Use these links to rapidly review the documentTABLE OF CONTENTS

Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

Commission File Number: 001-32330

NORTHSTAR REALTY FINANCE CORP.(Exact Name of Registrant as Specified in its Charter)

Maryland(State or Other Jurisdiction of
Incorporation or Organization)

11-3707493(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 the check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


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

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

The
Company has one class of common stock, par value $0.01 per share, 75,426,625 shares outstanding as of May 5, 2010.



---





Table of Contents



NORTHSTAR REALTY FINANCE CORP.        QUARTERLY REPORT        For the Three Months Ended March 31, 2010

TABLE OF CONTENTS



Index



PagePart I.

Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009

3Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and March 31, 2009

4Condensed Consolidated Statements of Stockholders' Equity as of March 31, 2010 (unaudited) and December 31, 2009

5Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and March 31,
2009

6Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and March 31, 2009

7Notes to the Condensed Consolidated Financial Statements (unaudited)

8Item 2.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

43Item 3.

Quantitative and Qualitative Disclosures about Market RiskItem 4.

Controls and Procedures

67Part II.

Other Information

68Item 1.

Legal ProceedingsItem 6.

Exhibits

68Signatures

72


2

---





Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS        (Amounts in Thousands, Except Share Data)

March 31,
2010

December 31,
2009(unaudited)ASSETS:Cash and cash equivalents

$
116,771

$
138,928Restricted cash (includes $87,895 and $74,453 from consolidated VIEs, respectively)


135,381


129,180Operating real estatenet


963,228


978,902Available for sale securities, at fair value (includes $1,198,123 and $283,184 from consolidated VIEs, respectively)


1,249,484


336,220Real estate debt investments, net (includes $1,282,138 and $1,356,038 from consolidated VIEs, respectively)


1,864,790


1,936,482Real estate debt investments, held-for-sale (includes $40,515 and $- from consolidated VIEs, respectively)


40,515


611Investments in and advances to unconsolidated ventures


40,178


38,299Receivables, net of allowance of $103 in 2010 and $1,349 in 2009 (includes net $17,777 and $7,421 from consolidated VIEs, respectively)


25,061


17,912Unbilled rents receivable


10,730


10,206Derivative instruments, at fair value (includes $57 and $- from consolidated VIEs, respectively)


57


Deferred costs and intangible assets, net


57,446


57,551Other assets (includes $3,454 and $2,888 from consolidated VIEs, respectively)


24,174


25,273Total assets

$
4,527,815

$
3,669,564LIABILITIES:Mortgage notes and loans payable


796,648


795,915Exchangeable senior notes


126,204


125,992Bonds payable, at fair value (includes $1,178,610 and $584,615 from consolidated VIEs, respectively)


1,178,610


584,615Secured term loans


386,952


368,865Liability to subsidiary trusts issuing preferred securities, at fair value


190,846


167,035Obligations under capital leases


3,519


3,527Accounts payable and accrued expenses (includes $5,025 and $1,631 from consolidated VIEs, respectively)


26,847


30,071Escrow deposits payable (includes $28,410 and $28,608 from consolidated VIEs, respectively)


39,261


39,461Derivative liability, at fair value (includes $124,563 and $46,187 from consolidated VIEs, respectively)


147,447


67,044Other liabilities (includes $387 and $358 from consolidated VIEs, respectively)


26,584


28,399Total liabilities


2,922,918


2,210,924EQUITY:NorthStar Realty Finance Corp. Stockholders' Equity:8.75% Series A preferred stock, $0.01 par value, $25 liquidation preference per share, 2,400,000 shares issued and outstanding at March 31, 2010
and December 31, 2009, respectively


57,867


57,8678.25% Series B preferred stock, $0.01 par value, $25 liquidation preference per share, 7,600,000 shares issued and outstanding at March 31, 2010
and December 31, 2009, respectively


183,505


183,505Common stock, $0.01 par value, 500,000,000 shares authorized, 75,425,755 and 74,882,600 shares issued and outstanding at March 31, 2010 and
December 31, 2009, respectively


754


749Additional paid-in capital


668,441


662,805Retained earnings


550,439


460,915Accumulated other comprehensive loss


(50,595
)

(92,670
)Total NorthStar Realty Finance Corp. Stockholders' Equity


1,410,411


1,273,171Non-controlling interest


194,486


185,469Total equity


1,604,897


1,458,640Total liabilities and stockholders' equity

$
4,527,815

$
3,669,564


See accompanying notes to condensed consolidated financial statements

3

---





Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (Amounts in Thousands, Except Share and Per Share Data)
     (Unaudited)

