the Securities and Exchange Commission (the “SEC”).

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“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.

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 March 31, 2017 is $350.9 million related to such consolidated VIEs. Included in mortgage notes payable, net on the Company’s consolidated balance sheet as of March 31, 2017 is $324.4 million collateralized by the real estate assets of the related consolidated VIEs.

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As of March 31, 2017, 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 March 31, 2017 (dollars in thousands):



	Carrying Value		Maximum Exposure to Loss
Real estate securities, available for sale	$	106,865	$	106,865
Investments in unconsolidated ventures	15,986		15,986
Real estate debt investments, net⁽¹⁾	142,535		142,535
Total assets	$	265,386	$	265,386

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(1)	Includes loan collateral receivable, related party of $51.7 million.

Based on management’s analysis, the Company determined that it is not the primary beneficiary of the above VIEs. Accordingly, the VIEs are not consolidated in the Company’s financial statements as of March 31, 2017. The Company did not provide financial support to the unconsolidated VIEs during the three months ended March 31, 2017. As of March 31, 2017, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to the unconsolidated VIEs.

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 or the cost method, and for either method, the Company may elect the fair value option. The Company will account for an investment in an unconsolidated entity 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 that it does not have significant influence. 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.

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 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).

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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 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 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.

Restricted Cash

Restricted cash consists of amounts related to loan origination (escrow deposits) and operating real estate (escrows for taxes, insurance, capital expenditures and payments required under certain lease agreements).

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 fair 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 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

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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 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 assets, 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 to realized gain (loss) 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 tables present a summary of deferred costs and other assets, net and other liabilities as of March 31, 2017 and December 31, 2016 (dollars in thousands):



	March 31, 2017 (Unaudited)		December 31, 2016
Deferred costs and other assets, net:
Intangible assets, net⁽¹⁾	$	37,780	$	41,375
Deferred commissions and leasing costs	10,070		10,287
Deferred financing costs, net - credit facilities	2,739		2,772
Prepaid expenses	1,969		1,386
Deposits	551		550
Total	$	53,109	$	56,370


	March 31, 2017 (Unaudited)		December 31, 2016
Other liabilities:
Intangible liabilities, net(2)	$	7,982	$	8,506
PE Investments deferred purchase price, net	4,081		4,248
Prepaid rent and unearned revenue	4,409		4,601
Tenant security deposits	1,461		1,433
Other	389		403
Total	$	18,322	$	19,191

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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 Company’s directors, including independent directors. For the three months ended March 31, 2017, 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

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 legal 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 the consolidated balance sheets. The Company amortizes any tenant inducements as a reduction of

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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 recognized 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 all 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. Interest accrued and not collected will be reversed against interest income. A loan is written off when it is no longer realizable and/or legally discharged. As of March 31, 2017, 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 March 31, 2017, the Company 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, 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.

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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. 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 March 31, 2017, the Company did not have any OTTI recorded on its CRE securities.

Equity-Based Compensation

The Company accounts for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award at the time of grant. All fixed equity-based awards to directors, which have no vesting conditions other than time of service, are amortized to compensation expense over the awards’ vesting period on a straight-line basis. Equity-based compensation is classified within general and administrative expense in the consolidated statements of operations.

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. 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, U.S. federal income and excise taxes may be due on its undistributed taxable income.

The Company made joint elections to treat certain subsidiaries as taxable REIT subsidiaries (“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

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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 months ended March 31, 2017 and 2016, the Company recorded income tax expense of $0.4 million and $0.8 million, respectively.

Transfers of Financial Assets

Sale accounting for transfers of financial assets requires the transfer of an entire financial asset, a group of financial assets in its entirety or if a component of the financial asset is transferred, that component meets the definition of a participating interest by having characteristics that mirror the original financial asset.

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. If the Company has any continuing involvement, rights or obligations with the transferred financial asset (outside of standard representations and warranties), sale accounting would require that the transfer meets the following sale conditions: (1) the transferred asset has been legally isolated; (2) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred asset; and (3) the Company does not maintain effective control over the transferred asset through an agreement that provides for (a) both an entitlement and an obligation by the Company to repurchase or redeem the asset before its maturity, or (b) the unilateral ability by the Company to reclaim the asset and a more than trivial benefit attributable to that ability, or (c) the transferee requiring the Company to repurchase the asset at a price so favorable to the transferee that it is probable the repurchase will occur.

If sale accounting is met, the transferred financial asset is removed from the balance sheet and a net gain or loss is recognized upon sale, taking into account any retained interests. Transfers of financial assets that do not meet the criteria for sale are accounted for as financing transactions, or secured borrowing. As of March 31, 2017, the carrying value of CRE debt investments that did not meet the requirements of sale accounting was $23.7 million and recorded in real estate debt investments, net with an offsetting secured borrowing recorded in loan collateral payable, net, related party of $23.3 million. Refer to Note 7, “Borrowings,” for additional information.

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. Leases are specifically excluded from this guidance and will be governed by the applicable lease codification; however, this update may have implications in certain variable payment terms included in lease agreements and in sale and leaseback transactions. The Company is currently assessing the potential effect of the adoption on its consolidated financial statements and related disclosures, as applicable.

In January 2016, the FASB issued an accounting update that addressed certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair value be measured at fair value with changes in fair value recognized in results of operations. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company does not have any equity investments with readily determinable fair value recorded as available-for-sale. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued an accounting update that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Additionally, the new update will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Under this guidance, allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained

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(Unaudited)

will no longer be capitalized as initial direct costs and instead will be expensed as incurred. 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. The Company is currently assessing the potential effect the adoption of this guidance will have on its consolidated financial statements and related 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 becomes 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. The Company adopted the new guidance prospectively on January 1, 2017 and the adoption of this standard did not have a material impact on its consolidated financial statements and related 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, 2016. The Company adopted the new guidance prospectively on January 1, 2017 and the adoption of this standard did not have a material impact on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued guidance that changes the impairment model for certain financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the incurred loss approach. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments). The new guidance is effective for reporting periods beginning after December 15, 2019 and will be applied as a cumulative adjustment to retained earnings as of the effective date. The Company is currently assessing the potential effect the adoption of this guidance will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued guidance that makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the company would be required to apply the amendments prospectively as of the earliest date practicable. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.

In November 2016, the FASB issued guidance which requires entities to show the changes in the total of cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017 and will be applied retrospectively to all periods presented. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued an accounting update to amend the guidance for determining whether a transaction involves the purchase or disposal of a business or an asset. The amendments clarify that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set and activities is not a business. The guidance is effective for fiscal years, and interim periods within those years, beginning December 15, 2017. The amendments in this update will be applied on a prospective basis. The Company expects that most acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets). A significant difference between the accounting for an asset acquisition and a business combination is that transaction costs are capitalized for an asset acquisition, rather than expensed for a business combination.

In February 2017, the FASB issued an accounting update which clarifies the scope and application of recently established guidance on recognition of gains and losses from derecognition of non-financial assets, and defines in-substance non-financial assets. In addition, the guidance clarifies the accounting for partial sales of non-financial assets to be more consistent with the accounting

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for sale of a business. Specifically, in a partial sale to a non-customer, when a non-controlling interest is received or retained, the latter is considered a non-cash consideration and measured at fair value, which would result in full gain or loss recognized upon sale. This guidance has the same effective date as the new revenue guidance, which is January 1, 2018, with early adoption permitted beginning January 1, 2017. Both the revenue guidance and this update must be adopted concurrently. While the transition method is similar to the new revenue guidance, either full retrospective or modified retrospective, the transition approach need not be aligned between both updates.


3.	Real Estate Debt Investments

The following table presents CRE debt investments as of March 31, 2017 (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⁽⁵⁾	12	$	524,478	$	519,655	75.8	%	15.00	%	5.15	%	7.31	%	92.4	%
Mezzanine loans⁽⁵⁾	5	78,177		78,161		11.3	%	12.18	%	11.00	%	12.21	%	36.5	%
Preferred equity interests⁽⁶⁾	1	89,095		89,535		12.9	%	10.00	%	—	%	10.00	%	—	%
Total/Weighted average	18	$	691,750	$	687,351	100.0	%	11.72	%	5.89	%	8.21	%	74.2	%

________________________________________________________


(1)	Includes future funding commitments of $5.3 million.


(2)	Certain CRE debt investments serve as collateral for financing transactions including $365.4 million for term loan facilities and $23.7 million for secured borrowings (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 March 31, 2017, the Company had $475.0 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.36%.


