N1 Liquidating Trust - FORM 10-Q - November 13, 2017

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EX-32.2 - EXHIBIT 32.2 - N1 Liquidating Trustnsre09302017exhibit322.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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, 119,333,203 shares outstanding as of November 8, 2017.
 



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








2


FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue,” “future” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to our ability to make distributions to our stockholders, our reliance on our advisor and our sponsor, the operating performance of our investments, our financing needs, the effects of our current strategies, the impact of the transactions pursuant to the master combination agreement, or the combination agreement, with, among others, Colony Capital Operating Company, LLC, or CLNS OP, the operating company of our sponsor, Colony NorthStar, Inc., and NorthStar Real Estate Income II, Inc., or NorthStar Income II, on our business and operations. 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:
•
our ability to consummate the transactions pursuant to the combination agreement on the contemplated terms or at all, including whether such transactions will have the full or any strategic and financial benefits and efficiencies we expect and whether such benefits will be delayed or materialize at all;
•
the occurrence of any event, change or other circumstances that could give rise to the termination of the combination agreement and the risk that the conditions to the closing of the transactions will not be satisfied;
•
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;

3


•
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;
•
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 U.S. Securities and Exchange Commission, or the SEC, included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 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.





4


PART I. Financial Information
Item 1.    Financial Statements
NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
 
September 30, 2017 (Unaudited)
 
December 31, 2016
Assets
 
 
 
Cash and cash equivalents
$
163,087

 
$
153,039

Restricted cash
45,130

 
74,195

Real estate debt investments, net
367,262

 
745,323

Real estate debt investments, held for sale
150,150

 
—

Operating real estate, net
477,531

 
488,839

Investments in unconsolidated ventures (refer to Note 5)
55,401

 
90,579

Real estate securities, available for sale
148,158

 
93,975

Mortgage loans held in a securitization trust, at fair value
922,034

 
—

Receivables, net
14,546

 
13,956

Deferred costs and other assets, net
50,570

 
56,370

  Loan collateral receivable, related party
50,791

 
52,204

Total assets(1)
$
2,444,660

 
$
1,768,480

Liabilities
 
 
 
Securitization bonds payable, net
$
—

 
$
39,762

Mortgage notes payable, net
394,903

 
393,410

Credit facilities
185,728

 
249,156

Mortgage obligations issued by a securitization trust, at fair value
870,075

 
—

Due to related party (refer to Note 8)
4,304

 
68

Accounts payable and accrued expenses
19,875

 
7,862

Escrow deposits payable
21,061

 
58,453

Distribution payable
6,866

 
8,192

Other liabilities
16,101

 
19,191

Loan collateral payable, net, related party (refer to Note 8)
23,408

 
23,261

Total liabilities(1)
1,542,321

 
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 September 30, 2017 and December 31, 2016
—

 
—

Common stock, $0.01 par value, 400,000,000 shares authorized, 119,333,203 and 120,903,352 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
1,193

 
1,209

Additional paid-in capital
1,066,717

 
1,080,434

Retained earnings (accumulated deficit)
(203,735
)
 
(151,731
)
Accumulated other comprehensive income (loss)
20,854

 
20,175

  Total NorthStar Real Estate Income Trust, Inc. stockholders’ equity
885,029

 
950,087

Non-controlling interests
17,310

 
19,038

Total equity
902,339

 
969,125

Total liabilities and equity
$
2,444,660

 
$
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 September 30, 2017, the Operating Partnership includes $1.3 billion and $1.3 billion 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.

5


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net interest income
 
 
 
 
 
 
 
 
Interest income
 
$
14,869

 
$
18,649

 
$
47,529

 
$
59,006

Interest expense
 
(2,938
)
 
(4,003
)
 
(9,044
)
 
(13,150
)
Interest income on mortgage loans held in a securitization trust
 
11,892

 
—

 
15,774

 
—

Interest expense on mortgage obligations issued by a securitization trust
 
(10,582
)
 
—

 
(14,202
)
 
—

Net interest income
 
13,241

 
14,646

 
40,057

 
45,856

 
 
 
 
 
 
 
 
 
Property and other revenues
 
 
 
 
 
 
 
 
Rental and other income
 
22,889

 
21,843

 
66,827

 
58,330

Total property and other revenues
 
22,889

 
21,843

 
66,827

 
58,330

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Asset management and other fees, related party
 
4,355

 
5,410

 
13,592

 
18,747

Mortgage notes interest expense
 
4,805

 
4,552

 
14,160

 
12,895

Other expenses related to securitization trust
 
42

 
—

 
55

 
—

Transaction costs
 
3,988

 
182

 
5,544

 
1,909

Property operating expenses
 
10,836

 
10,918

 
30,294

 
27,478

General and administrative expenses (refer to Note 8)
 
2,600

 
3,381

 
7,862

 
11,553

Depreciation and amortization
 
12,318

 
9,481

 
29,770

 
21,386

Total expenses
 
38,944

 
33,924

 
101,277

 
93,968

 
 
 
 
 
 
 
 
 
Other income (loss)
 
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net
 
725

 
—

 
725

 
—

Unrealized gain (loss) on investments
 
(1,487
)
 
(33
)
 
(1,487
)
 
(3,432
)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
(3,576
)
 
2,532

 
4,845

 
6,786

Equity in earnings (losses) of unconsolidated ventures
 
1,040

 
5,575

 
6,553

 
19,647

Income tax benefit (expense)
 
9

 
(810
)
 
(579
)
 
(2,265
)
Net income (loss)
 
(2,527
)
 
7,297

 
10,819

 
24,168

Net (income) loss attributable to non-controlling interests
 
245

 
194

 
(80
)
 
(89
)
Net income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders
 
$
(2,282
)
 
$
7,491

 
$
10,739

 
$
24,079

Net income (loss) per share of common stock, basic/diluted
 
$
(0.02
)
 
$
0.06

 
$
0.09

 
$
0.20

Weighted average number of shares of common stock outstanding, basic/diluted
 
119,479,714

 
121,080,070

 
119,900,584

 
120,979,224

Distributions declared per share of common stock
 
$
0.18

 
$
0.20

 
$
0.52

 
$
0.60



Refer to accompanying notes to consolidated financial statements.

6


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
(2,527
)
 
$
7,297

 
$
10,819

 
$
24,168

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Unrealized gain (loss) on real estate securities, available for sale
 
(539
)
 
(885
)
 
679

 
1,332

Total other comprehensive income (loss)
 
(539
)
 
(885
)
 
679

 
1,332

Comprehensive income (loss)
 
(3,066
)
 
6,412

 
11,498

 
25,500

Comprehensive (income) loss attributable to non-controlling interests
 
245

 
194

 
(80
)
 
(89
)
Comprehensive income (loss) attributable to NorthStar Real Estate Income Trust, Inc. common stockholders
 
$
(2,821
)
 
$
6,606

 
$
11,418

 
$
25,411




































Refer to accompanying notes to consolidated financial statements.

7


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars and Shares in Thousands)

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Total
Company’s
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
 
Balance as of December 31, 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
—

 
—

 
—

 
—

 
—

 
—

 
105

 
105

Non-controlling interests - distributions
—

 
—

 
—

 
—

 
—

 
—

 
(1,913
)
 
(1,913
)
Proceeds from distribution reinvestment plan
2,711

 
27

 
26,805

 
—

 
—

 
26,832

 
—

 
26,832

Shares redeemed for cash
(4,301
)
 
(43
)
 
(40,703
)
 
—

 
—

 
(40,746
)
 
—

 
(40,746
)
Issuance and amortization of equity-based compensation
20

 
—

 
181

 
—

 
—

 
181

 
—

 
181

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
679

 
679

 
—

 
679

Distributions declared
—

 
—

 
—

 
(62,743
)
 
—

 
(62,743
)
 
—

 
(62,743
)
Net income (loss)
—

 
—

 
—

 
10,739

 
—

 
10,739

 
80

 
10,819

Balance as of September 30, 2017 (unaudited)
119,333

 
$
1,193

 
$
1,066,717

 
$
(203,735
)
 
$
20,854

 
$
885,029

 
$
17,310

 
$
902,339










Refer to accompanying notes to consolidated financial statements.

8


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
10,819

 
$
24,168

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Equity in (earnings) losses of unconsolidated ventures
(6,553
)
 
(19,647
)
Depreciation and amortization
29,770

 
21,386

Straight-line rental income
(822
)
 
(1,409
)
Amortization of capitalized above/below market leases
1,107

 
70

Amortization of premium/accretion of discount and fees on investments and borrowings, net
(3,284
)
 
(774
)
Amortization of deferred financing costs
3,015

 
2,185

Interest accretion on investments
(5,798
)
 
(5,352
)
Distributions of cumulative earnings from unconsolidated ventures (refer to Note 5)
6,553

 
19,647

Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net
(725
)
 
—

Unrealized (gain) loss on investments
1,487

 
3,432

Amortization of equity-based compensation
181

 
135

Deferred income tax (benefit) expense
(2,597
)
 
(2,225
)
Changes in assets and liabilities:
 
 
 
Restricted cash
(3,548
)
 
(2,783
)
Receivables, net
4,108

 
1,290

Deferred costs and other assets
(9,363
)
 
(1,250
)
Due to related party
4,236

 
334

Accounts payable and accrued expenses
9,527

 
5,677

Other liabilities
(1,362
)
 
2,444

Net cash provided by (used in) operating activities
36,751

 
47,328

Cash flows from investing activities:
 
 
 
Origination and funding of real estate debt investments, net
(13,403
)
 
(130,224
)
Repayment on real estate debt investments
246,513

 
247,042

Repayment on loan collateral receivable, related party
1,413

 
1,384

Acquisition of operating real estate
—

 
(103,384
)
Improvements of operating real estate
(5,700
)
 
(4,521
)
Investments in unconsolidated ventures (refer to Note 5)
(13,248
)
 
(49,743
)
Proceeds from sale of unconsolidated ventures
—

 
59,760

Distributions in excess of cumulative earnings from unconsolidated ventures (refer to Note 5)
47,145

 
41,596

Acquisition of real estate securities, available for sale
(106,255
)
 
(13,822
)
Repayment of real estate securities, available for sale
4,694

 
8,538

Change in restricted cash
(4,779
)
 
(415
)
Net cash provided by (used in) investing activities
156,380

 
56,211

Cash flows from financing activities:
 
 
 
Proceeds from distribution reinvestment plan
26,832

 
32,950

Shares redeemed for cash
(40,746
)
 
(29,034
)
Distributions paid on common stock
(64,069
)
 
(72,690
)
Borrowings from mortgage notes
660

 
70,096

Repayment of mortgage notes
(161
)
 
(151
)
Borrowings from credit facilities
83,847

 
100,080

Repayment of credit facilities
(147,275
)
 
(94,380
)
Repayment of securitization bonds
(39,762
)
 
(120,930
)
Payment of deferred financing costs
(601
)
 
(2,793
)
Contributions from non-controlling interests
105

 
4,432

Distributions to non-controlling interests
(1,913
)
 
(1,191
)
Net cash provided by (used in) financing activities
(183,083
)
 
(113,611
)
Net increase (decrease) in cash and cash equivalents
10,048

 
(10,072
)
Cash and cash equivalents - beginning of period
153,039

 
127,890

Cash and cash equivalents - end of period
$
163,087

 
$
117,818


Refer to accompanying notes to consolidated financial statements.

9


NORTHSTAR REAL ESTATE INCOME TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
(Unaudited)

 
Nine Months Ended 
 September 30,
 
2017
 
2016
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Consolidation of securitization trust (VIE asset / liability)
$
873,951

 
$
—

Reclassification of CRE debt investments to held for sale
150,150

 
—

Escrow deposits payable related to real estate debt investments
37,392

 
12,874

Accrual of distribution payable
6,866

 
7,942

Non-cash related to PE Investments (refer to Note 5)
3,908

 
1,016

Acquisition of operating real estate / reduction of CRE debt investment(1)
—

 
67,493

CRE debt investment payoff due from servicer
—

 
24,400

Reclassification related to measurement-period adjustment
—

 
18,674

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


































Refer to accompanying notes to consolidated financial statements.

10


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 September 30, 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 September 30, 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.
On August 25, 2017, the Company entered into a master combination agreement (the “Combination Agreement”) with, among others, Colony Capital Operating Company, LLC, (“CLNS OP”), the operating company of the Sponsor, and NorthStar Real Estate Income II, Inc. (“NorthStar Income II”), a company managed by an affiliate of the Sponsor, pursuant to which a select portfolio of the assets and liabilities of the Sponsor will be combined with substantially all of the assets and liabilities of the Company and all of the assets and liabilities of NorthStar Income II in an all-stock combination transaction to create an externally managed commercial real estate credit REIT (the transactions associated with the Combination Agreement, collectively the “Combination”). The Combination has been unanimously approved by the special committees and the boards of directors of both the Company and NorthStar Income II and approved by the board of directors of the Sponsor. The combined company will be named “Colony NorthStar Credit Real Estate, Inc.” (“CLNC”) and its Class A common stock is expected to be listed on a national securities exchange.