Three Months Ended
March 31,
2010

Three Months Ended
March 31,
2009Revenues and other income:Interest income

$
57,575

$
36,781Interest incomerelated parties


621


4,507Rental and escalation income


21,780


25,176Advisory and management fee incomerelated parties


518


1,691Other revenue


1,055


168Total revenues


81,549


68,323Expenses:Interest expense


32,073


33,187Real estate propertiesoperating expenses


1,769


2,127Asset management feesrelated parties


466


853Provision for loan losses


36,316


21,462General and administrative:Salaries and equity-based compensation(1)


16,532


11,610Auditing and professional fees


2,940


2,261Other general and administrative


4,012


3,568Total general and administrative


23,484


17,439Depreciation and amortization


8,483


14,285Total expenses


102,591


89,353(Loss) from operations


(21,042
)

(21,030
)Equity in earnings/(loss) of unconsolidated ventures


1,349


(4,418
)Unrealized (loss)/gain on investments and other


(1,843
)

90,661Realized gain on investments and other


1,433


36,913(Loss)/income from continuing operations


(20,103
)

102,126Income from discontinued operations





605Consolidated net (loss)/income


(20,103
)

102,731Net income (loss) attributable to the non-controlling interests


411


(12,864
)Preferred stock dividends


(5,231
)

(5,231
)Net (loss)/income attributable to NorthStar Realty Finance Corp. common stockholders

$
(24,923
)
$
84,636Net (loss)/income per share from continuing operations (basic/diluted)


(0.33
)

1.31Income per share from discontinued operations (basic/diluted)





0.01Net (loss)/income attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)

$
(0.33
)
$
1.32Weighted average number of shares of common stock:Basic


75,068,654


64,348,264Diluted


82,217,223


72,255,413


(1)The
three months ended March 31, 2010 and 2009 include $5,058 and $5,144, respectively, of equity-based compensation expense. The three months ended
March 31, 2010 includes $3,583 of cash compensation expense and $1,014 of equity based compensation expense relating to a separation and consulting agreement with a former executive.


See accompanying notes to condensed consolidated financial statements

4

---





Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (Amounts in Thousands)    
(Unaudited)

Preferred
Stock
at Par

Shares
of
Common
Stock

Common
Stock
at Par

Additional
Paid-in
Capital

Treasury
Stock

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total
NorthStar
Stockholders
Equity

Non-controlling
Interests

Total
Stockholders
EquityBalance at December 31, 2008

$
100


62,907

$
634

$
861,300


(1,384
)
$
(94,343
)
$
648,860

$
1,415,167

$
198,593

$
1,613,760Equity component of exchangeable senior notes











(4,321
)










(4,321
)




(4,321
)Equity component of warrants











117











117





117Dividend reinvestment and stock purchase plan





80


1


276











277





277Proceeds from equity distribution agreement





7,327


69


23,995


1,384








25,448





25,448Stock awards/LTIP awards





94


1


300











301


20,172


20,473Restricted share grant





15





1











1





1Comprehensive loss

















1,673





1,673


199


1,872Conversion of OP/LTIP units





744


7


12,013











12,020


(12,020
)

Stock dividends





3,716


37


10,610








(9,607
)

1,040


(1,040
)

Cash dividends on common stock




















(27,133
)

(27,133
)

(15,957
)

(43,090
)Cash dividends on preferred stock




















(20,925
)

(20,925
)




(20,925
)Redemption of membership interest











(214
)










(214
)




(214
)Equity in private fund


























1,815


1,815Net income




















(130,280
)

(130,280
)

(6,293
)

(136,573
)Balance at December 31, 2009

$
100


74,883

$
749

$
904,077

$


$
(92,670
)
$
460,915

$
1,273,171

$
185,469

$
1,458,640VIE consolidation begining balance adjustment

















41,332


121,935


163,267


20,329


183,596Amortization of deferred compensation











4











4





4Dividend reinvestment and stock purchase plan





24





27











27





27Stock awards/LTIP awards


























5,054


5,054Restricted share grant





























Comprehensive loss

















743





743


95


838Conversion of OP/LTIP units





519


5


7,412











7,417


(7,417
)

Cash dividends on common stock




















(7,488
)

(7,488
)

(5,993
)