(5)	During the three months ended March 31, 2017, the Company originated one mezzanine loan with an aggregate committed principal amount of $12.0 million and received $69.8 million related to the repayment of one first mortgage and one mezzanine loans.


(6)	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 $80.2 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, 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	$	570,339	$	564,722	74.3	%	15.00	%	5.80	%	7.31	%	92.5	%
Mezzanine loans	5	109,832		92,814		14.3	%	12.16	%	9.29	%	11.24	%	55.3	%
Preferred equity interests⁽⁵⁾	1	87,323		87,787		11.4	%	10.00	%	—	%	10.00	%	—	%
Total/Weighted average	19	$	767,494	$	745,323	100.0	%	11.79	%	6.07	%	8.12	%	76.6	%

________________________________________________________


(1)	Includes future funding commitments of $23.2 million.


(2)	Certain CRE debt investments serve as collateral for financing transactions including carrying value of $70.7 million for a securitization financing transaction, $364.6 million for term loan facilities and $23.7 million for secured borrowings (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 December 31, 2016, the Company had $531.9 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.34%.


(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 $78.6 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 March 31, 2017 (dollars in thousands):



	Current Maturity		Maturity Including Extensions⁽¹⁾
April 1 to December 31, 2017	$	218,850	$	40,000
Years Ending December 31:
2018	70,101		49,850
2019	210,901		160,500
2020	12,000		45,050
2021	89,095		204,452
Thereafter	90,803		191,898
Total	$	691,750	$	691,750

__________________________________________________________


(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 March 31, 2017, the weighted average maturity, including extensions, of CRE debt investments was 4.2 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 March 31, 2017, 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 March 31, 2017 and December 31, 2016. For the three months ended March 31, 2017, two CRE debt investments each contributed more than 10.0% of interest income.


4.	Operating Real Estate

The following table presents operating real estate, net, as of March 31, 2017 and December 31, 2016 (dollars in thousands):



	March 31, 2017 (Unaudited)			December 31, 2016
Land and improvements	$	95,970		$	96,011
Buildings and improvements⁽¹⁾	431,176			430,776
Furniture, fixtures and equipment	4,477			4,472
Subtotal	$	531,623		$	531,259
Less: Accumulated depreciation	(47,379		)	(42,420		)
Operating real estate, net	$	484,244		$	488,839

____________________________________________________________


(1)	Includes tenant improvements.

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5.	Investments in Unconsolidated Ventures

Investments in Private Equity Funds

The Company completed the acquisition of a $118.0 million portfolio of PE Investments in February 2013 (“PE Investment I”), a $75.7 million portfolio of PE Investments in July 2013 (“PE Investment IIA”), a $26.5 million portfolio of PE Investments in February 2016 (“PE Investment IIB”), and a $23.1 million portfolio of PE Investments in March 2016 (“PE Investment III”). PE Investment I, IIA, and IIB own PE Investments indirectly through unconsolidated ventures and PE Investment III owns PE Investments directly. 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 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 table summarizes the Company’s PE Investment acquisitions (dollars in thousands):



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	$	118,035	$	207
PE Investment IIA	July 3, 2013	September 30, 2012	24	75,721		—
PE Investment IIB	February 9, 2016	September 30, 2015	—	26,498		—
PE Investment III	March 30, 2016	March 31, 2015	2	23,063		—
Total			75	$	243,317	$	207

____________________________________________________________


(1)	Represents the net asset value (“NAV”) date that served as the basis for the purchase price on which the Company agreed to acquire the respective PE Investment.

The following table summarizes the Company’s PE Investments as of March 31, 2017 and December 31, 2016 and activity for three months ended March 31, 2017 and 2016 (dollars in thousands):



	Carrying Value				Three Months Ended March 31, 2017						Three Months Ended March 31, 2016
	March 31, 2017 (Unaudited)		December 31, 2016		Equity in Earnings		Distributions		Contributions⁽¹⁾		Equity in Earnings		Distributions		Contributions⁽¹⁾
PE Investment	March 31, 2017 (Unaudited)		December 31, 2016		Equity in Earnings		Distributions		Contributions⁽¹⁾		Equity in Earnings		Distributions		Contributions⁽¹⁾
PE Investment I⁽²⁾	$	29,760	$	31,655	$	1,007	$	2,926	$	24	$	3,936	$	14,048	$	—
PE Investment IIA⁽³⁾	22,664		23,360		800		1,555		59		1,660		4,395		—
PE Investment IIB⁽³⁾	18,948		19,329		1,070		1,451		—		1,302		2,610		26,495
PE Investment III⁽⁴⁾	15,986		16,235		153		470		68		—		1,789		16,495
Total	$	87,358	$	90,579	$	3,030	$	6,402	$	151	$	6,898	$	22,842	$	42,990

___________________________________________________________


(1)	Includes initial investments, before closing statement adjustments for distributions and contributions, and subsequent contributions, including deferred purchase price fundings.


(2)	For PE Investment I, the Company did not have any unrealized gain (loss) for the three months ended March 31, 2017. The Company recorded an unrealized loss of $1.6 million for the three months ended March 31, 2016.

(3)

As of March 31, 2017, the Company’s share of the combined deferred amount for PE Investment IIA and PE Investment IIB was $85.7 million. The deferred amount will be paid in multiple installments throughout 2017 and 2018 and is expected to be paid from the distributions received from the underlying investments in PE Investment IIA and PE Investment IIB. The Company guaranteed its proportionate interest of the deferred amount. The Company determined there was an immaterial amount of fair value related to the guarantee. In April 2017, PE Investment IIA and PE Investment IIB collectively paid $12.9 million of the deferred amount.


(4)	As of March 31, 2017, the deferred purchase price for PE Investment III recorded in other liabilities was $4.3 million. The remaining portion of the purchase price will be paid on 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

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par value of $59.8 million. For the three months ended March 31, 2016, the Company recognized equity in earnings of $0.7 million.


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
March 31, 2017 (Unaudited)	14	$	155,194	$	84,781	$	22,748	$	(664	)	$	106,865	3.80	%	10.99	%
December 31, 2016	11	138,438		73,800		21,616		(1,441		)	93,975		3.85	%	10.78	%

_______________________________________________________________


(1)	Certain CRE securities serve as collateral for financing transactions including carrying value of $36.0 million for the CMBS Credit Facilities (refer to Note 7). The remainder is unleveraged.


(2)	All CMBS are fixed rate.

The Company recorded an unrealized gain of $1.9 million for the three months ended March 31, 2017 and an unrealized loss of $0.6 million for the three months ended March 31, 2016 in OCI. As of March 31, 2017, the Company held four securities with an aggregate carrying value of $29.7 million with an unrealized loss of $0.7 million, one of which was 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 March 31, 2017, the weighted average contractual maturity of CRE securities was 31.7 years with an expected maturity of 7.2 years.

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7.	Borrowings

The following table presents borrowings as of March 31, 2017 and December 31, 2016 (dollars in thousands):



							March 31, 2017 (Unaudited)				December 31, 2016
	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 financing transaction			Non-recourse⁽²⁾	Aug-29	LIBOR + 5.00%		$	—	$	—	$	39,762	$	39,762

Mortgage notes payable, net
Multifamily 1			Non-recourse⁽²⁾	Dec-23	4.84%		43,500		42,984		43,500		42,967
Multifamily 2			Non-recourse⁽²⁾	Dec-23	4.94%		43,000		42,457		43,000		42,440
Office 1			Non-recourse⁽²⁾	Oct-24	4.47%		108,850		108,603		108,850		108,595
Office 2			Non-recourse⁽²⁾	Jan-25	4.30%		77,700		77,541		77,700		77,535
Student housing 1			Non-recourse⁽²⁾	Jan-24	5.15%		16,000		15,781		16,000		15,774
Student housing 2⁽³⁾			Non-recourse⁽²⁾	Dec-20	5.27%		12,355		12,573		12,411		12,644
Student housing 3			Non-recourse⁽²⁾	Nov-26	3.98%		24,750		24,492		24,750		24,485
Industrial 1			Non-recourse⁽²⁾	Apr-21	LIBOR + 2.50%		70,629		69,483		70,402		68,970
Subtotal mortgage notes payable, net							396,784		393,914		396,613		393,410