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

Upon completion of the Combination, the Company’s stockholders, the Sponsor and NorthStar Income II’s stockholders will own approximately 32%, 37% and 31%, respectively, of CLNC on a fully diluted basis, subject to certain adjustments as set forth in the Combination Agreement.
The Combination is expected to close in the first quarter of 2018, subject to customary closing conditions, including approval by the stockholders of each of the Company and NorthStar Income II, and the listing of CLNC’s Class A common stock on a national securities exchange. There can be no assurance that the closing conditions will be satisfied, that the Combination will be consummated, or the timing thereof.
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 continued to offer DRP shares beyond the Total Primary Offering. On August 25, 2017, in connection with the entry into the Combination Agreement, the Company’s board of directors, including all of its independent directors, voted to suspend the DRP until further notice. Pursuant to the terms of the DRP, the suspension went into effect prior to the monthly distributions to be paid on or about October 1, 2017 and as a result, all stockholders will receive only cash distributions through the completion of the Combination unless and until the DRP is reinstated.
The Company raised total gross proceeds of $1.1 billion in the Offering. In addition, from the close of the Primary Offering through November 8, 2017, the Company has raised an additional $0.2 billion in gross proceeds pursuant to the DRP.
2.
Summary of Significant Accounting Policies
Basis of Quarterly Presentation
The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the U.S. 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,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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.
As of September 30, 2017, the Company has identified certain consolidated and unconsolidated VIEs. Assets of each of the VIEs, other than the Operating Partnership, 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.
Consolidated VIEs
The most significant consolidated VIEs are the Operating Partnership, the Investing VIE (as discussed below) 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 Operating Partnership consolidates certain properties that have non-controlling interests. Included in operating real estate, net on the Company’s consolidated balance sheet as of September 30, 2017 is $343.9 million related to such consolidated VIEs. Included in mortgage notes payable, net on the Company’s consolidated balance sheet as of September 30, 2017 is $324.4 million collateralized by the real estate assets of the related consolidated VIEs.
Investing VIEs
The Company’s investments in securitization financing entities (“Investing VIEs”), include subordinate first-loss tranches of the securitization trust, which represent interests in such VIE. Investing VIEs are structured as pass through entities that receive principal and interest payments from the underlying debt collateral assets and distribute those payments to the securitization trust’s certificate holders, including the most subordinate tranches of the securitization trust. Generally, a securitization trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint and remove the special servicer for the trust, and as such may qualify as the primary beneficiary of the trust.
If it is determined that the Company is the primary beneficiary of an Investing VIE as a result of acquiring the subordinate first-loss tranches of the securitization trust, the Company would consolidate the assets, liabilities, income and expenses of the entire Investing VIE. The assets held by an Investing VIE are restricted and can only be used to fulfill its own obligations. The obligations of an Investing VIE have neither any recourse to the general credit of the Company as the consolidator of an Investing VIE, nor to any of the Company’s other consolidated entities.
As of September 30, 2017, the Company held subordinate tranches of the securitization trust in an Investing VIE for which the Company has determined it is the primary beneficiary because it has the power to direct the activities that most significantly impact the economic performance of the securitization trust. The Company’s subordinate tranches of the securitization trust, which represent the retained interest and related interest income, are eliminated in consolidation. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, the assets, liabilities (obligations to the certificate holders of the securitization trust, less the Company’s retained interest from the subordinate tranches of the securitization trust), income and expense of the entire Investing VIE are presented in the consolidated financial statement of the Company. As a result, although the Company legally owns the subordinate tranches of the securitization trust only, U.S. GAAP requires the Company to present the assets, liabilities, income and expenses of the entire securitization trust on its consolidated financial statements. Regardless of the presentation, the Company’s consolidated financial statements of operations ultimately reflect the net income attributable to its retained interest in the subordinate tranches of the securitization trust. Refer to Note 6, “Real Estate Securities, Available for Sale” for further discussion.
The Company elected the fair value option for the initial recognition of the assets and liabilities of its consolidated Investing VIEs. Interest income and interest expense associated with this VIE will be recorded separately on the consolidated statements of operations. The Company will separately present the assets and liabilities of its consolidated Investing VIEs as “Mortgage loans

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

held in a securitization trust, at fair value” and “Mortgage obligations issued by a securitization trust, at fair value,” respectively, on its consolidated balance sheets. Refer to Note 12, “Fair Value” for further discussion.
The Company has adopted guidance issued by the FASB, allowing the Company to measure both the financial assets and liabilities of a qualifying collateralized financing entity (“CFE”), such as its Investing VIEs, using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. As the liabilities of the Company’s Investing VIE are marketable securities with observable trade data, their fair value is more observable and will be referenced to determine the fair value for assets of its Investing VIE. Refer to section “Fair Value Option” below for further discussion.
Unconsolidated VIEs
As of September 30, 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 September 30, 2017 (dollars in thousands):
 
 
Carrying Value
 
Maximum Exposure to Loss
Real estate securities, available for sale
 
$
148,158

 
$
148,158

Investments in unconsolidated ventures
 
14,482

 
14,482

Real estate debt investments, net(1)
 
142,250

 
142,250

Total assets
 
$
304,890

 
$
304,890

_______________________________________
(1)
Includes loan collateral receivable, related party of $50.8 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 September 30, 2017. The Company did not provide financial support to the unconsolidated VIEs during the nine months ended September 30, 2017. As of September 30, 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.

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

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).
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 may elect to apply the fair value option for certain investments due to the nature of the instrument. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.
The Company has elected the fair value option for PE Investments. The Company has also elected the fair value option to account for the eligible financial assets and liabilities of its consolidated Investing VIEs in order to mitigate potential accounting mismatches between the carrying value of the instruments and the related assets and liabilities to be consolidated. The Company has adopted guidance issued by the FASB allowing the Company to measure both the financial assets and liabilities of a qualifying CFE it consolidates using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable.
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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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 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. However, the Company has elected the fair value option for certain of its available for sale securities, and as a result, any unrealized gains (losses) on such securities are recorded in unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net in the consolidated statements of operations. As of September 30, 2017, the Company held subordinate tranches of a securitization trust, which represent the Company’s retained interest in the securitization trust, which the Company consolidates under U.S. GAAP. Refer to Note 6, “Real Estate Securities, Available for Sale” for further discussion.
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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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.
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 September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
Deferred costs and other assets, net:
 
 
 
 
Intangible assets, net(1)
 
$
29,366

 
$
41,375

Prepaid expenses
 
9,236

 
1,386

Deferred commissions and leasing costs
 
9,407

 
10,287

Deferred financing costs, net - credit facilities
 
1,546

 
2,772

Deposits
 
538

 
550

Other
 
477

 
—

Total
 
$
50,570

 
$
56,370

 
 
 
 
 
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
Other liabilities:
 
 
 
 
Intangible liabilities, net(2)
 
$
6,881

 
$
8,506

Prepaid rent and unearned revenue
 
4,147

 
4,601

PE Investments deferred purchase price, net
 
3,342

 
4,248

Tenant security deposits
 
1,401

 
1,433

Other
 
330

 
403

Total
 
$
16,101

 
$
19,191

_______________________________________
(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 a majority of its independent directors. For the nine months ended September 30, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Revenue Recognition
Real Estate Debt Investments
Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such loan is reclassified to held for sale.
Operating Real Estate
Rental and other income from operating real estate is derived from 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 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

18

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

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 September 30, 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 September 30, 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.
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 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 September 30, 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.

19

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

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 book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax benefit (expense) in the consolidated statements of operations.
For the three and nine months ended September 30, 2017, the Company recorded income tax benefit of less than $0.1 million and income tax expense of $0.6 million, respectively. For the three and nine months ended September 30, 2016, the Company recorded income tax expense of $0.8 million and $2.3 million, respectively.
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 September 30, 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 $23.4 million. Refer to Note 7, “Borrowings” for additional information.
Recent Accounting Pronouncements
Revenue Recognition- In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, 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.

20

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

The Company has commenced the process of adopting the new revenue standard; including forming a project team and compiling an inventory of the sources of revenue the Company expects will be impacted by the adoption of this standard. The Company plans to adopt the standard on its required effective date of January 1, 2018 using the modified retrospective approach. The new revenue standard specifically excludes revenue streams for which specific guidance is stipulated in other sections of the codification, therefore it will not impact rental income or interest income generated on financial instruments such as preferred equity investments. The Company’s escalation income includes certain lease-related executory cost payments (i.e., utilities, common area maintenance), which are considered non-lease components and subject to the new standard on revenue recognition. The Company expects to apply the revenue recognition guidance related to its non-lease components within leases on January 1, 2019, upon its adoption of the lease accounting update. While this revenue stream is subject to the application of the new revenue standard, the Company believes that the pattern and timing of recognition of income will be consistent with the current accounting model.
Financial Instruments- In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses 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.
Leases- In February 2016, the FASB issued ASU No. 2016-02, Leases, which 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 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.
Equity Method of Accounting- In March 2016, the FASB issued ASU No. 2016-07, Investments- Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting, 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 its 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.
Equity-Based Compensation- In March 2016, the FASB issued ASU No. 2016-09, Improvements to Share-Based Payment Accounting, 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.
Credit Losses- In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses, which 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

21

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

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.
Cash Flow Classifications- In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which 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.
Restricted Cash- In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, 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.
Business Combinations- In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which amends 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 of transferred assets and activities is not a business. The guidance is effective for fiscal years, and interim periods within those years, beginning after 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. The Company plans to adopt the standard on its required effective date of January 1, 2018. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.
Derecognition and Partial Sales of Nonfinancial Assets- In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition and Accounting for Partial Sales of Nonfinancial Assets, 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 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. The Company plans to adopt the standard on its required effective date of January 1, 2018 using the modified retrospective approach. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.

22

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

3.
Real Estate Debt Investments
The following table presents CRE debt investments as of September 30, 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
 
First mortgage loans(5)
8
 
$
196,075

 
$
196,125

 
53.5
%
 
—
%
 
5.67
%
 
7.34
%
 
100.0
%
Mezzanine loans(5)
5
 
79,340

 
79,328

 
21.6
%
 
12.23
%
 
11.00
%
 
12.33
%
 
35.9
%
Preferred equity interests(6)
1
 
91,417

 
91,809

 
24.9
%
 
10.00
%
 
—
%
 
10.00
%
 
—
%
Total/Weighted average
14
 
$
366,832

 
$
367,262

 
100.0
%
 
10.80
%
 
6.35
%
 
9.09
%
 
61.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate debt, held for sale(7)
1
 
$
150,150

 
$
150,150

 
N/A

 
—
%
 
6.20
%
 
7.51
%
 
100.0
%
_______________________________________
(1)
As of September 30, 2017, there were no future funding commitments.
(2)
Certain CRE debt investments, including loan collateral receivable, related party, serve as collateral for financing transactions including $314.6 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 September 30, 2017, the Company had $318.9 million principal amount of floating-rate loans subject to a weighted average LIBOR floor of 0.68%.
(5)
During the nine months ended September 30, 2017, the Company originated one mezzanine loan with an aggregate committed principal amount of $12.0 million and received $242.1 million related to the repayment of four first mortgage loans and one mezzanine loan.
(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 $82.3 million of the carrying value. The Company consolidates the loan and records RXR’s investment as a non-controlling interest.
(7)
In August 2017, pursuant to the Combination Agreement, the Company committed to sell to the Sponsor a $65 million senior interest in one $150.2 million first mortgage loan at par to the extent that the Company does not otherwise sell such loan to a third party. The junior interest of such loan (or, in the case of a sale to a third party, any unsold portion) will be transferred to a liquidating trust for the benefit of the Company’s stockholders. The first mortgage loan is financed on a term loan facility for a total of $46.9 million.
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
 
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 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.

23

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

The following table presents maturities of CRE debt investments based on principal amount as of September 30, 2017 (dollars in thousands):
 
Current
Maturity
 
Maturity
Including
Extensions(1)
October 1 to December 31, 2017
$
55,654

 
$
36,304

Years Ending December 31:
 
 
 
2018
25,051

 
19,350

2019
91,251

 
27,500

2020
12,000

 
34,500

2021
91,417

 
54,302

Thereafter
91,459

 
194,876

Total
$
366,832

 
$
366,832

_______________________________________
(1)
Assumes that all debt with extension options will qualify for extension at such maturity according to the conditions set forth in the governing documents.
As of September 30, 2017, the weighted average maturity, including extensions, of CRE debt investments was 4.7 years.
Credit Quality Monitoring
CRE debt investments are typically loans secured by direct senior priority liens on real estate properties or by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its debt investments at least quarterly and differentiates the relative credit quality principally based on: (i) whether the borrower is currently paying contractual debt service in accordance with its contractual terms and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity. The Company categorizes a debt investment for which it expects to receive full payment of contractual principal and interest payments as “performing.” The Company will categorize a weaker credit quality debt investment that is currently performing, but for which it believes future collection of all or some portion of principal and interest is in doubt, into a category called “performing with a loan loss reserve.” The Company will categorize a weaker credit quality debt investment that is not performing, which the Company defines as a loan in maturity default and/or past due at least 90 days on its contractual debt service payments, as a non-performing loan (“NPL”). The Company’s definition of an NPL may differ from that of other companies that track NPLs.
As of September 30, 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 September 30, 2017 and December 31, 2016. For the nine months ended September 30, 2017, two CRE debt investments each contributed more than 10.0% of interest income, of which one debt investment was classified as held for sale.
4.
Operating Real Estate
The following table presents operating real estate, net, as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
Land and improvements
 
$
96,232

 
$
96,011

Buildings and improvements(1)
 
435,319

 
430,776

Furniture, fixtures and equipment
 
5,408

 
4,472

Subtotal
 
$
536,959

 
$
531,259

Less: Accumulated depreciation
 
(59,428
)
 
(42,420
)
Operating real estate, net
 
$
477,531

 
$
488,839

_______________________________________
(1)
Includes tenant improvements.

24

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

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

 
$
60

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

 
$
60

_______________________________________
(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 tables summarize the Company’s PE Investments as of September 30, 2017 and December 31, 2016 and activity for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
 
Carrying Value
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
 
Equity in Earnings
 
Distributions
 
Contributions(1)
 
Equity in Earnings
 
Distributions
 
Contributions(1)
PE Investment
 
 
 
PE Investment I(2)
 
$
19,494

 
$
31,655

 
$
420

 
$
6,110

 
$
312

 
$
2,061

 
$
7,895

 
$
—

PE Investment IIA(3)
 
12,633

 
23,360

 
128

 
—

 
—

 
1,351

 
5,398

 
3

PE Investment IIB(3)
 
8,792

 
19,329

 
264

 
—

 
—

 
1,846

 
5,037

 
—

PE Investment III(4)
 
14,482

 
16,235

 
228

 
1,846

 
69

 
317

 
76

 
—

Total
 
$
55,401

 
$
90,579

 
$
1,040

 
$
7,956

 
$
381

 
$
5,575

 
$
18,406

 
$
3

_______________________________________
(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 recorded an unrealized loss of $1.5 million and less than $0.1 million for the three months ended September 30, 2017 and 2016, respectively.
(3)
As of September 30, 2017, the Company’s share of the combined deferred amount for PE Investment IIA and PE Investment IIB was $72.8 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 October 2017, PE Investment IIA and PE Investment IIB collectively paid $16.9 million of the deferred amount.
(4)
As of September 30, 2017, the deferred purchase price for PE Investment III recorded in other liabilities was $3.4 million. The remaining portion of the purchase price will be paid on December 31, 2017.