(13,481
)Cash dividends on preferred stock




















(5,231
)

(5,231
)

(2,625
)

(7,856
)Redemption of membership interest











(1,807
)










(1,807
)

1,800


(7
)Equity in private fund


























(1,815
)

(1,815
)Net income




















(19,692
)

(19,692
)

(411
)

(20,103
)Balance at March 31, 2010

$
100


75,426

$
754

$
909,713

$


$
(50,595
)
$
550,439

$
1,410,411

$
194,486

$
1,604,897


See accompanying notes to condensed consolidated financial statements

5

---





Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        (Amounts in Thousands)    
(Unaudited)

Three Months Ended
March 31,
2010

Three Months Ended
March 31,
2009Consolidated net (loss)/income

$
(20,103
)
$
102,731Unrealized (loss) on available for sale securities


(44
)

(15,860
)Change in fair value of derivatives


(857
)

979Reclassification adjustment for gains included in net income


1,739


1,397Comprehensive (loss)/income


(19,265
)

89,247Less: Comprehensive income attributable to non-controlling interests


(71
)

11,393Comprehensive (loss)/income attributable to NorthStar Realty Finance Corp.

$
(19,195
)
$
77,854


See
accompanying notes to condensed consolidated financial statements

6

---





Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Amounts in Thousands)        (Unaudited)

Three Months Ended
March 31, 2010

Three Months Ended
March 31, 2009Net cash (used in) provided by operating activities

$
(3,929
)
$
8,863Cash flows from investing activities:Improvement of Operating real estate


(402
)

(1,299
)Acquisition of available for sale securities


(87,355
)

(17,114
)Proceeds from disposition of securities available for sale


38,884


16,501Available for sale securities repayments


6,240


216Originations/acquisitions of real estate debt investments


(10,320
)

(121,677
)Real estate debt investment repayments


24,536


6,622Proceeds from the sale of real estate debt investments


611


101,513Real estate debt investment acquisition costs





(116
)Other loans receivable





(1,070
)Restricted cash used for investment activities


(1,989
)

(443
)Deferred lease costs


(220
)

Investment in and advances to unconsolidated ventures


(502
)

Distributions from unconsolidated ventures


2,109


6,952Net cash (used in) investing activities


(28,408
)

(9,915
)Cash flows from financing activities:Purchase of interest rate cap


(243
)

Settlement of derivative


(283
)

Collateral held by swap counter party


4,749


3,709Mortgage notes and loan borrowings


58,200


Mortgage principal repayments


(52,733
)

(2,207
)Borrowing under credit facilities





1,912Repayments credit facilities





(33,568
)Repurchase obligation borrowings





528Repurchase obligation repayments





(175
)Proceeds from bonds


9,000


60,000Bond repayments


(13,225
)

Borrowing under secured term loan


24,631


1,373Secured term loan repayment


(1,345
)

(1,365
)Bond repurchases


(218
)

(25,830
)Payment of deferred financing costs


(1,348
)

Restricted cash from financing activities


352


(1,081
)Proceeds from dividend reinvestment and stock purchase plan


89


14Dividends (common and preferred) and distributions


(12,720
)

(11,376
)Deferred offering costs


(1,100
)

Offering costs


(69
)

Distributions to non-controlling interest


(3,557
)

(3,578
)Net cash provided by (used in) financing activities


10,180


(11,644
)Net (decrease) increase in cash & cash equivalents


(22,157
)

(12,696
)Cash and cash equivalentsbeginning of period


138,928


134,039Cash and cash equivalentsend of period

$
116,771

$
121,343


See accompanying notes to condensed consolidated financial statements

7

---





Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        Amount in Thousands, Except per Share Data        (Unaudited)

1. Formation and Organization

NorthStar Realty Finance Corp., a Maryland corporation (the "Company"), is a self-administered and self-managed real estate investment trust ("REIT"), which was
formed in October 2003 in order to continue and expand the real estate debt, real estate securities and net lease businesses conducted by NorthStar Capital Investment Corp. ("NCIC"). Substantially all
of the Company's assets are held by, and it conducts its operations through, NorthStar Realty Finance Limited Partnership, a Delaware limited partnership and the operating partnership of the Company
(the "Operating Partnership"). On October 29, 2004, the Company closed its initial public offering pursuant to which it issued 20,000,000 shares of common stock, with proceeds to the Company of
approximately $160.1 million, net of issuance costs of $19.9 million. Simultaneously with the closing of the equity offering on October 29, 2004, three majority-owned subsidiaries
of NCIC contributed certain controlling and non-controlling interests in entities through which NCIC conducted its subordinate real estate debt, real estate securities and net lease
businesses to the Operating Partnership in exchange for an aggregate of 4,705,915 units of limited partnership interest in the Operating Partnership (the "OP Units") and approximately
$36.1 million in cash and an agreement to pay certain related transfer taxes on behalf of NCIC for approximately $1.0 million. From their inception through October 29, 2004,
neither the Company nor the Operating Partnership had any operations.