Term loan facilities
Citibank facility	$	150,000	Limited Recourse⁽⁴⁾	Oct-21⁽⁵⁾	LIBOR + 2.63%	(6)	24,150		24,150		21,350		21,350
Deutsche Bank facility	200,000		Limited Recourse⁽⁷⁾	Mar-18	LIBOR + 2.45%	(8)	99,953		99,953		112,919		112,919
Morgan Stanley facility	200,000		Limited Recourse⁽⁹⁾	Oct-18⁽¹⁰⁾	LIBOR + 2.50%	(11)	92,699		92,699		92,700		92,700
Subtotal term loan facilities	$	550,000					216,802		216,802		226,969		226,969

CMBS credit facilities
UBS facility			Recourse	(12)	LIBOR + 1.19%		—		—		—		—
Morgan Stanley facility			Recourse	(12)	LIBOR + 1.06%		—		—		—		—
Citibank facility			Recourse	(12)	LIBOR + 1.50%		7,652		7,652		11,034		11,034
Merrill Lynch facility			Recourse	(12)	LIBOR + 1.50%		3,260		3,260		2,989		2,989
JP Morgan facility			Recourse	(12)	LIBOR + 1.50%		14,896		14,896		8,164		8,164
Subtotal CMBS credit facilities							25,808		25,808		22,187		22,187
Subtotal credit facilities							242,610		242,610		249,156		249,156

Loan collateral payable, net, related party
Secured borrowing⁽¹³⁾			Non-recourse	May-19	LIBOR + 3.83%		23,729		23,309		23,729		23,261
Total							$	663,123	$	659,833	$	709,260	$	705,589

_____________________________________________________


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


(2)	Subject to customary non-recourse carveouts.


(3)	Represents two separate senior mortgage notes with a weighted average maturity of December 1, 2020 and weighted average interest rate of 5.27%.


(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, 2018, 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.


(6)	The contractual interest rate depends upon asset type and characteristics. As of March 31, 2017 the rate was one-month LIBOR plus 2.63%.


(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)	Represents the weighted average spread as of March 31, 2017. The contractual interest rate depends upon asset type and characteristics and ranges from one-month LIBOR plus 2.42% to 2.62%.


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


(10)	The initial maturity is October 13, 2018. The Company may, at its option, extend the facility for one-year periods indefinitely, subject to the approval of the global financial institution.

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(11)	Represents the weighted average spread as of March 31, 2017. The contractual interest rate depends upon asset type and characteristics and ranges from one-month LIBOR plus 2.25% to 2.65%.


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


(13)	Represents a secured borrowing financing transaction recorded in loan collateral payable, net, related party in connection with three first mortgage loans recorded in real estate debt investments, net. Refer to discussion below for additional detail.

The following table presents scheduled principal on borrowings, based on final maturity as of March 31, 2017 (dollars in thousands):



	Total		Mortgage Notes Payable, Net		Credit Facilities		Loan collateral payable, net, related party
April 1 to December 31, 2017	$	25,808	$	—	$	25,808	$	—
Years Ending December 31:
2018	192,652		—		192,652		—
2019	23,729		—		—		23,729
2020	12,355		12,355		—		—
2021	94,779		70,629		24,150		—
Thereafter	313,800		313,800		—		—
Total	$	663,123	$	396,784	$	242,610	$	23,729

Securitization Financing Transactions

The Company entered into two securitization financing transactions collateralized by CRE debt investments. All of the securitization bonds related to the two securitization financing transactions were repaid in January 2015 and January 2017, respectively, and therefore, the Company no longer holds any interest in securitization financing transactions.

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 March 31, 2017, the Company was in compliance with all of its financial covenants under the Term Loan Facilities.

As of March 31, 2017, the Company had $365.4 million carrying value of CRE debt investments financed with $216.8 million under the Term Loan Facilities.

CMBS Credit Facilities

As of March 31, 2017, the Company entered into five master repurchase agreements (collectively the “CMBS Credit Facilities”) to finance CMBS investments. The CMBS Credit 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 March 31, 2017, the Company had $36.0 million carrying value of CRE securities, financed with $25.8 million under its CMBS Credit Facilities.

Secured Borrowing

In November 2016, the Company bifurcated three first mortgage loans with an aggregate principal amount of $44.4 million into senior participations in mortgage loans of $29.5 million and junior participations in the related mortgage loans of $14.9 million to facilitate the financing of the mortgage loans through 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 sold three senior participations at cost into the securitization transaction. The Company did not retain any legal interest in the senior participations and retained the junior participations on an unleveraged basis. As a result of U.S. GAAP requirements for transfers of financial assets, the senior participations transferred into the securitization financing transaction are accounted for as a secured borrowing and presented as loan collateral payable, net, related party on the Company’s consolidated balance sheets. Refer to Note 2,

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“Summary of Significant Accounting Policies” for additional information. As of March 31, 2017, the carrying value of CRE debt investments recorded in real estate debt investments, net was $23.7 million with an offsetting secured borrowing recorded in loan collateral payable, net, related party of $23.3 million.


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. An acquisition fee incurred related to an equity investment will generally be expensed as incurred. A fee paid to the Advisor in connection with an acquisition of an equity or debt investment in an unconsolidated joint venture is included in investments in unconsolidated ventures on the consolidated balance sheets.

Disposition Fee

For substantial assistance in connection with the sale of investments and based on the services provided, as determined by the Company’s independent directors, the Advisor receives a disposition fee up to 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 a CRE 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.

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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.

Summary of Fees and Reimbursements

The following tables present the fees and reimbursements incurred to the Advisor for the three months ended March 31, 2017 and the amount due to related party as of March 31, 2017 and December 31, 2016 (dollars in thousands):



Type of Fee or Reimbursement	Financial Statement Location	Due to Related Party as of December 31, 2016⁽¹⁾		Three Months Ended March 31, 2017					Due to Related Party as of March 31, 2017 (Unaudited)⁽¹⁾
Type of Fee or Reimbursement	Financial Statement Location	Due to Related Party as of December 31, 2016⁽¹⁾		Incurred		Paid			Due to Related Party as of March 31, 2017 (Unaudited)⁽¹⁾
Fees to Advisor Entities
Asset management	Asset management and other fees, related party	$	10	$	4,695	$	(4,687	)	$	18
Acquisition⁽²⁾	Real estate debt investments, net / Asset management and other fees, related party	40		120		(160		)	—
Disposition⁽²⁾	Real estate debt investments, net / Asset management and other fees, related party	—		776		(776		)	—
Reimbursements to Advisor Entities
Operating costs⁽³⁾	General and administrative expenses	18		2,566		(2,573		)	11
Total		$	68	$	8,157	$	(8,196	)	$	29

____________________________________________________


(1)	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 March 31, 2017, the Advisor waived $1.0 million of acquisition fees and $0.4 million of disposition fees related to CRE securities.


(3)	As of March 31, 2017, the Advisor has incurred unreimbursed operating costs on behalf of the Company of $9.6 million that remain eligible to allocate to the Company.

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

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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. In connection with the mergers, the Sponsor assumed all of NorthStar Realty’s obligations.

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. In connection with the mergers, NorthStar Realty’s interests in PE Investment I and its other obligations were assumed by the Sponsor.

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 NorthStar Realty, which following the mergers became a subsidiary of the Sponsor. 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, adjusted for distributions and contributions. With this add-on investment, PE Investment IIA and PE Investment IIB are collectively responsible for 29.0% of the deferred amount, or $85.7 million as of March 31, 2017. In April 2017, PE Investment IIA and PE Investment IIB collectively paid $12.9 million of the deferred amount.

Secured Borrowing

In November 2016, the Company bifurcated three first mortgage loans with an aggregate principal amount of $44.4 million into senior participations in mortgage loans of $29.5 million and junior participations in the related mortgage loans of $14.9 million to facilitate the financing of the mortgage loans through a securitization financing transaction entered into by NorthStar Income II, a company managed by an affiliate of the Sponsor. The Company sold three senior participations at cost into the securitization transaction. The Company did not retain any legal interest in the senior participations and retained the junior participations on an unleveraged basis. As a result of U.S. GAAP requirements for transfers of financial assets, the senior participations transferred into the securitization financing transaction are accounted for as a secured borrowing and presented as loan collateral payable, net, related party on the Company’s consolidated balance sheets. Refer to Note 2, “Summary of Significant Accounting Policies” for additional information. As of March 31, 2017, the carrying value of CRE debt investments recorded in real estate debt investments, net was $23.7 million with an offsetting secured borrowing recorded in loan collateral payable, net, related party of $23.3 million.