25

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

 
 
Carrying Value
 
Nine months ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
 
Equity in Earnings
 
Distributions
 
Contributions(1)
 
Equity in Earnings
 
Distributions
 
Contributions(1)
PE Investment
 
 
 
PE Investment I(2)
 
$
19,494

 
$
31,655

 
$
1,987

 
$
12,997

 
$
336

 
$
7,766

 
$
28,039

 
$
206

PE Investment IIA(3)
 
12,633

 
23,360

 
1,568

 
19,002

 
6,707

 
4,709

 
16,921

 
7,824

PE Investment IIB(3)
 
8,792

 
19,329

 
2,443

 
19,185

 
6,205

 
5,494

 
14,302

 
33,798

PE Investment III(4)
 
14,482

 
16,235

 
555

 
2,514

 
206

 
1,006

 
1,981

 
16,545

Total
 
$
55,401

 
$
90,579

 
$
6,553

 
$
53,698

 
$
13,454

 
$
18,975

 
$
61,243

 
$
58,373

_______________________________________
(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 recorded an unrealized loss of $1.5 million and $3.4 million for the nine months ended September 30, 2017 and 2016, respectively.
(3)
As of September 30, 2017, the Company’s share of the combined deferred amount for PE Investment IIA and PE Investment IIB was $72.8 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 October 2017, PE Investment IIA and PE Investment IIB collectively paid $16.9 million of the deferred amount.
(4)
As of September 30, 2017, the deferred purchase price for PE Investment III recorded in other liabilities was $3.4 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 par value of $59.8 million. For the nine months ended September 30, 2016, the Company recognized equity in earnings of $0.7 million.
6.
Real Estate Securities, Available for Sale
Investments in CRE Securities
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 as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average
 
 
 
Principal
Amount(1)
 
Amortized
Cost
 
Cumulative Unrealized
on Investments
Fair
Value
 
 
 
Unleveraged
Current
Yield
As of Date:
Count
 
Gain
 
(Loss)
 
 
Coupon(2)
 
September 30, 2017 (Unaudited)
20
 
$
210,157

 
$
127,304

 
$
22,284

 
$
(1,430
)
 
$
148,158

 
3.63
%
 
10.01
%
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 $67.9 million for the CMBS Credit Facilities (refer to Note 7). The remainder is unleveraged.
(2)
All CMBS are fixed rate.
The Company recorded unrealized loss in OCI for the three months ended September 30, 2017 of $0.5 million and unrealized gain for the nine months ended September 30, 2017 of $0.7 million. The Company recorded unrealized loss in OCI for the three months ended September 30, 2016 of $0.9 million and unrealized gain in OCI for the nine months ended September 30, 2016 of $1.3 million. As of September 30, 2017, the Company held eight securities with an aggregate carrying value of $56.1 million with an unrealized loss of $1.4 million, none of which were in an unrealized loss position for a period of greater than 12 months. Based on management’s quarterly evaluation, no OTTI was identified related to these securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of its amortized cost basis, which may be at maturity.
As of September 30, 2017, the weighted average contractual maturity of CRE securities was 31.5 years with an expected maturity of 6.9 years.

26

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

Investments in Investing VIEs
In June 2017, the Company purchased the subordinate tranches of the $959.0 million securitization trust (UBS 2017-C1), which is secured by a pool of 67 mortgage loans. The securitization trust issued $846.3 million of permanent, non-recourse, investment grade securitization bonds, or offered certificates, which were purchased by unrelated third parties, and $112.7 million of subordinate non-offered certificates. The Company purchased $102.6 million of the non-offered certificates at a discount to par of $51.4 million, or 50.1%. The non-offered certificates have a fixed coupon of 4.84% and produce a bond equivalent yield of 10.35%.
The Company is the securitization trust’s directing certificate holder and has the ability to appoint and replace the special servicer on all mortgage loans. As such, U.S. GAAP requires the Company to consolidate the assets, liabilities, income and expenses of the securitization trust as an Investing VIE. Refer to Note 2, “Summary of Significant Accounting Policies” for further discussion on Investing VIEs.
Other than the securities represented by the Company’s subordinate tranches of the securitization trust, the Company does not have any claim to the assets or exposure to the liabilities of the securitization trust. The original issuer, an unrelated third party, guarantees the interest and principal payments related to the investment grade securitization bonds in the securitization trust, therefore these obligations do not have any recourse to the general credit of the Company as the consolidator of the securitization trust. The Company’s maximum exposure to loss would not exceed the carrying value of its retained investment in the securitization trust, or the subordinate tranches of the securitization trust.
The following table presents the assets and liabilities recorded on the consolidated balance sheets attributable to the securitization trust as of September 30, 2017 (dollars in thousands):
 
 
September 30, 2017 (Unaudited)
Assets
 
 
Mortgage loans held in a securitization trust, at fair value
 
$
922,034

Receivables, net
 
3,876

Total assets
 
$
925,910

Liabilities
 
 
Mortgage obligations issued by a securitization trust, at fair value
 
$
870,075

Accounts payable and accrued expenses
 
3,876

Total liabilities
 
$
873,951

As of September 30, 2017, the mortgage loans and the related mortgage obligations held in the securitization trust had an unpaid principal balance of $957.5 million and $854.9 million, respectively.
The Company elected the fair value option to measure the assets and liabilities of the securitization trust, which requires that changes in valuations of the securitization trust be reflected in the Company’s consolidated statements of operations.
The difference between the carrying values of the mortgage loans held in a securitization trust and the carrying value of the mortgage obligations issued by a securitization trust was $52.0 million as of September 30, 2017 and approximates the fair value of the Company’s underlying investment in the subordinate tranches of the securitization trust. Refer to Note 12, “Fair Value” for a description of the valuation techniques used to measure fair value of assets and liabilities of the Investing VIE.
The following table presents the activity recorded for the three and nine months ended September 30, 2017 related to the consolidated securitization trust on the consolidated statement of operations. Approximately, $2.0 million and $2.2 million for the three and nine months ended September 30, 2017, respectively, relates to net income attributable to the Company’s common stockholders generated from the Company’s investment in the subordinate tranches of the securitization trust (dollars in thousands):

27

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

 
 
Three Months Ended September 30, 2017 (Unaudited)
 
Nine Months Ended September 30, 2017 (Unaudited)
Statement of Operations
 
 
 
 
Interest income on mortgage loans held in a securitization trust
 
$
11,892

 
$
15,774

Interest expense on mortgage obligations issued by a securitization trust
 
(10,582
)
 
(14,202
)
Net interest income
 
1,310

 
1,572

Other expenses related to securitization trust
 
42

 
55

Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net
 
725

 
725

Net income attributable to NorthStar Real Estate Income Trust, Inc. common stockholders
 
$
1,993

 
$
2,242


28

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

7.
Borrowings
The following table presents borrowings as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
 
 
 
 
 
 
September 30, 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

 
43,019

 
43,500

 
42,967

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

 
42,493

 
43,000

 
42,440

Office 1
 
 
Non-recourse(2)
 
Oct-24
 
4.47%
 
108,850

 
108,617

 
108,850

 
108,595

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

 
77,548

 
77,700

 
77,535

Student housing 1
 
 
Non-recourse(2)
 
Jan-24
 
5.15%
 
16,000

 
15,794

 
16,000

 
15,774

Student housing 2(3)
 
 
Non-recourse(2)
 
Dec-20
 
5.27%
 
12,249

 
12,438

 
12,411

 
12,644

Student housing 3
 
 
Non-recourse(2)
 
Nov-26
 
3.98%
 
24,750

 
24,506

 
24,750

 
24,485

Industrial 1
 
 
Non-recourse(2)
 
Apr-21
 
LIBOR + 2.50%
 
71,062

 
70,488

 
70,402

 
68,970

Subtotal mortgage notes payable, net
 
 
 
 
 
 
 
 
397,111

 
394,903

 
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 + 2.38%
(8)
101,731

 
101,731

 
112,919

 
112,919

Morgan Stanley facility
200,000

 
Limited Recourse(9)
 
Oct-18(10)
 
LIBOR + 2.50%
(11)
10,850

 
10,850

 
92,700

 
92,700

Subtotal term loan facilities
$
550,000

 
 
 
 
 
 
 
136,731

 
136,731

 
226,969

 
226,969

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS credit facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UBS facility


 
Recourse
 
(12)
 

 
—

 
—

 
—

 
—

Morgan Stanley facility
 
 
Recourse
 
(12)
 

 
—

 
—

 
—

 
—

Citibank facility
 
 
Recourse
 
(12)
 
LIBOR + 1.46%
 
29,143

 
29,143

 
11,034

 
11,034

Merrill Lynch facility
 
 
Recourse
 
(12)
 
LIBOR + 1.50%
 
—

 
—

 
2,989

 
2,989

JP Morgan facility
 
 
Recourse
 
(12)
 
LIBOR + 1.50%
 
19,854

 
19,854

 
8,164

 
8,164

Subtotal CMBS credit facilities
 
 
 
 
 
 
 
 
48,997

 
48,997

 
22,187

 
22,187

Subtotal credit facilities
 
 
 
 
 
 
 
 
185,728

 
185,728

 
249,156

 
249,156

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan collateral payable, net, related party
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured borrowing(13)
 
 
Non-recourse
 
May-19
 
LIBOR + 3.08%
 
23,729

 
23,408

 
23,729

 
23,261

Total


 
 
 
 
 
 
 
$
606,568

 
$
604,039

 
$
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 September 30, 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 September 30, 2017. The contractual interest rate depends upon asset type and characteristics and ranges from one-month LIBOR plus 2.25% 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.

29

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

(11)
The contractual interest rate depends upon asset type and characteristics. As of September 30, 2017 the rate was one-month LIBOR plus 2.50%.
(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 September 30, 2017 (dollars in thousands):
 
Total
 
Mortgage Notes Payable, Net
 
Credit
Facilities
 
Loan collateral payable, net, related party
October 1 to December 31, 2017
$
48,997

 
$
—

 
$
48,997

 
$
—

Years Ending December 31:
 
 
 
 
 
 
 
2018
112,581

 
—

 
112,581

 
—

2019
23,729

 
—

 
—

 
23,729

2020
12,249

 
12,249

 
—

 
—

2021
337,950

 
313,800

 
24,150

 
—

Thereafter
71,062

 
71,062

 
—

 
—

Total
$
606,568

 
$
397,111

 
$
185,728

 
$
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 September 30, 2017, the Company was in compliance with all of its financial covenants under the Term Loan Facilities.
As of September 30, 2017, the Company had $314.6 million carrying value of CRE debt investments, including loan collateral receivable, related party, financed with $136.7 million under the Term Loan Facilities.
CMBS Credit Facilities
As of September 30, 2017, the Company has 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 September 30, 2017, the Company had $67.9 million carrying value of CRE securities, financed with $49.0 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 Income II. 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 September 30,

30

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

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 $23.4 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. Pursuant to the advisory agreement, the Advisor may defer or waive fees in its discretion.  Below is a description and table of the fees and reimbursements incurred to the Advisor.
In June 2017, the advisory agreement was renewed for an additional one-year term commencing on June 30, 2017 upon terms identical to those in effect through June 30, 2017.
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.

31

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

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 table presents the fees and reimbursements incurred to the Advisor for the nine months ended September 30, 2017 and the amount due to related party as of September 30, 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
 
Nine Months Ended 
 September 30, 2017
 
Due to Related Party as of
September 30, 2017 (Unaudited)
 
Incurred
 
Paid
 
Fees to Advisor Entities
 
 
 
 
 
 
 
 
 
 
   Asset management
 
Asset management and other fees, related party
 
$
10

 
$
13,592

 
$
(12,164
)
 
$
1,438

   Acquisition(1)
 
Real estate debt investments, net / Asset management and other fees, related party
 
40

 
120

 
(160
)
 
—

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

 
2,622

 
(2,207
)
 
415

Reimbursements to Advisor Entities
 
 
 
 
 
 
 
 
 
 
   Operating costs(2)
 
General and administrative expenses
 
18

 
7,391

 
(4,958
)
 
2,451

Total
 
 
 
$
68

 
$
23,725

 
$
(19,489
)
 
$
4,304

_______________________________________
(1)
Acquisition/disposition fees incurred to the Advisor related to CRE debt investments are generally offset by origination/exit fees paid to the Company by borrowers if such fees are required from the borrower. Acquisition fees related to equity investments are included in asset management and other fees, related party in the consolidated statements of operations. Acquisition fees related to investments in unconsolidated joint ventures are included in investments in unconsolidated ventures on the consolidated balance sheets. From inception through September 30, 2017, the Advisor waived $1.9 million of acquisition fees and $0.4 million of disposition fees related to CRE securities.
(2)
As of September 30, 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. Pursuant to the Combination Agreement, immediately prior to the closing of the Combination, CLNC will, if necessary, declare a special distribution to an affiliate of the Sponsor in an amount that is intended to true up such affiliate for, among other things, the expected present value of the unreimbursed operating costs incurred by the Advisor on the Company’s behalf.
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

32

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

obligations directly to the PE Investment entities. The Company and NorthStar Realty each agreed to indemnify the other proportionately for any losses that may arise in connection with the funding and other obligations as set forth in the governing documents in the case of a joint default by the Company and NorthStar Realty. The Company and NorthStar Realty further agreed to indemnify each other for all of the losses that may arise as a result of a default that was solely caused by the Company or NorthStar Realty, as the case may be. 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 $72.8 million as of September 30, 2017. In October 2017, PE Investment IIA and PE Investment IIB collectively paid $16.9 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. 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 September 30, 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 $23.4 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 September 30, 2017, the Company’s independent and non-management directors were granted a total of 121,364 shares of restricted common stock for an aggregate $1.2 million, based on the share price on the date of each grant. Unvested shares totaled 21,122 and 20,462 as of September 30, 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 1,878,636 shares remain available for future grants as of September 30, 2017.
The Company recognized equity-based compensation expense of $68,750 and $180,555 for the three and nine months ended September 30, 2017, respectively, and $56,250 and $134,528 for the three and nine months ended September 30, 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.

33

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

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, and until its suspension as described below, the Company continued to offer DRP shares beyond the Total Primary Offering.
Since 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.
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. On August 25, 2017, in connection with the entry into the Combination Agreement, the Company’s board of directors voted to suspend the DRP until further notice. Pursuant to the terms of the DRP, the suspension went into effect prior to the monthly distributions to be paid on or about October 1, 2017 and as a result, all stockholders will receive only cash distributions through the completion of the Combination unless and until the DRP is reinstated.
For the nine months ended September 30, 2017, the Company issued 2.7 million shares totaling $26.8 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 September 30, 2017, the Company issued 21.0 million shares totaling $201.3 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.

34

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

The following table presents distributions declared for the nine months ended September 30, 2017 (dollars in thousands):
 
Distributions(1)(2)
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

April
4,054

 
2,858

 
6,912

May
4,155

 
2,947

 
7,102

June
4,038

 
2,852

 
6,890

July
4,200

 
2,927

 
7,127

August
4,157

 
2,920

 
7,077

September
6,866

 
—

 
6,866

Total
$
39,469

 
$
23,274

 
$
62,743

_______________________________________
(1)
Represents distributions declared for the period, even though such distributions are actually paid to stockholders the month following such period.
(2)
On August 9, 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 December 31, 2017.
Share Repurchase Program
The Company adopted a share repurchase program that may enable stockholders to sell their shares to the Company in limited circumstances (as amended, the “Share Repurchase Program”). The Company may not repurchase shares unless a stockholder has held shares for one year. However, the Company may repurchase shares held for less than one year in connection with a stockholder’s death or qualifying disability. The Company is not obligated to repurchase shares under the Share Repurchase Program. The Company may amend, suspend or terminate the Share Repurchase Program at its discretion at any time, provided that any amendment that adversely affects the rights or obligations of a participant will take effect upon 10 days’ prior written notice (or 10 business days’ prior written notice if related to a change in the number of shares that can be repurchased in a calendar year).
On August 25, 2017, in connection with the entry into the Combination Agreement, the Company’s board of directors voted to suspend the Share Repurchase Program until further notice. The suspension of the Share Repurchase Program was effective as of September 7, 2017 and as a result, no further share repurchases will be processed unless and until the Share Repurchase Program is reinstated.
Prior to the suspension of the Share Repurchase Program’s suspension, for the nine months ended September 30, 2017, the Company repurchased 4.3 million shares of common stock for a total of $40.7 million or a weighted average price of $9.47 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. Prior to the suspension of the Share Repurchase Program, the Company generally funded repurchase requests received during a quarter with proceeds set aside for that purpose, which were not expected to exceed proceeds received from its DRP.
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 and nine months ended September 30, 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 loss attributable to other non-controlling interests for the three months ended September 30, 2017 was $0.2 million and net income attributable to other non-controlling interests for the nine months ended September 30, 2017 was $0.1 million.