Consolidating Subsidiaries

NRF Healthcare, LLC

In May 2006, the Company entered into joint venture called NRF Healthcare, LLC with Chain Bridge Capital LLC to invest in
senior housing and healthcare-related net leased assets. In connection with the formation of the venture, Chain Bridge contributed substantially all of its assets to NRF Healthcare, LLC for its
$15.1 million membership interest in the joint venture.

In
July 2008, NRF Healthcare, LLC sold a $100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. ("Inland American"). The
Company received approximately $87.7 million of net proceeds from the transaction. Prior to conversion, the convertible preferred investment is entitled to a 10.5% dividend per annum. The
convertible preferred membership interest may be converted or redeemed, at Inland American's option, upon the sale or recapitalization of NRF Healthcare, LLC. NRF Healthcare, LLC may, at
its option, redeem the convertible preferred interests at any time following the first anniversary of the closing, subject to payment of a call premium that declines over time. In addition, at any
time after the second anniversary of the closing, Inland American may convert its preferred membership interests into common equity in NRF Healthcare, LLC. Based on the initial investment
amount and capital accounts of the members of NRF Healthcare, LLC, the convertible preferred membership interests represent, upon conversion, approximately a 42% common equity ownership
interest in NRF Healthcare, LLC. Inland American will have the option of contributing additional preferred membership interest and participating in new NRF Healthcare, LLC investment
opportunities in proportion to its percentage ownership interest, assuming it was to convert its interests to common equity.

In
December 2009, the Company completed a membership interest redemption with NRF Healthcare, LLC, NRFC Healthcare Holding Company, LLC, NorthStar Healthcare Investors, Inc.,

8

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization (Continued)

Chain
Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or Midwest Holdings, and certain individuals, pursuant to which NRF Healthcare, LLC redeemed the 5.4% membership
interest of Chain Bridge and its affiliates in NRF Healthcare, LLC for $2.0 million and its membership interest in certain assets. As a result of the redemption, NorthStar holds 100% of
the common equity membership interests in NRF Healthcare, LLC.

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying condensed consolidated financial statements and related notes of the Company have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the
United States 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 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 year ended December 31, 2009, which was filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise
defined, are defined in the Company's December 31, 2009 consolidated financial statements included in its annual report on Form 10-K.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, and its subsidiaries, which are either majority owned or
controlled by the Company or a variable interest entity ("VIE") where the Company is the primary beneficiary. All significant intercompany balances have been eliminated in consolidation.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that could affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

9

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board ("FASB") issued guidance requiring additional disclosures about fair value
measurements regarding transfers between fair value categories as well as purchases, sales, issuances and settlements related to fair value measurements of financial instruments with
non-observable inputs. This update was effective and was adopted without a material impact on the Company's financial condition or results of operations for interim and annual periods
beginning after December 15, 2009 except for disclosures about purchases, sales, issuances and settlements of financial instruments with non-observable inputs, which are effective
for years beginning after December 15, 2010. The additional disclosures required by this update will be included in the note on fair value measurements upon adoption. The Company does not
expect these additional disclosures to have a material impact on its financial condition or results of operations.

3. Variable Interest Entities

On January 1, 2010, the Company adopted the FASB guidance for determining whether an entity is a variable interest entity, or VIE, and which requires an analysis of qualitative
rather than quantitative factors to determine the primary beneficiary of a VIE. The guidance requires an entity to consolidate a VIE if (i) it has the power to direct the activities that most
significantly impact the VIE's economic performance and (ii) the 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. As a result of the implementation of this pronouncement, the Company consolidated four of its previously off-balance sheet CDO financings, which are referred to as N-Star
I, II, III and V. The Company has elected the fair value option of accounting for the available for sale securities and bonds payable of these entities for the purpose of enhancing the transparency of
its financial condition.