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 March 31, 2017, 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. Unvested shares totaled 14,810 and 20,462 as of March 31, 2017 and December 31, 2016, respectively. The restricted stock outstanding 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. A maximum of 2,000,000 shares of restricted common stock may be granted, of which 1,898,796 shares remain available for future grants as of March 31, 2017.

The Company recognized equity-based compensation expense of $56,250 and $35,867 for the three months ended March 31, 2017 and 2016, 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.

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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. 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.

In April 2017, pursuant to the terms of the DRP, effective on April 14, 2017, the price per share purchased pursuant to the DRP was $9.92, which is equal to the estimated value per share of the Company’s common stock as of December 31, 2016, 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, 2017.

Prior to April 2017, the price per share purchased pursuant to the DRP was $9.87, which was equal to the estimated value per share of the Company’s common stock as of December 31, 2015. Prior to April 2016, 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 three months ended March 31, 2017, the Company issued 0.9 million shares totaling $9.4 million of proceeds pursuant to the DRP. For the year ended December 31, 2016, the Company issued 4.5 million shares totaling $43.5 million of proceeds pursuant to the DRP. From inception through March 31, 2017, the Company issued 19.2 million shares totaling $183.8 million of proceeds pursuant to the DRP.

Distributions

Distributions to stockholders are declared quarterly by the board of directors of the Company and are paid monthly based on a daily amount of $0.001917808 per share, which is equivalent to an annual distribution of $0.70 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 three months ended March 31, 2017 (dollars in thousands):



	Distributions⁽¹⁾
Period	Cash		DRP		Total
January	$	4,121	$	3,084	$	7,205
February	3,718		2,711		6,429
March	4,160		2,975		7,135
Total	$	11,999	$	8,770	$	20,769

_________________________________________________


(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” or “SRP”). 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

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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 three months ended March 31, 2017, the Company repurchased 1.8 million shares of common stock for a total of $17.4 million or a weighted average price of $9.42 per share. For the year ended December 31, 2016, the Company repurchased 4.3 million shares of common stock for a total of $41.5 million or a weighted average price of $9.53 per share. The Company generally 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 March 31, 2017, 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 and was a de minimis amount for the three months ended March 31, 2017 and 2016.

Other

Other non-controlling interests represent third-party equity interests in ventures that are consolidated with the Company’s financial statements. Net income (loss) attributable to other non-controlling interest for the three months ended March 31, 2017 and 2016 was $0.2 million and $0.1 million, respectively.


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

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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.

Derivative Instruments

Derivative instruments are valued using a third-party pricing service. These quotations are not adjustments and are generally based on valuation models with observable inputs such as interest rates and contractual cash flow, and as such, are classified as Level 2 of the fair value hierarchy. The derivative instruments are recorded within other liabilities on the Company’s balance sheets.

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 March 31, 2017 and December 31, 2016 by level within the fair value hierarchy (dollars in thousands):



	March 31, 2017 (Unaudited)								December 31, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Investments in unconsolidated ventures	$	—	$	—	$	87,358	$	87,358	$	—	$	—	$	90,579	$	90,579
Real estate securities, available for sale	—		106,865		—		106,865		—		93,975		—		93,975
Liabilities:
Derivative liabilities	$	—	$	220	$	—	$	220	$	—	$	186	$	—	$	186

The following table presents additional information about PE Investments which are measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 for which the Company has used Level 3 inputs to determine fair value (dollars in thousands):



	March 31, 2017 (Unaudited)			Year Ended December 31, 2016
Beginning balance	$	90,579		$	98,754
Contributions⁽¹⁾	151			59,646
Distributions	(6,402		)	(88,525		)
Equity in earnings	3,030			24,136
Unrealized gain (loss)	—			(3,432		)
Ending balance	$	87,358		$	90,579

_____________________________________________________


(1)	Includes initial investments, before distribution and contribution closing statement adjustments, and subsequent contributions, including deferred purchase price fundings.

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For the three months ended March 31, 2017 and the year ended December 31, 2016, the Company used a discounted cash flow model to quantify Level 3 fair value measurements on a recurring basis. For the three months ended March 31, 2017 and the year ended December 31, 2016, the key unobservable inputs used in this analysis included discount rates with a weighted average of 11.4% and 14.7%, respectively, and 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.

For the three months ended March 31, 2017, the Company did not have any unrealized gain (loss) for financial assets for which the fair value option was elected. For the three months ended March 31, 2016, the Company recorded an unrealized loss of $1.6 million. 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 elected the fair value option for PE Investments 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. As of March 31, 2017 and December 31, 2016, the Company has elected not to apply the fair value option for any other eligible financial assets or liabilities.

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 March 31, 2017 and December 31, 2016 (dollars in thousands):



	March 31, 2017 (Unaudited)							December 31, 2016
	Principal Amount			Carrying Value		Fair Value		Principal Amount			Carrying Value		Fair Value
Financial assets:⁽¹⁾
Real estate debt investments, net	$	686,456	⁽²⁾	$	687,351	$	696,519	$	744,297	⁽²⁾	$	745,323	$	755,317
Real estate securities, available for sale⁽³⁾	155,194			106,865		106,865		138,438			93,975		93,975
Loan collateral receivable, related party⁽⁴⁾	51,732			51,732		51,991		52,204			52,204		50,941
Financial liabilities:⁽¹⁾
Securitization bonds payable, net	$	—		$	—	$	—	$	39,762		$	39,762	$	39,961
Mortgage notes payable, net	396,784			393,914		373,421		396,613			393,410		356,031
Credit facilities	242,610			242,610		242,610		249,156			249,156		249,156
Loan collateral payable, net, related party⁽⁵⁾	23,729			23,309		23,716		23,729			23,261		23,050

______________________________________________


(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 $5.3 million and $23.2 million, as of March 31, 2017 and December 31, 2016, respectively.


(3)	Refer to “Determination of Fair Value” above for disclosure of methodologies used to determine fair value.


(4)	Represents one senior loan participation interest in a first mortgage loan (Refer to Note 7).


(5)	Represents three senior loan participation interests in first mortgage loans (Refer to Note 7).

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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, Net / Loan Collateral Receivable, Related Party / Loan Collateral Payable, Net, Related Party

For CRE debt investments, including loan collateral receivable, related party and loan collateral payable, net, related party, 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, including loan collateral receivable, related party and loan collateral payable, net, related party, 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.

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.


•	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.

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The following tables present segment reporting for the three months ended March 31, 2017 and 2016 (dollars in thousands):



Three Months Ended March 31, 2017	Real Estate Debt			Real Estate Equity			Real Estate Securities		Corporate			Total
Net interest income	$	11,930		$	—		$	2,108	$	45		$	14,083
Rental and other income	—			21,965			—		—			21,965
Asset management and other fees, related party	—			—			—		(4,695		)	(4,695		)
Mortgage notes interest expense	—			(4,635		)	—		—			(4,635		)
Property operating expenses	—			(9,420		)	—		—			(9,420		)
General and administrative expenses	(147		)	(31		)	—		(2,476		)	(2,654		)
Depreciation and amortization	—			(8,689		)	—		—			(8,689		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	11,783			(810		)	2,108		(7,126		)	5,955
Equity in earnings (losses) of unconsolidated ventures	—			3,030			—		—			3,030
Income tax benefit (expense)	—			(407		)	—		—			(407		)
Net income (loss)	$	11,783		$	1,813		$	2,108	$	(7,126	)	$	8,578



Three Months Ended March 31, 2016	Real Estate Debt			Real Estate Equity			Real Estate Securities		Corporate			Total
Net interest income	$	14,336		$	—		$	1,711	$	(152	)	$	15,895
Rental and other income	—			16,371			—		—			16,371
Asset management and other fees, related party	—			—			—		(7,628		)	(7,628		)
Mortgage notes interest expense	—			(3,710		)	—		—			(3,710		)
Transaction costs	—			(1,046		)	—		(32		)	(1,078		)
Property operating expenses	—			(7,486		)	—		—			(7,486		)
General and administrative expenses	(159		)	(9		)	—		(4,234		)	(4,402		)
Depreciation and amortization	—			(5,415		)	—		—			(5,415		)
Unrealized gain (loss) on investments and other	—			(1,579		)	—		—			(1,579		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	14,177			(2,874		)	1,711		(12,046		)	968
Equity in earnings (losses) of unconsolidated ventures	672			6,898			—		—			7,570
Income tax benefit (expense)	—			—			—		(765		)	(765		)
Net income (loss)	$	14,849		$	4,024		$	1,711	$	(12,811	)	$	7,773

The following table presents total assets by segment as of March 31, 2017 and December 31, 2016 (dollars in thousands):



	Real Estate Debt		Real Estate Equity		Real Estate Securities		Corporate⁽¹⁾		Total
March 31, 2017 (Unaudited)
Total Assets	$	770,567	$	657,010	$	117,170	$	125,987	$	1,670,734

December 31, 2016
Total Assets	$	871,600	$	665,643	$	105,830	$	125,407	$	1,768,480

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

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NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


14.	Subsequent Events

Distribution Reinvestment Plan

From April 1, 2017 through May 5, 2017, the Company issued 0.6 million shares of common stock pursuant to the DRP, raising proceeds of $5.8 million. As of May 5, 2017, 8.1 million shares were available to be issued pursuant to the DRP.