35

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

Net loss attributable to other non-controlling interests for the three months ended September 30, 2016 was $0.2 million and net income attributable to other non-controlling interests for the nine months ended September 30, 2016 was $0.1 million.
12.
Fair Value
Fair Value Measurement
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1.
Quoted prices for identical assets or liabilities in an active market.
Level 2.
Financial assets and liabilities whose values are based on the following:
a)
Quoted prices for similar assets or liabilities in active markets.
b)
Quoted prices for identical or similar assets or liabilities in non-active markets.
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
Level 3.
Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
Determination of Fair Value
The following is a description of the valuation techniques used to measure fair value of assets accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.
Investments in Private Equity Funds
The Company accounts for PE Investments at fair value which is determined based on a valuation model using assumptions for the timing and amount of expected future cash flow for income and realization events for the underlying assets in the funds and discount rate. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 of the fair value hierarchy. The Company is not using the NAV (practical expedient) of the underlying funds for purposes of determining fair value.
Real Estate Securities
CRE securities are generally valued using a third-party pricing service or broker quotations. These quotations are not adjusted and are based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy. Certain CRE securities may be valued based on a single broker quote or an internal price which may have less observable pricing, and as such, would be classified as Level 3 of the fair value hierarchy. Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as its knowledge of and experience in the market.
Investing VIEs
As discussed in Note 6, “Real Estate Securities, Available for Sale,” the Company has elected the fair value option for the financial assets and liabilities of the consolidated Investing VIE. The Investing VIE is “static,” that is no reinvestment is permitted and there is very limited active management of the underlying assets. The Company is required to determine whether the fair value of the financial assets or the fair value of the financial liabilities of the Investing VIE is more observable, but in either case, the methodology results in the fair value of the assets of the securitization trust being equal to the fair value of their liabilities. The Company has determined that the fair value of the liabilities of the securitization trust is more observable, since market prices for

36

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

the liabilities are available from a third-party pricing service or are based on quoted prices provided by dealers who make markets in similar financial instruments. The financial assets of the securitization trust are not readily marketable and their fair value measurement requires information that may be limited in availability.
In determining the fair value of the trusts financial liabilities, the dealers will consider contractual cash payments and yields expected by market participants. Dealers also incorporate common market pricing methods, including a spread measurement to the treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security. The Company’s collateralized mortgage obligations are classified as Level 2 of the fair value hierarchy, where a third-party pricing service or broker quotations are available, and as Level 3 of the fair value hierarchy, where internal price is utilized which may have less observable pricing. In accordance with ASC 810, Consolidation, the assets of the securitization trust is an aggregate value derived from the fair value of the trust liabilities, and the Company has determined that the valuation of the trust assets in their entirety including its retained interests from the securitization (eliminated in consolidation in accordance with U.S. GAAP) should be classified as Level 3 of the fair value hierarchy.
Derivative Instruments
Derivative instruments include listed derivatives with quoted prices in active markets for identical financial instruments as of the reporting date. The Company does not adjust the quoted price for these instruments, and as such, classifies derivative instruments as Level 1 of the fair value hierarchy. The derivative assets are recorded within deferred costs and other assets, net on the Company’s consolidated balance sheets. The derivative liabilities are recorded within other liabilities on the Company’s consolidated 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 September 30, 2017 and December 31, 2016 by level within the fair value hierarchy (dollars in thousands):
 
September 30, 2017 (Unaudited)
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in unconsolidated ventures
$
—

 
$
—

 
$
55,401

 
$
55,401

 
$
—

 
$
—

 
$
90,579

 
$
90,579

Real estate securities, available for sale
—

 
148,158

 
—

 
148,158

 
—

 
93,975

 
—

 
93,975

Mortgage loans held in a securitization trust, at fair value
—

 
—

 
922,034

 
922,034

 
—

 
—

 
—

 
—

Derivative assets(1)
477

 
—

 
—

 
477

 
—

 
—

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage obligations issued by a securitization trust,
at fair value
$
—

 
$
870,075

 
$
—

 
$
870,075

 
$
—

 
$
—

 
$
—

 
$
—

Derivative liabilities(2)
—

 
—

 
—

 
—

 
—

 
186

 
—

 
186

_______________________________________
(1)
Presented in deferred costs and other assets, net on the accompanying consolidated balance sheets.
(2)
Presented in other liabilities on the accompanying consolidated balance sheets.

37

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

The following table presents the changes in fair value of financial assets which are measured at fair value on a recurring basis using Level 3 inputs to determine fair value for the nine months ended September 30, 2017 and year ended December 31, 2016 (dollars in thousands):
 
Nine Months Ended
September 30, 2017 (Unaudited)
 
Year Ended December 31, 2016
 
PE Investments
 
CRE Securities(1)
 
PE Investments
Beginning balance
$
90,579

 
$
—

 
$
98,754

Contributions(2)/purchases
13,454

 
926,886

 
59,646

Distributions/paydowns
(53,698
)
 
—

 
(88,525
)
Equity in earnings
6,553

 
—

 
24,136

Unrealized gain (loss)
(1,487
)
 
(4,852
)
 
(3,432
)
Ending balance
$
55,401

 
$
922,034

 
$
90,579

_______________________________________
(1)
For the nine months ended September 30, 2017, unrealized loss of $4.9 million related to mortgage loans held in a securitization trust, at fair value was offset by unrealized gain of $5.6 million related to mortgage obligations issued by a securitization trust, at fair value.
(2)
Includes initial investments, before distribution and contribution closing statement adjustments, and subsequent contributions, including deferred purchase price fundings.
For the nine months ended September 30, 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 nine months ended September 30, 2017 and the year ended December 31, 2016, the key unobservable inputs used in the analysis of PE Investments included discount rates with a weighted average of 9.6% and 14.7%, respectively, and timing and amount of expected future cash flow. For the nine months ended September 30, 2017, the key unobservable inputs used in the analysis of CRE securities included a weighted average yield of 10.3% and a weighted average life of 9.76 years. 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 and nine months ended September 30, 2017, the Company recorded an unrealized gain of $0.7 million. These amounts, when incurred, are recorded as unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net in the consolidated statements of operations.
For the three and nine months ended September 30, 2017, the Company recorded an unrealized loss of $1.5 million, respectively. For the three and nine months ended September 30, 2016, the Company recorded an unrealized loss of less than $0.1 million and $3.4 million, respectively. These amounts, when incurred, are recorded as unrealized gain (loss) on investments in the consolidated statements of operations.
Fair Value Option
The Company may elect to apply the fair value option of accounting for certain of its financial assets or liabilities due to the nature of the instrument at the time of the initial recognition of the investment. The Company elected the fair value option for PE Investments and eligible financial assets and liabilities of its consolidated Investing VIEs 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 September 30, 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.

38

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

The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
September 30, 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
$
366,832

(2) 
$
367,262

 
$
366,832

 
$
744,297

(2) 
$
745,323

 
$
755,317

Real estate debt investments, held for sale
150,150

 
150,150

 
150,150

 
—

 
—

 
—

Real estate securities, available for sale(3)
210,157

 
148,158

 
148,158

 
138,438

 
93,975

 
93,975

Loan collateral receivable, related party(4)
50,791

 
50,791

 
50,791

 
52,204

 
52,204

 
50,941

Financial liabilities:(1)


 
 
 
 
 
 
 
 
 
 
Securitization bonds payable, net
$
—

 
$
—

 
$
—

 
$
39,762

 
$
39,762

 
$
39,961

Mortgage notes payable, net
397,111

 
394,903

 
397,111

 
396,613

 
393,410

 
356,031

Credit facilities
185,728

 
185,728

 
185,728

 
249,156

 
249,156

 
249,156

Loan collateral payable, net, related party(5)
23,729

 
23,408

 
23,729

 
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)
There were no future funding commitments as of September 30, 2017. Excludes future funding commitments of $23.2 million as of December 31, 2016.
(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.
(5)
Represents three senior loan participation interests in first mortgage loans (Refer to Note 7).
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 values were determined: (i) 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; or (ii) based on discounted cash flow projections of principal and interest expected to be collected, which includes consideration of the financial standing of the borrower or sponsor as well as operating results of the underlying collateral. As of the reporting date, the Company believes the principal amount approximates fair value. The fair value of CRE debt investments held for sale is determined based on the expected sales price. These fair value measurements of CRE debt, including loan collateral receivable, 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. As of the reporting date, the Company believes the principal amount 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.
Credit Facilities
The Company has amounts outstanding under five 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.

39

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

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. CRE securities include the Company’s investment in the subordinate tranches of the securitization trust which are eliminated in consolidation. The Company’s income is primarily derived through the difference between revenue and the cost at which the Company is able to finance its investments. The Company may also acquire investments which generate attractive returns without any leverage.
The following tables present segment reporting for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):
Three Months Ended September 30, 2017
 
Real Estate
Debt
 
Real Estate
Equity
 
Real Estate
Securities
 
Corporate
 
Subtotal
 
Investing VIE(1)
 
Total
Net interest income
 
$
8,814

 
$
—

 
$
4,138

(2) 
$
247

 
$
13,199

 
$
42

(2) 
$
13,241

Rental and other income
 
—

 
22,889

 
—

 
—

 
22,889

 
—

 
22,889

Asset management and other fees, related party
 
—

 
—

 
—

 
(4,355
)
 
(4,355
)
 
—

 
(4,355
)
Mortgage notes interest expense
 
—

 
(4,805
)
 
—

 
—

 
(4,805
)
 
—

 
(4,805
)
Other expenses related to securitization trust
 
—

 
—

 
—

 
—

 
—

 
(42
)
 
(42
)
Transaction costs
 
—

 
—

 
—

 
(3,988
)
 
(3,988
)
 
—

 
(3,988
)
Property operating expenses
 
—

 
(10,836
)
 
—

 
—

 
(10,836
)
 
—

 
(10,836
)
General and administrative expenses
 
(78
)
 
—

 
—

 
(2,522
)
 
(2,600
)
 
—

 
(2,600
)
Depreciation and amortization
 
—

 
(12,318
)
 
—

 
—

 
(12,318
)
 
—

 
(12,318
)
Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net

 
—

 
—

 
635

 
90

 
725

 
—

 
725

Unrealized gain (loss) on investments
 
—

 
(1,487
)
 
—

 
—

 
(1,487
)
 
—

 
(1,487
)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
8,736

 
(6,557
)
 
4,773

 
(10,528
)
 
(3,576
)
 
—

 
(3,576
)
Equity in earnings (losses) of unconsolidated ventures
 
—

 
1,040

 
—

 
—

 
1,040

 
—

 
1,040

Income tax benefit (expense)
 
—

 
9

 
—

 
—

 
9

 
—

 
9

Net income (loss)
 
$
8,736

 
$
(5,508
)
 
$
4,773

 
$
(10,528
)
 
$
(2,527
)
 
$
—

 
$
(2,527
)
_________________________________________________
(1)
Investing VIEs are not considered to be a segment through which the Company conducts its business; however, U.S. GAAP requires the Company, as the primary beneficiary, to present the assets and liabilities of the securitization trust on its consolidated balance sheets and recognize the related interest income and interest expense as net interest income on the consolidated statements of operations. Though U.S. GAAP requires this presentation, the Company views its investment in the securitization trust as a net investment in CRE securities.
(2)
Includes income earned from the CRE securities purchased at a discount, recognized using the effective interest method had the transaction been recorded as an available for sale security, at amortized cost. During the three months ended September 30, 2017, $0.1 million was attributable to discount accretion income and was eliminated in consolidation in the corporate segment. The corresponding interest expense is recorded in net interest income in the Investing VIE column.

40

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

Three Months Ended September 30, 2016
 
Real Estate
Debt
 
Real Estate
Equity
 
Real Estate
Securities
 
Corporate
 
Total
Net interest income
 
$
12,691

 
$
—

 
$
1,955

 
$
—

 
$
14,646

Rental and other income
 
—

 
21,843

 
—

 
—

 
21,843

Asset management and other fees - related party
 
—

 
—

 
—

 
(5,410
)
 
(5,410
)
Mortgage notes interest expense
 
—

 
(4,552
)
 
—

 
—

 
(4,552
)
Transaction costs
 
—

 
(182
)
 
—

 
—

 
(182
)
Property operating expenses
 
—

 
(10,918
)
 
—

 
—

 
(10,918
)
General and administrative expenses
 
(195
)
 
(49
)
 
—

 
(3,137
)
 
(3,381
)
Depreciation and amortization
 
—

 
(9,481
)
 
—

 
—

 
(9,481
)
Unrealized gain (loss) on investments
 
—

 
(33
)
 
—

 
—

 
(33
)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
12,496

 
(3,372
)
 
1,955

 
(8,547
)
 
2,532

Equity in earnings (losses) of unconsolidated ventures
 
—

 
5,575

 
—

 
—

 
5,575

Income tax benefit (expense)
 
—

 
(810
)
 
—

 
—

 
(810
)
Net income (loss)
 
$
12,496

 
$
1,393

 
$
1,955

 
$
(8,547
)
 
$
7,297

Nine Months Ended September 30, 2017
 
Real Estate
Debt
 
Real Estate
Equity
 
Real Estate
Securities
 
Corporate
 
Subtotal
 
Investing VIE(1)
 
Total
Net interest income
 
$
30,492

 
$
—

 
$
8,847

(2) 
$
663

 
$
40,002

 
$
55

(2) 
$
40,057

Rental and other income
 
—

 
66,827

 
—

 
—

 
66,827

 
—

 
66,827

Asset management and other fees, related party
 
—

 
—

 
—

 
(13,592
)
 
(13,592
)
 
—

 
(13,592
)
Mortgage notes interest expense
 
—

 
(14,160
)
 
—

 
—

 
(14,160
)
 
—

 
(14,160
)
Other expenses related to securitization trust
 
—

 
—

 
—

 
—

 
—

 
(55
)
 
(55
)
Transaction costs
 
(115
)
 
—

 
(216
)
 
(5,213
)
 
(5,544
)
 
—

 
(5,544
)
Property operating expenses
 
—

 
(30,294
)
 
—

 
—

 
(30,294
)
 
—

 
(30,294
)
General and administrative expenses
 
(333
)
 
(38
)
 
(3
)
 
(7,488
)
 
(7,862
)
 
—

 
(7,862
)
Depreciation and amortization
 
—

 
(29,770
)
 
—

 
—

 
(29,770
)
 
—

 
(29,770
)
Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net

 
—

 
—

 
618

 
107

 
725

 
—

 
725

Unrealized gain (loss) on investments
 
—

 
(1,487
)
 
—

 
—

 
(1,487
)
 
—

 
(1,487
)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
30,044

 
(8,922
)
 
9,246

 
(25,523
)
 
4,845

 
—

 
4,845

Equity in earnings (losses) of unconsolidated ventures
 
—

 
6,553

 
—

 
—

 
6,553

 
—

 
6,553

Income tax benefit (expense)
 
—

 
(579
)
 
—

 
—

 
(579
)
 
—

 
(579
)
Net income (loss)
 
$
30,044

 
$
(2,948
)
 
$
9,246

 
$
(25,523
)
 
$
10,819

 
$
—

 
$
10,819

_________________________________________________
(1)
Investing VIEs are not considered to be a segment through which the Company conducts its business; however, U.S. GAAP requires the Company, as the primary beneficiary, to present the assets and liabilities of the securitization trust on its consolidated balance sheets and recognize the related interest income and interest expense as net interest income on the consolidated statements of operations. Though U.S. GAAP requires this presentation, the Company views its investment in the securitization trust as a net investment in CRE securities.
(2)
Includes income earned from the CRE securities purchased at a discount, recognized using the effective interest method had the transaction been recorded as an available for sale security, at amortized cost. During the nine months ended September 30, 2017, $0.1 million was attributable to discount accretion income and was eliminated in consolidation in the corporate segment. The corresponding interest expense is recorded in net interest income in the Investing VIE column.