The
following tables present the cumulative effects of the change in accounting principle as of January 1, 2010 (in thousands):

As
Reported,
December 31, 2009

As Adjusted,
January 1, 2010

Effect of Change in
Accounting PrincipleNon-controlling interest

$
185,469

$
205,798

$
20,329Retained earnings


460,915


582,850


121,935Accumulated other comprehensive loss


(92,670
)

(51,338
)

41,332


The
Company has evaluated its real estate debt investments, liability to subsidiary trusts issuing preferred securities and its investments in each of its eight CDO transaction issuers
to determine whether they are a variable interest entity ("VIE"). A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. For each of these investments, the
Company has evaluated: (1) the sufficiency of the fair value of the entity's equity investment at risk to absorb losses; (2) whether as a group the holders of the equity investment at
risk have: (a) the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity's economic performance; (b) the
obligation to absorb the expected losses of the legal entity; and (c) the right to receive the expected residual returns of the legal entity; (3) whether the voting rights of these

10

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

investors
are proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of their equity, or both; and (4) whether substantially
all of the entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. An investment that lacks one or more of the above four characteristics
of a voting interest entity is considered to be a VIE.

As
of March 31, 2010, the Company identified interests in 17 entities which were determined to be VIEs. The Company reassesses its initial evaluation of an entity as a VIE upon
the occurrence of certain reconsideration events.

The
Company is required to consolidate a VIE if the Company is deemed to be the VIEs primary beneficiary. The primary beneficiary is the party that (i) has the power to direct the
activities that most significantly impact the VIE's economic performance and (ii) has the 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 first performing a qualitative analysis to determine if it holds the power to direct the activities that most
significantly impact the VIEs economic performance. This analysis includes: (i) assessing the Company's variable interests (both implicit and explicit) and any other involvements in the VIE, as
well as the involvements of other variable interest holders; (ii) consideration of the VIEs purpose and design, including the risks the VIE was designed to create and pass through to its
variable interest holders; (iii) identifying the activities that most significantly affect the VIE's economic performance; (iv) determining whether the Company's significant involvement
in the design of an entity provided the Company with the opportunity to establish arrangements that result in the Company having the power to direct the VIEs most significant activities; and
(v) determining whether the Company's level of economic interest in a VIE is indicative of the amount of power the Company holds in situations where the Company's stated power to direct the
VIEs most significant activities is disproportionately less than its economic interest in the entity. The Company performs a quantitative analysis to determine if it has the 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. For purposes of allocating a VIE's expected losses and expected residual returns to its
variable interest holders, the Company calculates its share of the VIE's expected losses and expected residual returns using the specific cash flows that would be allocated to it, based on contractual
arrangements and/or the Company's position in the capital structure of the VIE, under various probability-weighted scenarios.

Based
on management's analysis, the Company is not the primary beneficiary of nine of the identified VIEs since it (i) does not have the power to direct the activities that most
significantly impact the VIE's economic performance and (ii) does not have the 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. Accordingly, these VIEs are not consolidated into the Company's financial statements as of March 31, 2010. The Company reassesses its determination of whether it is the
primary beneficiary of a VIE each reporting period.

11

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

Consolidated VIEs (the Company is the primary beneficiary)

The Company has created and manages portfolios of commercial real estate securities and real estate debt investments, which were
financed in CDO financings. The collateral securities include commercial mortgage- backed securities ("CMBS"), fixed income securities issued by REITs and CDO financings backed primarily by real
estate securities. The collateral debt investments include whole loans, subordinate mortgage interests, mezzanine loans and other loans. By financing these securities with long-term debt
through the issuance of CDO financings, the Company expects to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. In connection with the
Company's CDO financings, the Company has various forms of significant ongoing involvement, which may include: (i) holding senior or subordinated interests in the CDOs; (ii) asset
management; and (iii) entering into derivative contracts.

N-Star
I, II, III, IV, V, VI, VII and VIII are consolidated CDO financings.