Distributions

On May 11, 2017, 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 September 30, 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 April 1, 2017 through May 5, 2017, the Company repurchased 1.1 million shares for a total of $10.7 million or a weighted average price of $9.47 per share under the SRP that enables stockholders to sell their shares to the Company in certain circumstances, including death or a qualifying disability. The Company generally 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.

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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 in the future include unsecured real estate investment trust, or REIT, debt, collateralized debt obligation, or CDO, notes and other securities. In addition, we may own investments through 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 January 11, 2017, we were managed by an affiliate of NorthStar Asset Management Group Inc. (NYSE: NSAM), or NSAM. Effective January 10, 2017, NSAM completed its previously announced merger with Colony Capital, Inc., or Colony, NorthStar Realty Finance Corp., or NorthStar Realty, and Colony NorthStar, Inc., or Colony NorthStar, a wholly-owned subsidiary of NSAM, which we refer to as the mergers, with Colony NorthStar surviving the mergers and succeeding NSAM as our Sponsor. As a result of the mergers, our Sponsor became an internally-managed equity REIT, with a diversified real estate and investment management platform and publicly-traded on the NYSE under the ticker symbol “CLNS.” In addition, following the mergers, CNI NSI Advisors, LLC (formerly known as NSAM J-NSI Ltd), an affiliate of NSAM, or our Advisor, became a subsidiary of Colony NorthStar. Our Advisor manages our day-to-day operations pursuant to an advisory agreement. The mergers had no material impact on our operations.

Colony NorthStar manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, non-traded and traded REITs and registered investment companies. As of March 31, 2017, our Sponsor had an aggregate of $55.6 billion of assets under management, adjusted for commitments to acquire or sell certain investments by our Sponsor and other managed companies.

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.


•	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.

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. 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 May 5, 2017, we have raised an additional $0.2 billion in gross proceeds pursuant to our DRP.

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Our Investments

The following table presents our investments as of March 31, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through May 5, 2017 (refer to the below and “Recent Developments”) (dollars in thousands):



Investment Type:	Count	Principal Amount/Cost⁽¹⁾		% of Total
CRE Debt	Loans
First mortgage loans⁽²⁾⁽³⁾	11	$	460,665	29.5	%
Mezzanine loans⁽²⁾	5	78,177		5.0	%
Preferred equity interests	1	80,186		5.1	%
Total CRE debt	17	619,028		39.6	%
Operating Real Estate	Properties
Industrial	23	107,474		6.9	%
Multi-tenant office	14	319,414		20.4	%
Multifamily	2	120,338		7.7	%
Student Housing	3	68,436		4.4	%
Total Operating Real Estate	42	615,662		39.4	%
PE Investments⁽²⁾
PE Investment I	1	29,760		1.9	%
PE Investment IIA	1	66,984		4.3	%
PE Investment IIB	1	60,312		3.9	%
PE Investment III	1	15,986		1.0	%
Total PE Investments	4	173,042		11.1	%
CRE Securities
CMBS	14	155,194		9.9	%
Total CRE securities	14	155,194		9.9	%
Total	77	$	1,562,926	100.0	%

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(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)	Excludes three senior participations in mortgage loans sold into a securitization financing transaction.

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, 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.

The following section describes the major CRE asset classes in which we may invest and actively manage to maximize value and to protect capital.

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Commercial Real Estate Debt

Overview

Our CRE debt investment strategy focuses 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 underwriting and structure and provides us the opportunity to syndicate some or all of the loans (including senior or subordinate interests), if desired. Further, direct origination of debt investments provides for a closer relationship with our borrowers.

Our Portfolio

As of March 31, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through May 5, 2017, $619.0 million, or 39.6%, of our assets were invested in CRE debt, consisting of 17 loans with an average investment size of $36.4 million. The weighted average extended maturity of our CRE debt portfolio is 4.4 years.

The following table presents a summary of our CRE debt investments as of March 31, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through May 5, 2017 (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⁽⁴⁾	11	$	460,665	$	456,169	74.4	%	—		5.71	%	6.80	%	100.0	%
Mezzanine loans	5	78,177		78,161		12.6	%	12.18	%	11.00	%	12.21	%	36.5	%
Preferred equity interests⁽⁵⁾	1	80,186		80,582		13.0	%	10.00	%	—		10.00	%	—
Total/Weighted average	17	$	619,028	$	614,912	100.0	%	10.83	%	6.02	%	7.83	%	78.9	%

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(1)	Includes future funding commitments of $5.0 million.


(2)	Based on principal amount.


(3)	As of May 5, 2017, we had $451.6 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.34%.


(4)	Excludes three senior participations in mortgage loans sold into a securitization financing transaction.


(5)	Excludes an $8.9 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 as of March 31, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through May 5, 2017:

Debt Investments by Investments Type



Debt Investments by Property Type		Debt Investments by Geographic Location

Operating Real Estate

Our operating real estate investment strategy focuses on direct ownership in commercial real estate with an emphasis on properties with stable cash flow, which may be structurally senior to a third-party partner’s equity. In addition, we may own operating real estate investments through joint ventures with one or more partners. 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 March 31, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through May 5, 2017, $615.7 million, or 39.4%, of our assets were invested in real estate properties and our portfolio was 93% occupied. The following table presents our real estate property investments as of March 31, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through May 5, 2017 (dollars in thousands):



Property Type	Number of Portfolios	Number of Properties	Capacity		Amount⁽¹⁾
Industrial	1	23	2,077,743	square feet	$	107,474
Multi-tenant office	3	14	1,878,968	square feet	319,414
Multifamily	2	2	1,422	units	120,338
Student housing	1	3	2,166	beds	68,436
Total	7	42			$	615,662

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

Private Equity Investments

Our PE Investments own limited partnership interests in real estate private equity funds acquired in the secondary market and are managed by institutional-quality sponsors, which we refer to as fund interests. In addition, we may own PE Investments through joint ventures with one or more partners.

As of March 31, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through May 5, 2017, $173.0 million, or 11.1%, of our assets were invested in PE Investments through unconsolidated ventures.

The following tables present a summary of our PE Investments (dollars in thousands):



					Underlying Fund Interests
PE Investment⁽¹⁾	Number of Funds	Number of General Partners	Amount⁽²⁾		Assets, at Cost		Implied Underlying Leverage⁽³⁾		Expected Future Contributions
PE Investment I	49	26	$	29,760	$	11,876,000	45.4	%	$	207
PE Investment IIA⁽⁴⁾	24	15	66,984		14,859,000		36.5	%	—
PE Investment IIB⁽⁴⁾	—	—	60,312		—		—		—
PE Investment III⁽⁵⁾	2	1	15,986		938,000		—		—
Total	75	42	$	173,042	$	27,673,000			$	207

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(1)	Based on financial data reported by the underlying funds as of December 31, 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)

As of March 31, 2017, our share of the combined deferred amount for PE Investment IIA and PE Investment IIB was $85.7 million. The deferred amount will be paid in multiple installments throughout 2017 and 2018 and is expected to be paid from the distributions received from the underlying investments in PE Investment IIA and PE Investment IIB. In April 2017, PE Investment IIA and PE Investment IIB collectively paid $12.9 million of the deferred amount.