41

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

Nine Months Ended September 30, 2016
 
Real Estate
Debt
 
Real Estate
Equity
 
Real Estate
Securities
 
Corporate
 
Total
Net interest income
 
$
40,454

 
$
—

 
$
5,402

 
$
—

 
$
45,856

Rental and other income
 
—

 
58,330

 
—

 
—

 
58,330

Asset management and other fees, related party
 
—

 
—

 
—

 
(18,747
)
 
(18,747
)
Mortgage notes interest expense
 
—

 
(12,895
)
 
—

 
—

 
(12,895
)
Transaction costs
 
—

 
(1,698
)
 
—

 
(211
)
 
(1,909
)
Property operating expenses
 
—

 
(27,478
)
 
—

 
—

 
(27,478
)
General and administrative expenses
 
(576
)
 
(114
)
 
—

 
(10,863
)
 
(11,553
)
Depreciation and amortization
 
—

 
(21,386
)
 
—

 
—

 
(21,386
)
Unrealized gain (loss) on investments
 
—

 
(3,432
)
 
—

 
—

 
(3,432
)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
39,878

 
(8,673
)
 
5,402

 
(29,821
)
 
6,786

Equity in earnings (losses) of unconsolidated ventures
 
672

 
18,975

 
—

 
—

 
19,647

Income tax benefit (expense)
 
—

 
(2,265
)
 
—

 
—

 
(2,265
)
Net income (loss)
 
$
40,550

 
$
8,037

 
$
5,402

 
$
(29,821
)
 
$
24,168

The following table presents total assets by segment as of September 30, 2017 and December 31, 2016 (dollars in thousands):
Total Assets
 
Real Estate
Debt
 
Real Estate
Equity(1)
 
Real Estate
Securities
 
Corporate(2)
 
Subtotal
 
Investing VIE(3)
 
Total
September 30, 2017 (unaudited)
 
$
601,758

 
$
616,360

 
$
206,579

 
$
94,053

 
$
1,518,750

 
$
925,910

 
$
2,444,660

December 31, 2016
 
871,600

 
665,643

 
105,830

 
125,407

 
1,768,480

 
—

 
1,768,480

_______________________________________
(1)
Includes investments in PE Investments totaling $55.4 million and $90.6 million as of September 30, 2017 and December 31, 2016, respectively.
(2)
Includes cash, unallocated receivables, deferred costs and other assets, net and the elimination of the subordinate tranches of the securitization trust in consolidation.
(3)
Investing VIEs are not considered to be a segment through which the Company conducts its business; however, U.S. GAAP requires the Company, as the primary beneficiary, to present the assets and liabilities of the securitization trust on its consolidated balance sheets and recognize the related interest income and interest expense as net interest income on the consolidated statements of operations. Though U.S. GAAP requires this presentation, the Company views its investment in the securitization trust as a net investment in CRE securities. As such, the Company has presented the statements of operations and balance sheets within this note in a manner consistent with the views of the Company’s management and chief decision makers.
14.
Subsequent Events
Distributions
On November 8, 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 March 31, 2018. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution was accrued.
New Investments
Real Estate Securities Investments
In October 2017, the Company purchased one CMBS investment with a face value of $6.5 million at a discount to par of $1.8 million, or 27.2%.



42


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 September 30, 2017, our Sponsor had $57.1 billion of assets under management, including Colony NorthStar’s balance sheet investments and third-party managed investments.
Combination Agreement

On August 25, 2017, we entered into a master combination agreement, or the Combination Agreement, with, among others, Colony Capital Operating Company, LLC, or CLNS OP, the operating company of our Sponsor, and NorthStar Real Estate Income II, Inc., or NorthStar Income II, a company managed by an affiliate of our Sponsor, pursuant to which a select portfolio of our Sponsor’s assets and liabilities will be combined with substantially all of our assets and liabilities and all of the assets and liabilities of NorthStar Income II in an all-stock combination transaction to create an externally managed commercial real estate credit REIT (the transactions associated with the Combination Agreement, collectively, the “Combination”). The Combination has been unanimously approved by our special committee and our board of directors as well as the special committee and the board of directors of NorthStar Income II and approved by the board of directors of our Sponsor. The combined company will be named “Colony NorthStar Credit Real Estate, Inc.,” or CLNC, and its Class A common stock is expected to be listed on a national securities exchange.

Upon completion of the Combination, our stockholders, our Sponsor, and the stockholders of NorthStar Income II will own approximately 32%, 37% and 31%, respectively, of CLNC on a fully diluted basis, subject to certain adjustments as set forth in the Combination Agreement.

The Combination is expected to close in the first quarter of 2018, subject to customary closing conditions, including approval by our stockholders as well as stockholders of NorthStar Income II, and the listing of CLNC’s Class A common stock on a national securities exchange. There can be no assurance that the closing conditions will be satisfied, that the Combination will be consummated, or the timing thereof.


43


Our Business
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.
Our Offering
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 continued to offer DRP shares beyond our Total Primary Offering. On August 25, 2017, in connection with the entry into the Combination Agreement, our board of directors voted to suspend the DRP until further notice. Pursuant to the terms of the DRP, the suspension went into effect prior to the monthly distributions to be paid on or about October 1, 2017 and as a result, our stockholders will receive only cash distributions through the completion of the Combination unless and until the DRP is reinstated.
We have raised total gross proceeds of $1.1 billion in the Offering. In addition, from the close of the Primary Offering through November 8, 2017, we have raised an additional $0.2 billion in gross proceeds pursuant to our DRP.

44


Our Investments
The following table presents our investments as of September 30, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 8, 2017 (refer to the below and “Recent Developments”) (dollars in thousands):
Investment Type:
 
Count
 
Principal
Amount/Cost(1)
 
% of Total
CRE Debt(2)
 
Loans
 
 
 
 
First mortgage loans(3)
 
8
 
$
172,346

 
11.2
%
Mezzanine loans
 
5
 
79,340

 
5.1
%
Preferred equity interests
 
1
 
82,275

 
5.3
%
Subtotal
 
14
 
333,961

 
21.6
%
CRE debt, held for sale(4)
 
1
 
150,150

 
9.7
%
Total CRE Debt
 
15
 
484,111

 
31.3
%
Operating Real Estate
 
Properties
 
 
 
 
Multi-tenant office
 
14
 
319,414

 
20.6
%
Multifamily
 
2
 
120,796

 
7.8
%
Industrial
 
23
 
107,707

 
7.0
%
Student housing
 
3
 
68,436

 
4.4
%
Total Operating Real Estate
 
42
 
616,353

 
39.8
%
PE Investments(5)
 
 
 
 
 
 
PE Investment I
 
1
 
19,494

 
1.3
%
PE Investment IIA
 
1
 
50,305

 
3.3
%
PE Investment IIB
 
1
 
43,952

 
2.8
%
PE Investment III
 
1
 
14,482

 
0.9
%
Total PE Investments
 
4
 
128,233

 
8.3
%
CRE Securities
 
 
 
 
 
 
CMBS
 
25
 
319,269

 
20.6
%
Total CRE Securities
 
25
 
319,269

 
20.6
%
Total
 
86
 
$
1,547,966

 
100.0
%
_______________________________________
(1)
Based on principal amount for real estate debt and securities investments, fair value for our PE Investments and cost for real estate equity, which includes purchase price allocations related to net intangibles, deferred costs and other assets.
(2)
As of November 8, 2017, we had no future funding commitments.
(3)
Excludes three senior participations in mortgage loans sold into a securitization financing transaction.
(4)
In August 2017, pursuant to the Combination Agreement, we committed to sell to our Sponsor a $65 million senior interest in one $150.2 million first mortgage loan at par to the extent that we do not otherwise sell such loan to a third party. The junior interest of such loan (or, in the case of a sale to a third party, any unsold portion) will be transferred to a liquidating trust for the benefit of our stockholders.
(5)
Includes the deferred purchase price for PE Investment IIA, PE Investment IIB and PE Investment III (as defined below).
For financial information regarding our reportable segments, refer to Note 13, “Segment Reporting” in our accompanying consolidated financial statements included in Part I, Item 1. “Financial Statements.”
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

45


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.
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 September 30, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 8, 2017, $334.0 million, or 21.6%, of our assets were invested in CRE debt, consisting of 14 loans with an average investment size of $23.9 million. The weighted average extended maturity of our CRE debt portfolio is 4.7 years.
The following table presents a summary of our CRE debt investments as of September 30, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 8, 2017 (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
Weighted Average
 
Floating Rate
as % of
Principal
Amount
Investment Type:
 
Count(1)
 
Principal
Amount(2)
 
Carrying
Value
 
Allocation by
Investment
Type(3)
 
Fixed
Rate
 
Spread
over
LIBOR(4)
 
Total Unleveraged
Current
Yield
 
First mortgage loans(5)
 
8
 
$
172,346

 
$
172,396

 
51.6
%
 
—
%
 
6.03
%
 
7.76
%
 
100.0
%
Mezzanine loans
 
5
 
79,340

 
79,328

 
23.8
%
 
12.23
%
 
11.00
%
 
12.33
%
 
35.9
%
Preferred equity interests(6)
 
1
 
82,275

 
82,628

 
24.6
%
 
10.00
%
 
—
%
 
10.00
%
 
—
%
Total/Weighted average
 
14
 
$
333,961

 
$
334,352

 
100.0
%
 
10.85
%
 
6.73
%
 
9.31
%
 
60.1
%
_______________________________________
(1)
Excludes CRE debt, held for sale.
(2)
As of November 8, 2017, we had no future funding commitments.
(3)
Based on principal amount.
(4)
As of November 8, 2017, we had $168.7 million principal amount of floating-rate loans subject to a weighted average fixed minimum LIBOR rate of 1.05%.
(5)
Excludes three senior participations in mortgage loans sold into a securitization financing transaction.
(6)
Excludes a $9.1 million proportionate interest in a preferred equity investment owned by a joint venture partner.

46


The following presents our CRE debt portfolio’s diversity across investment type, property type and geographic location based on principal amount as of September 30, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 8, 2017:
Debt Investments by Investments Type
ns1redebtinvest093017.jpg
Debt Investments by Property Type
 
Debt Investments by Geographic Location
ns1redebtprop093017.jpg
 
ns1redebtgeoloc093017.jpg
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.
As of September 30, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 8, 2017, $616.4 million, or 39.8%, 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 September 30, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 8, 2017 (dollars in thousands):
Property Type
 
Number of Portfolios
 
Number of Properties
 
Capacity
 
Amount(1)
Multi-tenant office
 
3
 
14
 
1,878,968
square feet
 
$
319,414

Multifamily
 
2
 
2
 
1,422
units
 
120,796

Industrial
 
1
 
23
 
2,077,743
square feet
 
107,707

Student housing
 
1
 
3
 
2,166
beds
 
68,436

Total
 
7
 
42
 
 
 
 
$
616,353

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

47


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 September 30, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 8, 2017, $128.2 million, or 8.3%, 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
 
$
19,494

 
$
11,462,000

 
43.9
%
 
$
60

PE Investment IIA(4)
 
24
 
15
 
50,305

 
10,627,000

 
36.3
%
 
—

PE Investment IIB(4)
 
—
 
—
 
43,952

 
—

 
—
%
 
—

PE Investment III(5)
 
2
 
1
 
14,482

 
842,000

 
—
%
 
—

Total
 
75
 
42
 
$
128,233

 
$
22,931,000

 
 
 
$
60

_______________________________________
(1)
Based on financial data reported by the underlying funds as of June 30, 2017, 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 September 30, 2017, our share of the combined deferred amount for PE Investment IIA and PE Investment IIB was $72.8 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 October 2017, PE Investment IIA and PE Investment IIB collectively paid $16.9 million of the deferred amount.
(5)
As of September 30, 2017, the deferred purchase price for PE Investment III recorded in other liabilities was $3.4 million. The remaining portion of the purchase price will be paid on December 31, 2017.
 
 
Our Proportionate Share of PE Investments
 
 
Income
 
Return of Capital
 
Distributions
 
Contributions(1)
 
Net
PE Investment I
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
$
420

 
$
5,690

 
$
6,110

 
$
312

 
$
5,798

February 15, 2013 to September 30, 2017(2)
 
76,627

 
110,453

 
187,080

 
129,451

 
57,629

 
 
 
 
 
 
 
 
 
 
 
PE Investment IIA
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
$
128

 
$
(128
)
 
$
—

 
$
—

 
$
—

July 3, 2013 to September 30, 2017(2)
 
35,775

 
90,910

 
126,685

 
105,434

 
21,251

 
 
 
 
 
 
 
 
 
 
 
PE Investment IIB
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
$
264

 
$
(264
)
 
$
—

 
$
—

 
$
—

February 9, 2016 to September 30, 2017(2)
 
9,393

 
31,212

 
40,605

 
40,003

 
602

 
 
 
 
 
 
 
 
 
 
 
PE Investment III
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
$
228

 
$
1,618

 
$
1,846

 
$
69

 
$
1,777

March 30, 2016 to September 30, 2017(2)
 
2,326

 
2,314

 
4,640

 
16,797

 
(12,157
)
_______________________________________
(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 September 30, 2017.