The
following table displays the classification and carrying amounts of assets and liabilities of consolidated VIEs as of March 31, 2010 (in thousands):

Variable Interest EntityN-Star I

N-Star II

N-Star III

N-Star IV

N-Star V

N-Star VI

N-Star VII

N-Star VIII

TotalAssets of consolidated VIEs:Restricted cash

$
1,682

$
398

$
2,313

$
26,414

$
4,088

$
11,974

$
6,021

$
35,005

$
87,895Available for sale securities, at fair value


214,281


217,496


205,402


32,187


237,106


12,202


246,546


32,903


1,198,123Real estate debt investments, net








24,480


301,281





298,490


12,572


645,315


1,282,138Real estate debt investments, held-for-sale

















12,527





27,988


40,515Receivables, net of allowance


2,261


2,393


2,402


1,397


3,790


838


2,680


2,016


17,777Derivative instruments, at fair value




















57





57Other assets


8





11


10





2,617


187


621


3,454Total assets of consolidated VIEs(1):


218,232


220,287


234,608


361,289


244,984


338,648


268,063


743,848


2,629,959Liabilities of consolidated VIEs:Bonds payable, at fair value


185,002


178,174


146,663


132,543


79,521


142,997


85,895


227,815


1,178,610Accounts payable and accrued expenses


1,418


126


1,148


128


525


422


386


872


5,025Derivative liability, at fair value


15,905


15,529


17,760





24,329


6,631


32,583


11,826


124,563Escrow deposits payable











8,776





7,583





12,051


28,410Other liabilities




















387





387Total liabilities of consolidated VIEs(2):


202,325


193,829


165,571


141,447


104,375


157,633


119,251


252,564


1,336,995Net assets

$
15,907

$
26,458

$
69,037

$
219,842

$
140,609

$
181,015

$
148,812

$
491,284

$
1,292,964


(1)Assets
of each of the consolidated VIEs may only be used to settle obligations of the respective VIE.(2)Creditors
of each of the consolidated VIEs have no recourse to the general credit of the Company.


The Company did not provide financial support to any of its consolidated VIEs during the three months ended March 31, 2010 and 2009. At
March 31, 2010 there are no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its consolidated VIEs.

12

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

Unconsolidated VIEs (the Company is not the primary beneficiary, but has a variable interest)



The Company has identified one real estate debt investment with a principal amount of $21.8 million as a variable interest in a
VIE and has determined that the Company is not the primary beneficiary of this VIE and as such the VIE should not be consolidated in the Company's consolidated financial statements. For all other real
estate debt investments, the Company has determined that these investments are not VIEs and, as such, the Company has continued to account for all real estate debt investments as loans.



The Company owns all of the common stock of NorthStar Realty Finance Trusts I through VIII (collectively, the "Trusts"). The Trusts
were formed to issue preferred securities. The Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result, the Company did not
consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting.

The
following table displays the classification, carrying amounts and maximum exposure of unconsolidated VIEs as of March 31, 2010 (in thousands):

Variable Interest EntityTrusts Issuing Preferred
Securities, at Fair Value

Real Estate Debt
Investments

Total

Maximum Exposure
to Loss(1)Real estate debt investments




$
21,799

$
21,799

$
21,799Total assets





21,799


21,799


21,799Liability to subsidiary trusts issuing preferred securities, at fair value


190,846





190,846


N/ATotal liabilities


190,846





190,846


N/ANet assets

($
190,846
)
$
21,799

($
169,047
)
$
21,799


(1)The
Company's maximum exposure to loss at March 31, 2010 would not exceed the carrying amount of its investment.


The
Company did not provide financial support to any of its unconsolidated VIEs during the three months ended March 31, 2010 and 2009. At March 31, 2010 there are no
explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

13

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments

Fair Value Measurements



The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a
three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that
is significant to the fair value measurement of the instrument.

Financial
assets and liabilities recorded on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1.

Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives,
most U.S. government and agency securities, and certain other sovereign government obligations).Level 2.

Financial assets and liabilities whose values are based on the following:a)

Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);b)

Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);c)

Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); andd)

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain
mortgage loans).Level 3.

Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect
management's own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, beneficial interest in securitizations and long-dated or complex derivatives, including
certain foreign exchange options and long-dated options on gas and power).


Determination of Fair Value

The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and
liabilities. The Company's market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or

14

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

liabilities.
The Company's income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company
maximizes the use of observable inputs and minimizes the use of unobservable inputs. The Company
reviews the fair values determined by the third-party pricing models and dealer quotes and compares the results to internally generated pricing models on each asset or liability to validate
reasonableness.

The
following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.



When available, the fair value of debt securities available for sale is based on quoted prices in active markets. If quoted prices are
not available, fair values are obtained from nationally-recognized pricing services, broker quotes, or other model-based valuation techniques. The fair value of Level 2 securities is based on a
market approach with prices obtained from nationally-recognized pricing services. Observable inputs used to value these securities can include: reported trades, benchmark yields, issuer spreads and
broker/dealer quotes. The fair value of Level 3 securities is typically based on a single broker quote or the Company's discounted cash flow analysis.