(5)	As of March 31, 2017, the deferred purchase price for PE Investment III recorded in other liabilities was $4.3 million. The remaining portion of the purchase price will be paid on 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 March 31, 2017	$	1,007	$	1,919	$	2,926	$	24	$	2,902
February 15, 2013 to March 31, 2017⁽²⁾	75,647		101,362		177,009		129,139		47,870

PE Investment IIA
Three months ended March 31, 2017	$	800	$	755	$	1,555	$	59	$	1,496
July 3, 2013 to March 31, 2017⁽²⁾	35,007		74,231		109,238		98,786		10,452

PE Investment IIB
Three months ended March 31, 2017	$	1,070	$	381	$	1,451	$	—	$	1,451
February 9, 2016 to March 31, 2017⁽²⁾	8,020		14,851		22,871		33,798		(10,927		)

PE Investment III
Three months ended March 31, 2017	$	153	$	317	$	470	$	68	$	402
March 30, 2016 to March 31, 2017⁽²⁾	1,924		672		2,596		16,659		(14,063		)

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(1)	Includes initial investments, before distribution and contribution closing statement adjustments, and subsequent contributions, including deferred purchase price fundings.


(2)	Represents activity from the respective initial closing date through March 31, 2017.

The following presents the underlying fund interests in our PE Investments by investment type and geographic location based on NAV as of December 31, 2016 (the most recently available information):



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 in the future 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 March 31, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through May 5, 2017, $155.2 million, or 9.9%, of our assets were invested in CRE securities and consisted of 14 CMBS investments purchased at an aggregate $77.7 million, or 50.1%, discount to par and our average investment size was $11.1 million. As of May 5, 2017, the weighted average expected maturity of our CMBS was 7.2 years.

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.

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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 continues to demonstrate positive underlying fundamentals, with moderate gross domestic product, or GDP, growth and improving employment conditions. With the national unemployment rate falling to 4.4% in April and the Federal Reserve projecting 2.1% GDP growth for 2017, overall macroeconomic conditions remain strong. The Federal Reserve’s March 2017 decision to raise the federal funds rate for the third time in almost a decade reflects a consensus that the economic foundation driving the current expansion remains sound, as well as a belief the labor market is close to or already at full employment resulting in wage growth and consumer confidence. While some market participants believe that higher interest rates may potentially reduce investor demand in the broader commercial real estate market, we expect real estate prices and returns to remain attractive while inflation is targeted to remain at 2.0% in the near term.

The results of the referendum passed and the subsequent actions taken to initiate the exit process from the European Union by the United Kingdom and the new U.S. presidential administration elected in November 2016 concluded a year of political uncertainty. While the markets initially appeared poised to react negatively to both outcomes, by quarter-end, the S&P 500 was up 10.4%, the ten year Treasury note’s yield was up 25.8%, the U.S. dollar had strengthened against the Eurozone’s euro by 3.7% and the Dow Jones Industrial Average surpassed 21,000 for the first time ever. In addition, benchmark 10-year interest rates in several other key global economies, including England, Germany and Japan, have recently trended to positive territory, signaling normalized market conditions while many global central banks continue to ease monetary policy to combat low inflation and economic stagnation. The pace of these changes may create volatility in global debt and equity markets and at the same time, the Federal Reserve experiences increased pressure to raise interest rates and reduce its large balance sheet holdings of financial instruments acquired during the financial crisis. In addition, the impact of potentially significant fiscal and regulatory policy changes, including potential infrastructure spending, healthcare reform and new trade policies, may also have a considerable impact on the trajectory of the U.S. and global economies during 2017.

CRE fundamentals remain relatively healthy across U.S. property types. Given certain dynamics in the current market including (i) the continuing steady recovery of the economy; (ii) a historically low interest rate environment; (iii) low aggregate new CRE supply; and (iv) robust international demand for U.S. commercial real estate, we expect real estate values to trend positively due to increased property level net operating income, continued strong transaction volume or a combination of both. Investor demand in 2016 slowed slightly compared to 2015 as indicated by fewer total real estate transactions despite net operating income at or approaching all-time highs for all property sectors and positive projected 2017 expansion for property-level revenue of 4.3%. In addition, approximately $400 million of ten-year debt originated during 2007 is set to mature in 2017, and these maturities may contribute to periodic volatility in the commercial real estate market. With CMBS issuance continuing to decline and uncertainty around the Dodd-Frank and capital requirements for banks, traditional capital sources may lack sufficient lending capacity to absorb the high refinancing demand. As regulatory uncertainty continues to limit CMBS issuance, these developments may provide attractive lending opportunities for new market participants such as alternative investment platforms, REITs and insurance companies. Industry experts estimate a projected total origination volume of approximately $55 billion for 2017, with the shift to non-traditional lenders focused on risk retention resulting in higher underwriting standards that may support market stability and a protracted environment of increasing commercial real estate values.

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 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

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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, or our Term Loan Facilities, and our CMBS facilities to make new investments in CMBS, or our CMBS Credit 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. All of the securitization bonds related to our two securitization financing transactions were repaid in January 2015 and January 2017, respectively, and therefore, we no longer hold any interest in securitization financing transactions. Our real estate portfolio is financed with long-term, non-recourse mortgage notes.

The following table presents our investment activity for the three months ended March 31, 2017 and from inception through March 31, 2017, adjusted for our acquisitions and commitments through May 5, 2017 (dollars in thousands):



	Three Months Ended			From Inception Through
	March 31, 2017			May 5, 2017
Investment Type:	Count	Principal Amount/Cost ⁽¹⁾		Count	Principal Amount/Cost⁽¹⁾
CRE debt	1	$	12,000	52	$	1,945,305
Operating Real Estate	—	—		42	615,662
PE Investments⁽²⁾	—	—		4	353,684
CRE securities	4	21,450		19	204,625
Total	5	$	33,450	117	$	3,119,276

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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)	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 44%.

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 Credit 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. All of the securitization bonds related to our two securitization financing transactions were repaid in January 2015 and January 2017, respectively, and therefore, we no longer hold any interest in securitization financing transactions.

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Real Estate Income II, Inc., or NorthStar Income II, a company managed by an affiliate of our Sponsor. We sold three senior participations at cost into the securitization transaction. We did not retain any legal interest in the senior participations and retained the junior participations on an unleveraged basis. As a result of U.S. GAAP requirements for transfers of financial assets, the senior participations transferred into the securitization financing transaction are accounted for as a secured borrowing and presented as loan collateral payable, net, related party on our consolidated balance sheets. Refer to Note 2, “Summary of Significant Accounting Policies” in our accompanying consolidated financial statements for additional information. As of March 31, 2017, the carrying value of CRE debt investments recorded in real estate debt investments, net was $23.7 million with an offsetting secured borrowing recorded in loan collateral payable, net, related party of $23.3 million.

As of March 31, 2017, we had $216.8 million outstanding under our Term Loan Facilities and $25.8 million outstanding under our CMBS Credit Facilities. As of May 5, 2017, we have $333.2 million of available borrowing under our Term Loan Facilities.

Refer to “Liquidity and Capital Resources” for further disclosure regarding our 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 March 31, 2017, 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.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect

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the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. There have been no material changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Recent Accounting Pronouncements

For recent accounting pronouncements, refer to Note 2, “Summary of Significant Accounting Policies” in our accompanying consolidated financial statements included in Part I Item 1. “Financial Statements.”

Results of Operations

Comparison of the Three Months Ended March 31, 2017 to 2016 (Dollars in Thousands):



	Three Months Ended March 31,						Increase (Decrease)
	2017			2016			Amount			%
Net interest income
Interest income	$	17,027		$	20,630		$	(3,603	)	(17.5	)%
Interest expense	2,944			4,735			(1,791		)	(37.8	)%
Net interest income	14,083			15,895			(1,812		)	(11.4	)%

Property and other revenues
Rental and other income	21,965			16,371			5,594			34.2	%
Total property and other revenues	21,965			16,371			5,594			34.2	%

Expenses
Asset management and other fees, related party	4,695			7,628			(2,933		)	(38.5	)%
Mortgage notes interest expense	4,635			3,710			925			24.9	%
Transaction costs	—			1,078			(1,078		)	(100.0	)%
Property operating expenses	9,420			7,486			1,934			25.8	%
General and administrative expenses	2,654			4,402			(1,748		)	(39.7	)%
Depreciation and amortization	8,689			5,415			3,274			60.5	%
Total expenses	30,093			29,719			374			1.3	%

Other income (loss)
Unrealized gain (loss) on investments and other	—			(1,579		)	1,579			(100.0	)%
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	5,955			968			4,987			515.2	%
Equity in earnings (losses) of unconsolidated ventures	3,030			7,570			(4,540		)	(60.0	)%
Income tax benefit (expense)	(407		)	(765		)	358			(46.8	)%
Net income (loss)	$	8,578		$	7,773		$	805		10.4	%

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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 March 31, 2017 and 2016. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):



	Three Months Ended March 31,
	2017						2016
	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	$	716,337	$	14,897	8.32	%	$	964,541	$	18,854	7.82	%
CRE securities investments	79,292		2,130		10.75	%	63,771		1,776		11.14	%
	$	795,629	$	17,027	8.56	%	$	1,028,312	$	20,630	8.02	%
Interest-bearing liabilities:
Securitization bonds payable, net	$	19,881	$	153	3.08	%	$	171,557	$	2,209	5.15	%
Credit facilities	245,883		2,569		4.18	%	318,452		2,526		3.17	%
Loan collateral payable, net, related party	23,285		222		3.81	%	—		—		—
	$	289,049	$	2,944	4.07	%	$	490,009	$	4,735	3.87	%
Net interest income			$	14,083					$	15,895

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(1)	Based on amortized cost for CRE debt and securities investments and principal amount for securitization bonds payable, net, credit facilities and loan collateral payable, net, related party. 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 by $3.6 million to $17.0 million as a result of a $232.7 million decrease in the average carrying value of our interest-earning assets.