48


The following presents the underlying fund interests in our PE Investments by investment type and geographic location based on net asset value, or NAV, as of June 30, 2017 (the most recently available information):
PE Investments by Underlying Investment Type(1)
 
PE Investments by Underlying Geographic Location(1)
ns1repeinvestype093017a.jpg
 
ns1repeinvestgeo093017a.jpg
_________________________________
(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 September 30, 2017, adjusted for acquisitions, dispositions, and commitments to purchase and sell through November 8, 2017, $319.3 million, or 20.6%, of our assets were invested in CRE securities and consisted of 25 CMBS investments purchased at an aggregate $145.6 million, or 45.6%, discount to par and our average investment size was $12.8 million. As of November 8, 2017, the weighted average expected maturity of our CMBS was 7.9 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.
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 lowered to 4.2% as of September and third quarter GDP growth of 3.0%, overall macroeconomic conditions remain strong. The Federal Reserve’s June 2017 decision to raise the federal funds rate for the fourth 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. Market participants expect another rate increase in December, and while some believe that higher interest rates may potentially reduce investor demand in the broader commercial real estate market, significant increases across long-term rates have yet to materialize and we expect real estate prices and returns to remain attractive while inflation is targeted to remain at 2.0% in the near term.

49


With major stock indexes at all-time highs and corporate earnings generally exceeding estimates, investor sentiment across both U.S. and European capital markets reflects increased confidence in the global economy. Following a year of political uncertainty given the unexpected results of the Brexit referendum and the U.S. presidential election, strong corporate earnings have overshadowed these political headwinds, providing fundamental support for record stock valuations in the U.S. and Europe. Despite the initial volatility following both outcomes, since the U.S. election the S&P 500 has increased nearly 20% and the Dow Jones Industrial Average has surpassed 23,000, for the first time and is up more than 5,000 points. 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 U.S. corporate and personal tax reform, infrastructure spending, healthcare reform and new trade policies, may also have a considerable impact on the trajectory of the U.S. and global economies over the next few years.
CRE fundamentals remain relatively healthy across U.S. property types. Given certain dynamics in the current market including (i) the continuing strength of the economy; (ii) a historically low interest rate environment; (iii) low relative 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, strong transaction volume or a combination of both. Although CRE transaction volume has slowed slightly during 2017, property valuations remain at all-time highs across property sectors. Extreme weather events and natural disasters have had a devastating effect on real estate in impacted markets, both commercial and residential, in 2017. Hurricanes Harvey, Irma, Jose, and Maria have preliminary total cost estimates of up to $200 billion. More recently, wildfires in northern California have left significant damage to hotels, retirement communities and trailer parks. Projected costs and the impact on loans secured by properties in these regions and other regions subject to natural disasters remain uncertain. In addition, approximately $400 billion of ten-year debt originated during 2007 is set to mature during the course of 2017, and these maturities may contribute to periodic volatility in the commercial real estate market. Despite the highest quarterly issuance in three years during the third quarter 2017, overall CMBS issuance remains below pre-crisis levels due in part to uncertainty around the Dodd-Frank risk retention rules and capital requirements for banks. Given these trends, traditional capital sources may lack sufficient lending capacity to absorb the high refinancing demand, which may provide attractive lending opportunities for new market participants such as alternative investment platforms, REITs and insurance companies. Overall, economic and industry trends should support robust CRE investment activity, providing attractive investment opportunities for CRE capital providers with strong balance sheets and high underwriting standards.
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 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.

50


The following table presents our investment activity for the nine months ended September 30, 2017 and from inception through September 30, 2017, adjusted for our acquisitions and commitments through November 8, 2017 (dollars in thousands):
 
 
Nine Months Ended
 
From Inception Through
 
 
September 30, 2017
 
November 8, 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
 
616,353

PE Investments(2)
 
—
 
—

 
4
 
353,684

CRE securities
 
14
 
179,025

 
30
 
368,700

Total
 
15
 
$
191,025

 
128
 
$
3,284,042

_______________________________________
(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 43%.
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 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.
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. 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 September 30, 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 $23.4 million.
As of September 30, 2017, we had $136.7 million outstanding under our Term Loan Facilities and $49.0 million outstanding under our CMBS Credit Facilities. As of November 8, 2017, we had $413.3 million of available borrowing under our Term Loan Facilities.
Refer to “Liquidity and Capital Resources” for further disclosure regarding our financing transactions.

51


Portfolio Management
Our Advisor and its affiliates maintain a comprehensive portfolio management process that generally includes day-to-day oversight by the portfolio management and servicing team, regular management meetings and an exhaustive quarterly credit review process. These processes are designed to enable management to evaluate and proactively identify asset-specific credit issues and trends on a portfolio-wide basis. Nevertheless, we cannot be certain that our Advisor’s review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from investments that are not identified during these credit reviews. The portfolio management team, under the direction of our Advisor’s investment committee, uses many methods to actively manage our asset base to preserve our income and capital. Credit risk management is the ability to manage our assets in a manner that preserves principal/cost and income and minimizes credit losses that could decrease income and portfolio value. For CRE debt and real estate investments, frequent re-underwriting and dialogue with borrowers/tenants/partners and regular inspections of our collateral and owned properties have proven to be an effective process for identifying issues early. During the quarterly credit review, or more frequently as necessary, investments are put on highly-monitored status and identified for possible loan loss reserves/asset impairment, as appropriate, based upon several factors, including missed or late contractual payments, significant declines in collateral performance and other data which may indicate a potential issue in our ability to recover our invested capital from an investment. Our Advisor uses an experienced portfolio management and servicing team that monitors these factors on our behalf.
Our investments are reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our investments may be impaired or that its carrying value may not be recoverable. In conducting these reviews, we consider macroeconomic factors, including real estate sector conditions, together with asset and market specific circumstances among other factors. To the extent an impairment has occurred, the loss will be measured as compared to the carrying amount of the investment. An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due. Additionally, we establish, on a current basis, allowance for future tenant credit losses on unbilled rents receivable based upon an evaluation of the collectability of such amounts.
Each of our debt investments is secured by CRE collateral and requires customized portfolio management and servicing strategies for dealing with potential credit situations. The complexity of each situation depends on many factors, including the number of properties, the type of property, macro and local market conditions impacting supply/demand, cash flow and the financial condition of our collateral and our borrowers’/tenants’ ability to further support the collateral. Further, many of our investments may be considered transitional in nature because the business plan is to re-position, re-develop or otherwise lease-up the property in order to improve the collateral. At the time of origination or acquisition, the underlying property revenues may not be sufficient to support debt service, lease payments or generate positive net operating income. The business plan may necessitate an interest or lease reserve or other reserves, whether through proceeds from our loans, borrowings, offering proceeds or otherwise, to support debt service or lease payments and capital expenditures during the implementation of the business plan. There may also be a requirement for the borrower, tenant, guarantor or us, to refill these reserves should they become deficient during the applicable period for any reason.
As of September 30, 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 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.”

52


Results of Operations
Comparison of the Three Months Ended September 30, 2017 to 2016 (Dollars in Thousands):
 
Three Months Ended September 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
%
Net interest income
 
 
 
 
 
 
 
Interest income
$
14,869

 
$
18,649

 
$
(3,780
)
 
(20.3
)%
Interest expense
(2,938
)
 
(4,003
)
 
(1,065
)
 
26.6
 %
Interest income on mortgage loans held in a securitization trust
11,892

 
—

 
11,892

 
100.0
 %
Interest expense on mortgage obligations issued by a securitization trust
(10,582
)
 
—

 
(10,582
)
 
100.0
 %
Net interest income
13,241

 
14,646

 
(1,405
)
 
(9.6
)%
 
 
 
 
 
 
 
 
Property and other revenues
 
 
 
 
 
 
 
Rental and other income
22,889

 
21,843

 
1,046

 
4.8
 %
Total property and other revenues
22,889

 
21,843

 
1,046

 
4.8
 %
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Asset management and other fees, related party
4,355

 
5,410

 
(1,055
)
 
(19.5
)%
Mortgage notes interest expense
4,805

 
4,552

 
253

 
5.6
 %
Other expenses related to securitization trust
42

 
—

 
42

 
100.0
 %
Transaction costs
3,988

 
182

 
3,806

 
2,091.2
 %
Property operating expenses
10,836

 
10,918

 
(82
)
 
(0.8
)%
General and administrative expenses
2,600

 
3,381

 
(781
)
 
(23.1
)%
Depreciation and amortization
12,318

 
9,481

 
2,837

 
29.9
 %
Total expenses
38,944

 
33,924

 
5,020

 
14.8
 %
 
 
 
 
 
 
 
 
Other income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net
725

 
—

 
725

 
100.0
 %
Unrealized gain (loss) on investments
(1,487
)
 
(33
)
 
(1,454
)
 
4,406.1
 %
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
(3,576
)
 
2,532

 
(6,108
)
 
(241.2
)%
Equity in earnings (losses) of unconsolidated ventures
1,040

 
5,575

 
(4,535
)
 
(81.3
)%
Income tax benefit (expense)
9

 
(810
)
 
819

 
(101.1
)%
Net income (loss)
$
(2,527
)
 
$
7,297

 
$
(9,824
)
 
(134.6
)%

53


Net Interest Income
Net interest income is interest income generated on our interest-earning assets less interest expense on our related interest-bearing liabilities.
The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the three months ended September 30, 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 September 30,
 
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
$
539,212

 
$
11,859

 
8.80
%
 
$
868,327

 
$
16,895

 
7.78
%
CRE securities investments(4)
162,596

 
4,320

 
10.63
%
 
68,911

 
1,754

 
10.18
%
 
$
701,808

 
$
16,179

 
9.22
%
 
$
937,238

 
$
18,649

 
7.96
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Securitization bonds payable, net
$
—

 
$
—

 
—
%
 
$
73,273

 
$
996

 
5.44
%
Credit facilities
192,850

 
2,677

 
5.55
%
 
324,907

 
3,007

 
3.70
%
Loan collateral payable, net, related party
23,383

 
261

 
4.46
%
 
—

 
—

 
—
%
 
$
216,233

 
$
2,938

 
5.43
%
 
$
398,180

 
$
4,003

 
4.02
%
Net interest income
 
 
$
13,241

 
 
 
 
 
$
14,646

 
 
_______________________________________
(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.
(4)
Includes interest income on mortgage loans held in a securitization trust net of interest expense on mortgage obligations issued by a securitization trust.
Interest income decreased by $2.5 million to $16.2 million primarily as a result of a $329.1 million decrease in the average carrying value of our debt investments, offset by a $93.7 million increase in the average carrying value of our CRE securities investments.
Interest expense decreased by $1.1 million to $2.9 million primarily as a result of the repayment of securitization bonds payable and a $132.1 million decrease in the average carrying value of our credit facilities.
Other Revenues
Rental and Other Income
Rental and other income increased by $1.0 million to $22.9 million as a result of improved performance from existing properties.
Expenses
Asset Management and Other Fees, Related Party
Asset management and other fees, related party decreased by $1.1 million to $4.4 million during the three months ended September 30, 2017 primarily as a result of a lower level of invested assets during the three months ended September 30, 2017 as compared to the three months ended September 30, 2016.
Mortgage Notes Interest Expense
Mortgage notes interest expense increased by $0.3 million to $4.8 million primarily as a result of a higher principal amount in connection with the refinancing of one of our mortgage notes in the fourth quarter of 2016.
Transaction Costs
Transaction costs represent costs such as professional fees associated with new investments and transactions. Transaction costs increased by $3.8 million for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 primarily as a result of costs associated with the Combination.

54


Property Operating Expenses
Property operating expenses generally were flat during the three months ended September 30, 2017 compared to the three months ended September 30, 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 $0.8 million to $2.6 million as a result of lower operating expenses reimbursed to our Advisor due to lower average invested assets during the three months ended September 30, 2017 as compared to the three months ended September 30, 2016.
Depreciation and Amortization
Depreciation and amortization expense increased by $2.8 million to $12.3 million primarily as a result of accelerated amortization of lease intangibles driven by tenant move-outs during the three months ended September 30, 2017.
Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net
During the three months ended September 30, 2017, we recorded an unrealized gain on mortgage loans and obligations held in a securitization trust, net of $0.7 million which represents the change in the fair value of the consolidated assets and liabilities of our investment in the subordinate tranches of the securitization trust in June 2017.
Unrealized Gain (Loss) on Investments
During the three months ended September 30, 2017 and 2016, we recorded an unrealized loss of $1.5 million and less than $0.1 million, respectively, related to our PE Investments.
Equity in Earnings (Losses) of Unconsolidated Ventures
Equity in earnings (losses) of unconsolidated ventures decreased by $4.5 million to $1.0 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 September 30, 2017 and 2016, we recorded income tax benefit of less than $0.1 million and income tax expense of $0.8 million, respectively, related to our PE Investments.

55


Comparison of the Nine Months Ended September 30, 2017 to 2016 (Dollars in Thousands):
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
%
Net interest income
 
 
 
 
 
 
 
Interest income
$
47,529

 
$
59,006

 
$
(11,477
)
 
(19.5
)%
Interest expense
(9,044
)
 
(13,150
)
 
(4,106
)
 
31.2
 %
Interest income on mortgage loans held in a securitization trust
15,774

 
—

 
15,774

 
100.0
 %
Interest expense on mortgage obligations issued by a securitization trust
(14,202
)
 
—

 
(14,202
)
 
100.0
 %
Net interest income
40,057

 
45,856

 
(5,799
)
 
(12.6
)%
 
 
 
 
 
 
 
 
Property and other revenues
 
 
 
 
 
 
 
Rental and other income
66,827

 
58,330

 
8,497

 
14.6
 %
Total property and other revenues
66,827

 
58,330

 
8,497

 
14.6
 %
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Asset management and other fees, related party
13,592

 
18,747

 
(5,155
)
 
(27.5
)%
Mortgage notes interest expense
14,160

 
12,895

 
1,265

 
9.8
 %
Other expenses related to securitization trust
55

 
—

 
55

 
100.0
 %
Transaction costs
5,544

 
1,909

 
3,635

 
190.4
 %
Property operating expenses
30,294

 
27,478

 
2,816

 
10.2
 %
General and administrative expenses
7,862

 
11,553

 
(3,691
)
 
(31.9
)%
Depreciation and amortization
29,770

 
21,386

 
8,384

 
39.2
 %
Total expenses
101,277

 
93,968

 
7,309

 
7.8
 %
 
 
 
 
 
 
 
 
Other income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net
725

 
—

 
725

 
100.0
 %
Unrealized gain (loss) on investments
(1,487
)
 
(3,432
)
 
1,945

 
(56.7
)%
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
4,845

 
6,786

 
(1,941
)
 
(28.6
)%
Equity in earnings (losses) of unconsolidated ventures
6,553

 
19,647

 
(13,094
)
 
(66.6
)%
Income tax benefit (expense)
(579
)
 
(2,265
)
 
1,686

 
(74.4
)%
Net income (loss)
$
10,819

 
$
24,168

 
$
(13,349
)
 
(55.2
)%

56


Net Interest Income
Net interest income is interest income generated on our interest-earning assets less interest expense on our related interest-bearing liabilities.
The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the nine months ended September 30, 2017 and 2016. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):
 
Nine Months Ended September 30,
 
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
$
627,774

 
$
40,253

 
8.55
%
 
$
916,549

 
$
53,635

 
7.80
%
CRE securities investments(4)
120,944

 
8,848

 
9.75
%
 
66,341

 
5,371

 
10.79
%
 
$
748,718

 
$
49,101

 
8.74
%
 
$
982,890

 
$
59,006

 
8.00
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Securitization bonds payable, net
$
9,941

 
$
153

 
2.05
%
 
$
122,415

 
$
4,576

 
4.98
%
Credit facilities
219,366

 
8,176

 
4.97
%
 
321,679

 
8,574

 
3.55
%
Loan collateral payable, net, related party
23,334

 
715

 
4.09
%
 
—

 
—

 
—
%
 
$
252,641

 
$
9,044

 
4.77
%
 
$
444,094

 
$
13,150

 
3.95
%
Net interest income
 
 
$
40,057

 
 
 
 
 
$
45,856

 
 
_______________________________________
(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.
(4)
Includes interest income on mortgage loans held in a securitization trust net of interest expense on mortgage obligations issued by a securitization trust.