Derivatives are measured using market approach with prices obtained from nationally-recognized pricing service and are generally
measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy.



The Company's corporate lending investment is measured using in income approach with prices obtained from a nationally-recognized
banking institution that acted as underwriter for the investment and is generally measured using pricing models with market observable inputs such as interest rates and equity index levels, with
adjustments for unobservable inputs. These measurements are classified as Level 3 within the fair value hierarchy.



N-Star CDO bonds payable are measured using an income approach with prices obtained from a nationally-recognized banking
institution that acted as underwriter for the investment and are generally measured using pricing models with market observable inputs such as interest rates and equity index levels, with adjustments
for unobservable inputs. These measurements are classified as Level 3 within the fair value hierarchy.



Liability to subsidiary trusts issuing preferred securities is measured using market approach with prices obtained from an experienced
pricing service and is generally measured using pricing models

15

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

with
market observable inputs such as implied credit spreads on the Company's preferred stock and exchangeable senior notes as adjusted for unobservable inputs which reflect the differences between
these other instruments and the trust preferred securities. These measurements are classified as Level 3 within the fair value hierarchy.

Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the
Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2010 by level within the fair value hierarchy:

Assets and Liabilities at Fair ValueLevel 1

Level 2

Level 3

TotalAssets:Available for sale securities:CMBS

$


$
737,452

$
184,520

$
921,972N-Star CDO notes








1,342


1,342Third party CDO notes








28,414


28,414REIT debt





258,557


7,344


265,901Trust preferred securities








8,486


8,486Real estate interest





16,767


6,602


23,369Derivative asset





57





57Corporate lending investment








9,553


9,553Total assets

$


$
1,012,833

$
246,261

$
1,259,094Liabilities:N-Star CDO bonds payable








1,178,610

$
1,178,610Liability to subsidiary trusts issuing preferred securities








190,846


190,846Derivative liability





147,447





147,447Total liabilities

$


$
147,447

$
1,369,456

$
1,516,903


16

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

The
following table presents additional information about the Company's available for sale securities, corporate lending investment, bonds payable and liabilities to subsidiary trusts
issuing preferred securities which are measured at fair value on a recurring basis at March 31, 2010 for which the Company has utilized Level 3 inputs to determine fair value:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):

Available
for Sale
Securities

Corporate
Lending
Investment

N-Star
CDO Bonds
Payable

Liability to
Subsidiary
Trusts Issuing
Preferred
SecuritiesBeginning balance:

$
309,505

$
8,943

$
1,141,096

$
167,035Total net transfers into/out of Level 3


(60,577
)Purchases, sales, issuance and settlements, net


(33,699
)

(2,061
)

(4,325
)Less: total losses and premium/discount amortization (realized or unrealized):Included in earnings


4,925


2,671


46,219


23,811Included in other comprehensive loss


Plus: total gains and premium/discount amortization (realized or unrealized):Included in earnings


26,364





4,380Included in other comprehensive loss


40








Ending balance

$
236,708

$
9,553

$
1,178,610

$
190,846The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or
liabilities still held at the reporting date

$
21,479

$
(2,671
)
$
41,839

$
23,811


Fair Value Option

The Company has elected to apply the fair value option of accounting to the following financial assets and liabilities existing at the
time of adoption or at the time the Company recognizes the eligible item:



The
Company has elected the fair value option for the above financial instruments for the purpose of enhancing the transparency of its financial condition.

17

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

Changes
in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. The fair value option may be elected on an instrument by
instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The following table sets forth the Company's
financial instruments for which the fair value option was elected:

Financial Instruments, at Fair Value

March 31,
2010

December 31,
2009(1)Assets:Available for sale securities:CMBS

$
921,972

$
249,583N-Star CDO notes





4,268Third party CDO notes


28,414


9,515REIT debt


265,901


30,580Trust preferred securities


8,486


8,739Real estate interest


23,369


Corporate lending investment


9,553


8,943Total assets

$
1,257,695

$
311,628Liabilities:N-Star CDO bonds payable


1,178,610


584,615Liability to subsidiary trusts issuing preferred securities


190,846


167,035Total liabilities

$
1,369,456

$
751,650


(1)December 31,
2009 does not include the assets and liabilities of N-Star I, II, III and V, for which the Company has elected the fair
value option, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.