Interest expense decreased by $1.8 million to $2.9 million as a result of a $201.0 million decrease in the average carrying value of our interest-bearing liabilities.

Other Revenues

Rental and Other Income

Rental and other income increased by $5.6 million to $22.0 million as a result of the acquisition of operating real estate during 2016 and improved performance from existing properties.

Expenses

Asset Management and Other Fees, Related Party

Asset management and other fees, related party decreased by $2.9 million to $4.7 million during the three months ended March 31, 2017 compared to $7.6 million during the three months ended March 31, 2016 primarily as a result of a lower level of invested assets during the three months ended March 31, 2017, as well as acquisition and disposition fees incurred during the three months ended March 31, 2016.

Mortgage Notes Interest Expense

Mortgage notes interest expense increased by $0.9 million to $4.6 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 and transactions. There were no transaction costs incurred during the three months ended March 31, 2017. We incurred $1.1 million in transaction costs as a result of acquisition of operating real estate during the three months ended March 31, 2016.

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Property Operating Expenses

Property operating expenses increased by $1.9 million to $9.4 million primarily as a result of the acquisition of operating real estate during 2016.

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 by $1.7 million to $2.7 million as a result of lower operating expenses reimbursed to our Advisor due to lower average invested assets during three months ended March 31, 2017 as compared to three months ended March 31, 2016.

Depreciation and Amortization

Depreciation and amortization expense increased by $3.3 million to $8.7 million primarily as a result of the acquisition of operating real estate during 2016.

Unrealized Gain (Loss) on Investments

We did not have any unrealized gain (loss) related to our PE Investments during the three months ended March 31, 2017. We recorded an unrealized loss of $1.6 million related to our PE Investments during the three months ended March 31, 2016.

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) of unconsolidated ventures decreased by $4.5 million to $3.0 million as a result of a decrease in earnings from PE Investments as they continue to mature.

Income Tax Benefit (Expense)

For the three months ended March 31, 2017 and 2016, we recorded income tax expense of $0.4 million and $0.8 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 May 5, 2017, we had current investable cash (excluding property level and liquidity requirements) of $151.0 million.

Securitization Financing Transactions

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. All of the securitization bonds related to our two securitization financing transactions were repaid in January 2015 and January 2017, respectively, and therefore, we no longer hold any interest in securitization financing transactions. 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.

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 five CMBS Credit Facilities. The interest rate and advance rate depend on asset type and characteristic. Maturity dates of our Term Loan Facilities range from March 2018 to October 2018 and all have extensions available at our option, subject to the satisfaction of certain customary conditions, with final maturity dates ranging from March 2018 to October 2021. The advance rate and maturity date of our CMBS Credit 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. As of March 31, 2017, we are in compliance with all of our financial covenants under our Credit Facilities.

Secured Borrowing

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transaction. We did not retain any legal interest in the senior participations and retained the junior participations on an unleveraged basis. As a result of U.S. GAAP requirements for transfers of financial assets, the senior participations transferred into the securitization financing transaction are accounted for as a secured borrowing and presented as loan collateral payable, net, related party on our consolidated balance sheets. Refer to Note 2, “Summary of Significant Accounting Policies” in our accompanying consolidated financial statements for additional information. As of March 31, 2017, the carrying value of CRE debt investments recorded in real estate debt investments, net was $23.7 million with an offsetting secured borrowing recorded in loan collateral payable, net, related party of $23.3 million.

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 March 31, 2017, our leverage as a percentage of our cost of investments was 44.0%.

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. 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.

Cash Flows

The following presents a summary of our consolidated statements of cash flows for the three months ended March 31, 2017 and 2016, (dollars in thousands):



	Three Months Ended March 31,
Cash flow provided by (used in):	2017			2016			Change
Operating activities	$	16,930		$	15,252		$	1,678
Investing activities	54,800			(44,393		)	99,193
Financing activities	(77,175		)	20,823			(97,998		)
Net change in cash and cash equivalents	$	(5,445	)	$	(8,318	)	$	2,873

Comparison of the Three Months Ended March 31, 2017 to 2016

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 increased by $1.7 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 primarily as a result of increased income from our operating real estate, partially offset by lower net interest income from our debt investments and lower equity in earnings from our PE Investments, respectively, period over period.

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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 increased by $99.2 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. Cash flows provided by investing activities for the three months ended March 31, 2017 was primarily a result of CRE debt and real estate securities repayments, partially offset by origination of a new CRE debt investment and acquisition of real estate securities. Cash flows used in investing activities for the three months ended March 31, 2016 was primarily a result of acquiring and originating investments, including operating real estate, CRE debt and PE Investments, partially offset by the sale of an unconsolidated joint venture and CRE debt repayments.

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. Our net cash used in financing activities decreased by $98.0 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. Cash flows used in financing activities for the three months ended March 31, 2017 was primarily a result of repayment of securitization bonds payable and credit facilities, partially offset by borrowing from credit facilities. Cash flows provided by financing activities for the three months ended March 31, 2016 was primarily a result of borrowings from a mortgage notes payable and credit facilities, partially offset by the repayment of securitization bonds payable and credit facilities.

Off-Balance Sheet Arrangements

As of March 31, 2017, we are not dependent on the use of any off-balance sheet financing arrangements for liquidity. 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

Subject to certain restrictions and limitations, our Advisor is responsible for managing our affairs on a day-to-day basis and for identifying, originating, acquiring and asset managing investments on our behalf. Our Advisor may delegate certain of its obligations to affiliated entities, which may be organized under the laws of the United States or foreign jurisdictions. 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.

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.

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

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the investment using the effective interest method. An acquisition 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 a CRE 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 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 tables present the fees and reimbursements incurred to our Advisor for the three months ended March 31, 2017 and the amount due to related party as of March 31, 2017 and December 31, 2016 (dollars in thousands):



Type of Fee or Reimbursement		Due to Related Party as of December 31, 2016⁽¹⁾		Three Months Ended March 31, 2017					Due to Related Party as of March 31, 2017 (Unaudited)⁽¹⁾
Type of Fee or Reimbursement	Financial Statement Location	Due to Related Party as of December 31, 2016⁽¹⁾		Incurred		Paid			Due to Related Party as of March 31, 2017 (Unaudited)⁽¹⁾
Fees to Advisor Entities
Asset management	Asset management and other fees, related party	$	10	$	4,695	$	(4,687	)	$	18
Acquisition⁽²⁾	Real estate debt investments, net / Asset management and other fees, related party	40		120		(160		)	—
Disposition⁽²⁾	Real estate debt investments, net / Asset management and other fees, related party	—		776		(776		)	—
Reimbursements to Advisor Entities
Operating costs⁽³⁾	General and administrative expenses	18		2,566		(2,573		)	11
Total		$	68	$	8,157	$	(8,196	)	$	29

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(1)	The balance is included in accounts payable and accrued expenses on our consolidated balance sheet.

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(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 March 31, 2017, our Advisor waived $1.0 million of acquisition fees and $0.4 million of disposition fees related to CRE securities.


(3)	As of March 31, 2017, our Advisor has incurred unreimbursed operating costs on our behalf of $9.6 million that remain eligible to allocate to us.

PE Investments

In connection with our 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. In connection with the mergers, our Sponsor assumed all of NorthStar Realty’s obligations.

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. In connection with the mergers, NorthStar Realty’s interests in PE Investment I and its other obligations were assumed by our Sponsor.