Interest income decreased by $9.9 million to $49.1 million primarily as a result of a $288.8 million decrease in the average carrying value of our debt investments, offset by a $54.6 million increase in the average carrying value of our CRE securities investments.
Interest expense decreased by $4.1 million to $9.0 million as a result of the repayment of securitization bonds payable and a $102.3 million decrease in the average carrying value of our credit facilities.
Other Revenues
Rental and Other Income
Rental and other income increased by $8.5 million to $66.8 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 $5.2 million to $13.6 million during the nine months ended September 30, 2017 primarily as a result of a lower level of invested assets during the nine months ended September 30, 2017, as well as acquisition and disposition fees incurred during the nine months ended September 30, 2016.
Mortgage Notes Interest Expense
Mortgage notes interest expense increased by $1.3 million to $14.2 million primarily as a result of a mortgage note obtained in connection with the acquisition of an operating real estate portfolio during 2016.
Transaction Costs
Transaction costs represent costs such as professional fees associated with new investments and transactions. Transaction costs increased by $3.6 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 primarily as a result of costs associated with the Combination.

57


Property Operating Expenses
Property operating expenses increased by $2.8 million to $30.3 million primarily as a result of the acquisition of an operating real estate portfolio 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 $3.7 million to $7.9 million as a result of lower operating expenses reimbursed to our Advisor due to lower average invested assets during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.
Depreciation and Amortization
Depreciation and amortization expense increased by $8.4 million to $29.8 million primarily as a result of the acquisition of an operating real estate portfolio during 2016.
Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net
During the nine months ended September 30, 2017, we recorded an unrealized gain on mortgage loans and obligations held in a securitization trust, net of $0.7 million which represents the change in the fair value of the consolidated assets and liabilities of our investment in the subordinate tranches of the securitization trust in June 2017.
Unrealized Gain (Loss) on Investments
During the nine months ended September 30, 2017 and 2016, we recorded an unrealized loss of $1.5 million and $3.4 million, respectively, related to our PE Investments.
Equity in Earnings (Losses) of Unconsolidated Ventures
Equity in earnings (losses) of unconsolidated ventures decreased by $13.1 million to $6.6 million as a result of a decrease in earnings from PE Investments as they continue to mature.
Income Tax Benefit (Expense)
For the nine months ended September 30, 2017 and 2016, we recorded income tax expense of $0.6 million and $2.3 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, and mortgage notes and other term borrowings. As of November 8, 2017, we had current investable cash (excluding property level and liquidity requirements) of $119.5 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 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 September 30, 2017, we were in compliance with all of our financial covenants under our Credit Facilities.

58


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. 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 September 30, 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 $23.4 million.
Offering
We are no longer raising capital from our Primary Offering or our DRP and we have invested substantially all of the net proceeds from our Primary Offering. As such, we do not expect significant new investment activity. However, as investments are repaid or sold, we expect that those proceeds will be reinvested. Our inability to invest these proceeds could reduce our net income and limit our ability to make distributions. Further, we have certain fixed direct and indirect operating expenses, including certain expenses as a publicly-registered REIT. We expect our net income from operations will be sufficient to cover such expenses.
Our charter limits us from incurring borrowings that would exceed 300% of our net assets. We cannot exceed this limit unless any excess in borrowing over such level is approved by our stockholders. An approximation of this leverage calculation is 75.0% of the cost of our investments, excluding indirect leverage held through our unconsolidated venture investments. As of September 30, 2017, our leverage as a percentage of our cost of investments was 43.0%.
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 2017, 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 nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
 
Nine Months Ended September 30,
 
 
Cash flow provided by (used in):
 
2017
 
2016
 
Change
Operating activities
 
$
36,751

 
$
47,328

 
$
(10,577
)
Investing activities
 
156,380

 
56,211

 
100,169

Financing activities
 
(183,083
)
 
(113,611
)
 
(69,472
)
Net change in cash and cash equivalents
 
$
10,048

 
$
(10,072
)
 
$
20,120


59


Comparison of the Nine Months Ended September 30, 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, and general and administrative expenses. Our net cash provided by operating activities decreased by $10.6 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily as a result of lower net interest income from our debt investments and lower equity in earnings from our PE Investments, partially offset by increased income from our operating real estate and lower asset management and general and administrative expenses, period over period.
Investing Activities
Our cash flows from investing activities are generally used to fund debt investment originations and investment acquisitions, net of proceeds received from dispositions or repayments of real estate assets. Our net cash provided by investing activities increased by $100.2 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Cash flows provided by investing activities for the nine months ended September 30, 2017 was primarily a result of CRE debt and real estate securities repayments and distributions from PE Investments, partially offset by the origination of a new CRE debt investment and acquisition of real estate securities. Cash flows provided by investing activities for the nine months ended September 30, 2016 was primarily a result of CRE debt investment repayments, proceeds from the sale of an unconsolidated venture, and distributions from PE Investments, offset by the origination of new CRE debt investments, acquisition of real estate securities and operating real estate.
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 increased by $69.5 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Cash flows used in financing activities for the nine months ended September 30, 2017 was primarily a result of repayment of securitization bonds payable and credit facilities, partially offset by borrowing from credit facilities. Cash flows used in financing activities for the nine months ended September 30, 2016 was primarily a result of the repayment of securitization bonds payable and credit facilities, partially offset by borrowings from mortgage notes and credit facilities.
Off-Balance Sheet Arrangements
As of September 30, 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. Pursuant to the advisory agreement, our Advisor may defer or waive fees in its discretion.  Below is a description and table of the fees and reimbursements incurred to our Advisor.
In June 2017, 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).

60


Incentive Fee
Our Advisor is entitled to receive distributions equal to 15.0% of net cash flows of us, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus an 8.0% cumulative, non-compounded annual pre-tax return on such invested capital.
Acquisition Fee
Our Advisor also receives fees for providing structuring, diligence, underwriting advice and related services in connection with real estate acquisitions equal to 1.0% of the amount funded or allocated by us to originate or acquire investments, including acquisition costs and any financing attributable to such investments (or our proportionate share thereof in the case of an investment made through a joint venture). A fee paid to our Advisor in connection with the origination or acquisition of CRE debt investments is included in CRE debt investments, net on our consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method. 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.

61


Summary of Fees and Reimbursements
The following table presents the fees and reimbursements incurred to our Advisor for the nine months ended September 30, 2017 and the amount due to related party as of September 30, 2017 and December 31, 2016 (dollars in thousands):
Type of Fee or Reimbursement
 
 
 
Due to Related Party as of
December 31, 2016
 
Nine Months Ended 
 September 30, 2017
 
Due to Related Party as of
September 30, 2017
 
Financial Statement Location
 
 
Incurred
 
Paid
 
Fees to Advisor Entities
 
 
 
 
 
 
 
 
 
 
   Asset management
 
Asset management and other fees, related party
 
$
10

 
$
13,592

 
$
(12,164
)
 
$
1,438

   Acquisition(1)
 
Real estate debt investments, net / Asset management and other fees, related party
 
40

 
120

 
(160
)
 
—

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

 
2,622

 
(2,207
)
 
415

Reimbursements to Advisor Entities
 
 
 
 
 
 
 

 
 
   Operating costs(2)
 
General and administrative expenses
 
18

 
7,391

 
(4,958
)
 
2,451

Total
 
 
 
$
68

 
$
23,725

 
$
(19,489
)
 
$
4,304

_______________________________________
(1)
Acquisition/disposition fees incurred to our Advisor related to CRE debt investments are generally offset by origination/exit fees paid to us by borrowers if such fees are required from the borrower. Acquisition fees related to equity investments are included in asset management and other fees, related party in our consolidated statements of operations. Acquisition fees related to investments in unconsolidated joint ventures are included in investments in unconsolidated ventures on our consolidated balance sheets. From inception through September 30, 2017, our Advisor waived $1.9 million of acquisition fees and $0.4 million of disposition fees related to CRE securities.
(2)
As of September 30, 2017, our Advisor has incurred unreimbursed operating costs on our behalf of $9.6 million that remain eligible to allocate to us. Pursuant to the Combination Agreement, immediately prior to the closing of the Combination, CLNC will, if necessary, declare a special distribution to an affiliate of our Sponsor in an amount that is intended to true up such affiliate for, among other things, the expected present value of the unreimbursed operating costs incurred by our Advisor on our behalf.
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 $72.8 million as of September 30, 2017. In October 2017, PE Investment IIA and PE Investment IIB collectively paid $16.9 million of the deferred amount.

62


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. 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 September 30, 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 $23.4 million.
Recent Developments
Distributions
On November 8, 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 March 31, 2018. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution was accrued.
New Investments
Real Estate Securities Investments
In October 2017, we purchased one CMBS investment with a face value of $6.5 million at a discount to par of $1.8 million, or 27.2%.
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

63


distribute to our stockholders. We believe that acquisition fees incurred by us negatively impact our operating performance during the period in which such investments are originated or acquired by reducing cash flow and therefore the potential distributions to our stockholders. However, in general, we earn origination fees for debt investments from our borrowers in an amount equal to the acquisition fees paid to our Advisor, and as a result, the impact of acquisition fees to our operating performance and cash flow would be minimal.
Acquisition fees and expenses paid to our Advisor and third parties in connection with the acquisition of equity investments are generally considered expenses and are included in the determination of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense), both of which are performance measures under U.S. GAAP. Such fees and expenses will not be reimbursed by our Advisor or its affiliates and third parties, and therefore if there are no further proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operating earnings, cash flow or net proceeds from the sale of investments or properties. All paid and accrued acquisition fees and expenses will have negative effects on future distributions to stockholders and cash flow generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.
The origination and acquisition of debt investments and the corresponding acquisition fees paid to our Advisor (and any offsetting origination fees received from our borrowers) associated with such activity is a key operating feature of our business plan that results in generating income and cash flow in order to make distributions to our stockholders. Therefore, the exclusion for acquisition fees may be of limited value in calculating operating performance because acquisition fees affect our overall long-term operating performance and may be recurring in nature as part of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense) over our life.
Due to certain of the unique features of publicly-registered, non-traded REITs, the Investment Program Association, or the IPA, an industry trade group, standardized a performance measure known as MFFO and recommends the use of MFFO for such REITs. Management believes MFFO is a useful performance measure to evaluate our business and further believes it is important to disclose MFFO in order to be consistent with the IPA recommendation and other non-traded REITs. MFFO that adjusts for items such as acquisition fees would only be comparable to non-traded REITs that have completed the majority of their acquisition activity and have other similar operating characteristics as us. Neither the U.S. Securities and Exchange Commission, or the SEC, nor any other regulatory body has approved the acceptability of the adjustments that we use to calculate MFFO. In the future, the SEC or another regulatory body may decide to standardize permitted adjustments across the non-listed REIT industry and we may need to adjust our calculation and characterization of MFFO.
MFFO is a metric used by management to evaluate our future operating performance once our organization and offering and acquisition and development stages are complete and is not intended to be used as a liquidity measure. Although management uses the MFFO metric to evaluate future operating performance, this metric excludes certain key operating items and other adjustments that may affect our overall operating performance. MFFO is not equivalent to net income (loss) as determined under U.S. GAAP. In addition, MFFO is not a useful measure in evaluating net asset value, or NAV, since an impairment is taken into account in determining NAV but not in determining MFFO.
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;

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•
realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business;
•
unrealized gains (losses) from fair value adjustments on real estate securities, including CMBS and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings;
•
unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting;
•
adjustments related to contingent purchase price obligations; and
•
adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above.
Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.
MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves/impairment on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. With respect to debt investments, we consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business. Fair value is typically estimated based on discounting expected future cash flow of the underlying collateral taking into consideration the discount rate, capitalization rate, occupancy, creditworthiness of major tenants and many other factors. This requires significant judgment and because it is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If the estimated fair value of the underlying collateral for the debt investment is less than its net carrying value, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. With respect to a real estate investment, a property’s value is considered impaired if 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

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uncertainties. Furthermore, neither FFO nor MFFO should be considered as an alternative to net income (loss) as an indicator of our operating performance.
The following table presents a reconciliation of net income (loss) attributable to common stockholders to FFO and MFFO attributable to common stockholders (dollars in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,

 
2017
 
2016
 
2017
 
2016
Funds from operations:
 
 
 
 
 
 
 
 
Net income (loss) attributable to NorthStar Real Estate Income Trust Inc. common stockholders
 
$
(2,282
)
 
$
7,491

 
$
10,739

 
$
24,079

Adjustments:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
12,318

 
9,481

 
29,770

 
21,386

Depreciation and amortization related to non-controlling interests
 
(1,150
)
 
(978
)
 
(2,728
)
 
(2,172
)
FFO attributable to NorthStar Real Estate Income Trust, Inc. common stockholders
 
$
8,886

 
$
15,994

 
$
37,781

 
$
43,293

Modified funds from operations:
 
 
 
 
 
 
 
 
FFO attributable to NorthStar Real Estate Income Trust, Inc. common stockholders
 
$
8,886

 
$
15,994

 
$
37,781

 
$
43,293

Adjustments:
 
 
 
 
 
 
 
 
Amortization of premiums, discounts and fees on investments and borrowings, net
 
1,187

 
1,011

 
3,012

 
3,193

Amortization of capitalized above/below market leases
 
504

 
250

 
1,107

 
70

Acquisition fees and transaction costs on investments
 
3,988

 
182

 
5,544

 
4,338

Straight-line rental (income) loss
 
(81
)
 
(522
)
 
(822
)
 
(1,418
)
Unrealized gain (loss) on mortgage loans and obligations held in a securitization trust, net
 
(725
)
 
—

 
(725
)
 
—

Unrealized (gain) loss on investments
 
1,487

 
33

 
1,487

 
3,432

Adjustments related to non-controlling interests
 
(46
)
 
(10
)
 
(57
)
 
(89
)
MFFO attributable to NorthStar Real Estate Income Trust, Inc. common stockholders
 
$
15,200

 
$
16,938

 
$
47,327

 
$
52,819

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 September 30, 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.

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The following table presents distributions declared for the nine months ended September 30, 2017 and year ended December 31, 2016 (dollars in thousands):
 
 
Nine Months Ended September 30, 2017
 
Year Ended December 31, 2016
Distributions Declared(1)(2)
 
 
 
 
 
 
 
 
   Cash
 
$
39,469

 


 
$
53,408

 


   DRP
 
23,274

 


 
43,337

 


Total
 
$
62,743

 


 
$
96,745

 


 
 
 
 
 
 
 
 
 
Sources of Distributions(1)
 
 
 
 
 
 
 
 
   Funds from Operations(3)
 
$
37,781

 
60
%
 
$
60,286

 
62
%
   Offering proceeds
 
24,962

 
40
%
 
36,459

 
38
%
Total
 
$
62,743

 
100
%
 
$
96,745

 
100
%
 
 
 
 
 
 
 
 
 
Cash Flow Provided by (Used in) Operations
 
$
36,751

 
 
 
$
60,836

 
 
_______________________________________
(1)
Represents distributions declared for such period, even though such distributions are actually paid to stockholders the month following such period.
(2)
On August 9, 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 December 31, 2017.
(3)
From inception through September 30, 2017, we declared distributions of $461.6 million, of which 74% was paid from FFO, 25% was paid from Offering proceeds and 1% was paid from distribution support proceeds. From inception through September 30, 2017, the difference between total distributions paid (including cash distributions and shares issued in connection with our DRP) and cash flow provided by operations was $97.9 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 November 8, 2017, our portfolio is generating an 11.8% 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.

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A change in interest rates could affect the value of our fixed-rate CRE debt and securities investments. For instance, an increase in interest rates would result in a higher required yield on investments, which would decrease the value on existing fixed-rate investments in order to adjust their yields to current market levels.
Our general financing strategy has focused on the use of “match-funded” structures. This means that we seek to align the maturities of our liabilities with the maturities on our assets as closely as possible in order to manage the risks of being forced to refinance our liabilities prior to the maturities of our assets. In addition, we seek to match the interest rate on our assets with like-kind borrowings, so fixed-rate investments are financed with fixed-rate borrowings and floating-rate assets are financed with floating-rate borrowings, directly or indirectly, through the use of interest rate swaps, caps and other financial instruments or through a combination of these strategies. We are subject to interest rate risk because on certain investments, we maintain a net floating-rate asset position, and, therefore, our income will increase with increases in interest rates and decrease with declines in interest rates. As of September 30, 2017, 73.9% of our debt investments, including future funding commitments, were floating rate investments and 44.1% of our total borrowings were floating rate liabilities. Of the floating rate liabilities, 19.1% related to the use of our CMBS Credit Facilities. As of September 30, 2017, a hypothetical 100 basis point increase in interest rates (including the effect of the interest rate floor) would increase income by $1.6 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 applicable U.S. Treasury yield) to value these assets. Under these conditions, the value of our portfolio should decrease. Conversely, if the spread used to value these assets were to decrease or “tighten,” the value of these assets should increase.
Credit Risk
Credit risk in our CRE debt and securities investments relates to each individual borrower’s ability to make required interest and principal payments on scheduled due dates. We seek to manage credit risk through our Advisor’s comprehensive credit analysis prior to making an investment, actively monitoring our portfolio and the underlying credit quality, including subordination and diversification of our portfolio. Our analysis is based on a broad range of real estate, financial, economic and borrower-related factors, which we believe are critical to the evaluation of credit risk inherent in a transaction. For the nine months ended September 30, 2017, two CRE debt investments each contributed more than 10% of interest income, of which one debt investment was classified as held for sale.
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 nine months ended September 30, 2017, we declared distributions of $62.7 million compared to cash provided by operating activities of $36.8 million with $25.0 million, or 40%, 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.
On August 25, 2017, in connection with our entry into the Combination Agreement, our board of directors voted to suspend the DRP until further notice. Pursuant to the terms of the DRP, the suspension went into effect prior to the monthly distributions to be paid on or about October 1, 2017 and as a result, all stockholders will receive only cash distributions unless the DRP is reinstated.
Stockholders cannot be sure of the market price of the CLNC common stock they will receive as consideration.
Upon completion of mergers of each of us and NorthStar Income II with and into CLNC as contemplated by the Combination Agreement, which we refer to as the Mergers, our stockholders will receive shares of CLNC class B common stock, which will subsequently convert to shares of CLNC’s class A common stock at various times as further described in the Combination Agreement. We anticipate that CLNC’s class A common stock will be traded on a national securities exchange; however, prior to the Combination, there has not been and will not be an established public trading market for CLNC common stock. The market price of the CLNC class A common stock following the Combination will be unknown until the commencement of trading of CLNC class A common stock upon the consummation of the Combination. The value of the CLNC class B common stock will be based on the market price of the CLNC class A common stock at the time that the applicable class of CLNC class B common stock converts to CLNC class A common stock. Therefore, stockholders will not know the value of the consideration they will receive for the Mergers until the completion of the Combination.
The NorthStar I exchange ratio in the Combination is fixed and generally will not be adjusted for changes affecting us.
If the Mergers are completed, and assuming the exchange ratio is not adjusted pursuant to the terms of the Combination Agreement, each outstanding share of our common stock will be converted into the right to receive 0.3532 (which we refer to as the NorthStar I exchange ratio) shares of CLNC class B common stock, classified as follows: (i) 10% as shares of CLNC class B-1 common stock, (ii) 45% as shares of CLNC class B-2 common stock and (iii) 45% as shares of CLNC class B-3 common stock.
The NorthStar I exchange ratio is fixed and may be adjusted only under certain limited circumstances as set forth in the Combination Agreement and will not be adjusted to reflect any changes in the value of our common stock between the signing of the Combination Agreement and the closing of the Mergers. However, immediately prior to the closing of the Combination, if we have generated the least amount of cash leakage as compared to NorthStar Income II during the period from July 1, 2017 through the day immediately preceding the closing date, excluding the dividend payment made on July 1, 2017, we will declare a special dividend in order to true up the agreed contribution values of us and NorthStar Income II in relation to each other. In addition, immediately prior to the closing of the Combination, CLNC will, if necessary, declare a special distribution to CLNS OP in an amount that is intended to true up CLNS OP for the difference between (i) the sum of (a) the loss in value of us and NorthStar Income II as a result of the distributions made by us and NorthStar Income II in excess of funds from operations from July 1, 2017 through the day immediately preceding the closing date (excluding the dividend payment made on July 1, 2017), (b) funds from operations

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for the Contributed Entities (as defined in the Combination Agreement) from July 1, 2017 through the day immediately preceding the closing date of the Combination, (c) cash contributions or contributions of certain intercompany receivables made to the Contributed Entities from July 1, 2017 through the day immediately preceding the closing date and (d) the expected present value of certain unreimbursed operating expenses of us and NorthStar Income II paid on each company’s behalf by their respective advisors, and (ii) cash distributions made by the Contributed Entities from July 1, 2017 through the day immediately preceding the closing date, excluding the Goodwill Distribution (as defined in the Combination Agreement).
Completion of the Combination is subject to many conditions and if these conditions are not satisfied or waived, the Combination will not be completed.
Completion of the Combination is subject to many conditions that must be satisfied or waived under the Combination Agreement in order for the Combination to be completed including, among others, receipt of approval of our stockholders and the stockholders of NorthStar Income II.
In addition, each of the parties may terminate the Combination Agreement under certain circumstances, including, among other reasons, if the Combination is not completed by the outside date (as set forth in the Combination Agreement).
There can be no assurance that the conditions to the closing of the Combination will be satisfied or waived. For example, CLNC’s ability to qualify as a REIT depends, in part, on its acquisition of our and NorthStar Income II’s qualifying REIT assets in the Mergers. Accordingly, for CLNC’s counsel to deliver the REIT qualification opinion that is a condition to the closing of the Combination, CLNC must be able to project, and its counsel to reasonably assume, that CLNC will satisfy the REIT income and asset tests for the entire taxable year of the Mergers. Accordingly, there can be no assurance that the Combination, including the Mergers, will be completed.
If the Combination does not occur, we may incur payment obligations to the others.
If the Combination Agreement is terminated under certain circumstances, we may be required to pay NorthStar Income II and/or CLNS OP certain termination fees of approximately $43.4 million or transaction expenses of up to $10 million each (depending on the specific circumstances).
Our stockholders, as a group, will hold a significantly smaller share of CLNC following the closing of the Combination than they currently do as stockholders of us.
Following the Combination, our former stockholders are expected to hold approximately 32% of CLNC immediately after the completion of the Combination, on a fully diluted basis. Consequently, our stockholders, as a group, will exercise less influence over the management and policies of CLNC after the completion of the Combination than they currently exercise over the management and policies of us. In addition, our charter includes certain provisions required by the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association, or the NASAA REIT Guidelines, which apply to REITs with shares that are publicly registered with the SEC but are not listed on a national securities exchange, including certain director removal rights. The CLNC charter does not include provisions based on the NASAA REIT Guidelines and such guidelines would not apply to CLNC.
If the Mergers are approved, the date on which our stockholders will receive CLNC common stock is uncertain.
Even if the Mergers are approved by our stockholders and NorthStar Income II’s stockholders, the date on which the Mergers are consummated and our stockholders will receive CLNC common stock will remain uncertain, and may not occur at all. Although it is expected that the Mergers will be consummated in the first quarter of 2018, the completion date of the Mergers might be later than expected due to delays in satisfying the conditions to the closing of the Combination (including the listing by CLNC of its class A common stock on a national securities exchange) or other unforeseen events. In addition, there can be no assurance that the Mergers will be completed even if the required stockholder approvals are obtained.
The Combination Agreement includes restrictions on our ability to make distributions to our stockholders, even if we would otherwise have net income and net cash available to make such distributions.
Pursuant to the Combination Agreement, we are permitted to make our regular daily dividend distributions to our stockholders of up to $0.001917808 per share of our common stock prior to the closing of the Mergers. Our board of directors may also declare a special dividend in cash in respect of our common stock to the extent the cash leakage of NorthStar Income II exceeds any cash leakage of us prior to the closing of the Mergers.
We are permitted under the Combination Agreement to make certain minimum distributions in excess of the above limits as needed in order to maintain our respective statuses as REITs. In the event the amounts of permitted dividends described above are exceeded,

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pursuant to a distribution necessary for us to qualify as a REIT or to avoid the incurrence of any income or excise tax, the NorthStar I exchange ratio will be adjusted.
Therefore, even if we have available net income or net cash to make distributions to our stockholders and satisfy any other conditions to make such distributions, the terms of the Combination Agreement could prohibit such action.
We will be subject to business uncertainties and certain operation restrictions until consummation of the Combination.
Uncertainty about the effect of the Mergers may have an adverse effect on us. These uncertainties could disrupt our business and cause investors and others that deal with us to seek to change existing business relationships, cease doing business with us or cause potential new business partners or investment counterparties to delay doing business with us until the Combination has been completed successfully. In addition, the Combination Agreement restricts us from making certain acquisitions and investments and taking other specified actions without the consent of the other parties until the Combination occurs. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Combination, even if such actions would otherwise prove beneficial to our stockholders. Those operating covenants will continue to apply until the Mergers occur.
Failure to complete the Combination could negatively affect our value and our future business and financial results.
If the Combination Agreement is terminated and the Combination is not completed for any reason, including as a result of our stockholders’ or NorthStar Income II stockholders’ failing to approve the necessary proposals, our ongoing business could be adversely affected and, without realizing any of the benefits of having completed the Combination, may be subject to several risks, including that:
•
we may experience negative reactions from our investors;
•
we will be required to pay certain costs relating to the Combination, whether or not the Combination is completed, and, depending on the circumstances relating to a termination, may be required to pay certain termination fees or transaction expenses; and
•
our management’s focus and resources may be diverted from operational matters and other strategic opportunities while working to implement the Combination.

If either of the Mergers does not qualify as a “reorganization” within the meaning of Section 368(a) of the Code, stockholders participating in such Merger may be required to pay substantial U.S. federal income taxes.
Although the parties intend that each of the Mergers will qualify as a “reorganization” within the meaning of Section 368(a) of the Code, it is possible that the Internal Revenue Service, which we refer to as the IRS, could assert that one or both of the Mergers fails to so qualify. If the IRS were to be successful in any such contention, or if for any other reason any such Merger were to fail to qualify as a “reorganization,” each U.S. holder participating in any such Merger would recognize gain or loss with respect to all such U.S. holder’s shares of stock based on the difference between: (i) that U.S. holder’s tax basis in the relevant shares; and (ii) the aggregate cash and the fair market value of the shares of stock received in the applicable Merger.
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.
Prior to the suspension of our Share Repurchase Program (described below), we generally funded 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

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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. On August 25, 2017, in connection with the entry into the Combination Agreement, our board of directors voted to suspend our Share Repurchase Program until further notice. The suspension of our Share Repurchase Program went effective as of September 7, 2017 and as a result, no further share repurchases will be processed unless and until the Share Repurchase Program is reinstated.
For the nine months ended September 30, 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
 
—

 
—

 
—

 
 
April 1 to April 30
 
—

 
—

 
—

 
 
May 1 to May 31
 
1,135,346

 
9.44

 
1,135,346

 
(1)
June 1 to June 30
 
—

 
—

 
—

 
 
July 1 to July 31
 
—

 
—

 
—

 
 
August 1 to August 31
 
1,318,509

 
9.51

 
1,318,509

 
(1)
September 1 to September 30
 
—

 
—

 
—

 
 
Total
 
4,301,494

 
 
 
4,301,494

 
 
_______________________________________
(1)
Subject to funds being available, and if our Share Repurchase Program resumes, 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.
Unregistered Sales of Equity Securities
During the three months ended September 30, 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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Item 6.    Exhibits
 
 
Description of Exhibit
2.1

 
3.1

 
3.2

 
4.1

 
31.1*

 
31.2*

 
32.1*

 
32.2*

 
101*

 
The following materials from the NorthStar Real Estate Income Trust, Inc. Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016; (ii) Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2017 and 2016; (iv) Consolidated Statements of Equity for the nine months ended September 30, 2017 (unaudited) and year ended December 31, 2016; (v) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2017 and 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:
November 13, 2017
By:
 
/s/ DANIEL R. GILBERT
 
 
 
 
Name:
 
Daniel R. Gilbert
 
 
 
 
Title:
 
Chairman, Chief Executive Officer and President
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date:
November 13, 2017
By:
 
/s/ FRANK V. SARACINO
 
 
 
 
Name:
 
Frank V. Saracino
 
 
 
 
Title:
 
Chief Financial Officer and Treasurer
 
 
 
 
 
 
 



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