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 NorthStar Realty, which, following the mergers became a subsidiary of our Sponsor, or PE Investment IIB. We purchased PE Investment IIB on the same terms and conditions negotiated by another existing and purchasing unrelated co-investor in the transaction. This increased our total ownership from 15% to 29%. We acquired PE Investment IIB for $26.5 million, adjusted for distributions and contributions. With this add-on investment, PE Investment IIA and PE Investment IIB are collectively responsible for 29% of the deferred amount, or $85.7 million as of March 31, 2017. In April 2017, PE Investment IIA and PE Investment IIB collectively paid $12.9 million of the deferred amount.

Secured Borrowing

In November 2016, we bifurcated three first mortgage loans with an aggregate principal amount of $44.4 million into senior participations in mortgage loans of $29.5 million and junior participations in the related mortgage loans of $14.9 million to facilitate the financing of our mortgage loans through a securitization financing transaction, or secured borrowing, entered into by NorthStar Income II, a company managed by an affiliate of our Sponsor. We sold three senior participations at cost into the securitization transaction. We did not retain any legal interest in the senior participations and retained the junior participations on an unleveraged basis. As a result of U.S. GAAP requirements for transfers of financial assets, the senior participations transferred into the securitization financing transaction are accounted for as a secured borrowing and presented as loan collateral payable, net, related party on our consolidated balance sheets. Refer to Note 2, “Summary of Significant Accounting Policies” in our accompanying consolidated financial statements for additional information. As of March 31, 2017 the carrying value of CRE debt investments recorded in real estate debt investments, net was $23.7 million with an offsetting secured borrowing recorded in loan collateral payable, net, related party of $23.3 million.

Recent Developments

Distribution Reinvestment Plan

From April 1, 2017 through May 5, 2017, we issued 0.6 million shares of common stock pursuant to our DRP, raising proceeds of $5.8 million. As of May 5, 2017, 8.1 million shares were available to be issued pursuant to our DRP.

Distributions

On May 11, 2017, our board of directors approved a daily cash distribution of $0.001917808 per share of common stock for each of the three months ended September 30, 2017. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution was accrued.

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Share Repurchases

From April 1, 2017 through May 5, 2017, we repurchased 1.1 million shares for a total of $10.7 million or a weighted average price of $9.47 per share under a share repurchase program, or our Share Repurchase Program or SRP, that enables stockholders to sell their shares to us in certain circumstances, including death or a qualifying disability. We generally fund repurchase requests received during a quarter with proceeds set aside for that purpose, which are not expected to exceed proceeds received from our DRP.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance significantly more than inflation does. A change in interest rates may correlate with the inflation rate. Substantially all of the leases at our multifamily and student housing properties allow for monthly or annual rent increases which provide us with the opportunity to achieve increases, where justified by the market, as each lease matures. Such types of leases generally minimize the risks of inflation on our multifamily and student housing properties.

Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for additional details.

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 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

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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 NAV, since an impairment is taken into account in determining NAV but not in determining MFFO.

We define MFFO in accordance with the concepts established by the IPA and adjust for certain items, such as accretion of a discount and amortization of a premium on borrowings and related deferred financing costs, as such adjustments are comparable to adjustments for debt investments and will be helpful in assessing our operating performance. We also adjust MFFO for 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,

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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 a triggering event is identified and 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.

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, which we refer to as 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.

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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 March 31,
	2017			2016⁽¹⁾
Funds from operations:
Net income (loss) attributable to NorthStar Real Estate Income Trust Inc. common stockholders	$	8,404		$	7,688
Adjustments:
Depreciation and amortization	8,689			5,415
Depreciation and amortization related to non-controlling interests	(783		)	(550		)
FFO attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	16,310		$	12,553
Modified funds from operations:
FFO attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	16,310		$	12,553
Adjustments:
Amortization of premiums, discounts and fees on investments and borrowings, net	1,080			914
Amortization of capitalized above/below market leases	290			(123		)
Acquisition fees and transaction costs on investments	—			3,356
Straight-line rental (income) loss	(343		)	(700		)
Unrealized (gain) loss on investments and other	—			1,579
Adjustments related to non-controlling interests	(5		)	(43		)
MFFO attributable to NorthStar Real Estate Income Trust, Inc. common stockholders	$	17,332		$	17,536

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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 $9.92, our annualized distribution amount represents an effective current yield of 7.1%. From January 1, 2017 through March 31, 2017, we paid distributions at an annualized distribution rate of $0.70 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.

The following table presents distributions declared for the three months ended March 31, 2017 and year ended December 31, 2016 (dollars in thousands):



	Three Months Ended March 31, 2017				Year Ended December 31, 2016
Distributions Declared⁽¹⁾
Cash	$	11,999			$	53,408
DRP	8,770				43,337
Total	$	20,769			$	96,745

Sources of Distributions⁽¹⁾
Funds from Operations⁽²⁾	$	16,310	79	%	$	60,286	62	%
Offering proceeds	4,459		21	%	36,459		38	%
Total	$	20,769	100	%	$	96,745	100	%

Cash Flow Provided by (Used in) Operations	$	16,930			$	60,836

_________________________________


(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 March 31, 2017, we declared distributions of $419.7 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 March 31, 2017, the difference between total distributions paid

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(including cash distributions and shares issued in connection with our DRP) and cash flow provided by operations was $75.4 million, of which $4.6 million related to shares purchased by an affiliate of our Sponsor (previously a subsidiary of 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 May 5, 2017, our portfolio is generating a 11.5% 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, credit spread 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.

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 March 31, 2017, 75.2% of our debt investments, including future funding commitments, were floating rate investments and 49.0% of our total borrowings were floating rate liabilities. Of the floating rate liabilities, 8.2% related to the use of our CMBS Credit Facilities. As of March 31, 2017, a hypothetical 100 basis point increase in interest rates (including the effect of the interest rate floor) would increase income by $5.7 million annually, net of interest expense.

Credit Spread Risk

The value of our fixed and floating-rate investments also changes with market credit spreads. This means that when the 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

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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 three months ended March 31, 2017, two CRE debt investments each 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.

There have not been any changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. Other Information

Item 1. Legal Proceedings

We may be involved in various litigation matters arising in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, any 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, 2016 as filed with the SEC on March 17, 2017, 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 three months ended March 31, 2017, we declared distributions of $20.8 million compared to cash provided by operating activities of $16.9 million with $4.5 million, or 21%, of the distributions declared during this period being paid using proceeds from our DRP. For the year ended December 31, 2016, we declared distributions of $96.7 million compared to cash provided by operating activities of $60.8 million with $36.5 million, or 38%, 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 a listing of our shares occurs on a national securities exchange or are included for quotation in a national securities market.

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For the three months ended March 31, 2017, 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
January 1 to January 31	—	$	—	—
February 1 to February 28	1,847,639	9.42		1,847,639	(1)
March 1 to March 31	—	—		—
Total	1,847,639			1,847,639

__________________________________________________________

(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 March 31, 2017, we had no unfulfilled repurchase requests.

Unregistered Sales of Equity Securities

During the three months ended March 31, 2017, we did not issue any equity securities that were not registered under the Securities Act. All prior sales of unregistered securities have been previously reported on quarterly reports on Form 10-Q or annual reports on Form 10-K.

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PART IV

Item 6. Exhibits



Exhibit Number			Description of Exhibit
3.1			Second Articles of Amendment and Restatement of NorthStar Real Estate Income Trust, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 26, 2010 and incorporated herein by reference)
3.2			Amended and Restated Bylaws of NorthStar Real Estate Income Trust, Inc. (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 and incorporated herein by reference)
4.1			Amended and Restated Distribution Reinvestment Plan (filed as Appendix A to the Company’s Registration Statement on Form S-3D (File No. 333-213092) 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 March 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016; (ii) Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2017 and 2016; (iv) Consolidated Statements of Equity for the three months ended March 31, 2017 (unaudited) and year ended December 31, 2016; (v) Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2017and 2016; and (vi) Notes to Consolidated Financial Statements (unaudited)

____________________________________________________


*	Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		NorthStar Real Estate Income Trust, Inc.
Date:	May 11, 2017	By:	/s/ DANIEL R. GILBERT
			Name:	Daniel R. Gilbert
			Title:	Chairman, Chief Executive Officer and President





Date:	May 11, 2017	By:	/s/ FRANK V. SARACINO
			Name:	Frank V. Saracino
			Title:	Chief Financial Officer and Treasurer

N1 Liquidating Trust - FORM 10-Q - May 11, 2017

Attached files

N1 Liquidating Trust Reports