18

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)




The
following table presents the difference between fair values and the aggregate contractual amounts of available for sale securities and liabilities, for which the fair value option
has been elected:

Fair Value at
March 31,
2010

Amount
Due Upon
Maturity

DifferenceAssets:Available for sale securities:CMBS

$
921,972

$
2,119,422

$
(1,197,450
)Third party CDO notes


28,414


143,484


(115,070
)REIT debt


265,901


271,121


(5,220
)Trust preferred securities


8,486


15,000


(6,514
)Real estate interest


23,369


40,659


(17,290
)Total assets

$
1,248,142

$
2,589,686

$
(1,341,544
)Liabilities:N-Star CDO bonds payable


1,178,610


2,973,514


(1,794,904
)Liability to subsidiary trusts issuing preferred securities


190,846


280,133


(89,287
)Total Liabilities

$
1,369,456

$
3,253,647

$
(1,884,191
)


At
March 31, 2010 and December 31, 2009, the basis in the Company's corporate lending investment was $68.0 million and $70.0 million, respectively. The
Company has elected the fair value option for this investment which is accounted for under the equity method of accounting. The fair market value of the Company's investment at March 31, 2010
and December 31, 2009 was $9.6 million and $8.9 million, respectively.

For
the three months ended March 31, 2010 and 2009, the Company recognized a net gain of $33.3 million and a net gain of $89.1 million, respectively, as the result
of the change in fair value of financial assets and liabilities for which the fair value option was elected, which is recorded as unrealized gain (loss) on investments and other in the Company's
consolidated statement of operations. The net gain for the three months ended March 31, 2009 does not include net gains or losses on the assets and liabilities of N-Star I, II, III
and V, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

The
impact of changes in instrument-specific credit spreads on N-Star bonds payable and liability to subsidiary trusts issuing preferred securities for which the fair value
option was elected was a net gain of $65.6 million and a net gain of $136.7 million for the three months ended March 31,
2010 and 2009, respectively. The Company attributes changes in the fair value of floating rate liabilities to changes in instrument-specific credit spreads. For fixed rate liabilities, the firm
allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in interest rates. The net gain for the three months ended
March 31, 2009 does not include net gains or losses on the assets and liabilities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to
January 1, 2010.

19

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Operating Real Estate

Discontinued Operations

In December 2009, NRF Healthcare, LLC completed the sale of 18 assisted living facilities containing approximately 1,300 beds
located in North Carolina to a private investor group for approximately $95.9 million.

The
following table summarizes income from discontinued operations for the three months ended March 31, 2009:

For the Three Months
Ended
March 31, 2009Revenue:Rental and escalation income

$
2,072Interest and other


3Total revenue


2,075Expenses:General and administrative expenses


17Interest expense


925Depreciation and amortization


528Total expenses


1,471Income from discontinued operations

$
605


6. Available for Sale Securities

The following is a summary of the Company's available for sale securities at March 31, 2010:

March 31, 2010

Carrying
Value

Losses in
Accumulated
OCI

Cumulative
Unrealized
(Loss)/Gain on
Investments

Fair
Value(1)CMBS

$
1,576,681

$


$
(654,709
)
$
921,972N-Star CDO notes


15,108


(13,765
)




1,343Third party CDO notes


109,919





(81,505
)

28,414REIT debt


266,869





(969
)

265,900Real estate interest


33,489





(10,120
)

23,369Trust preferred securities


15,000





(6,514
)

8,486Total

$
2,017,066

$
(13,765
)
$
(753,817
)
$
1,249,484


(1)Approximately
$1.2 billion of these investments serve as collateral for the Company's consolidated CDO transactions and the balance is financed under
other borrowing facilities.


At
March 31, 2010, the maturities of the available for sale securities ranged from two months to 48 years.

20

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Available for Sale Securities (Continued)

During
the three months ended March 31, 2010, proceeds from the sale and redemption of available for sale securities was $38.9 million. The net realized gain on the sale
and redemption of available for sale securities was $2.9 million. During the three months ended March 31, 2009, proceeds from the sale and redemption of available for sale securities was
$16.5 million. The net realized gain on the sale of available for sale securities was $2.5 million. Proceeds and realized gains from the sale and redemption of available for sale
securities for the three months ended March 31, 2009 does not include the sale and redemption of available for sale securities of N-Star I, II, III and V, as these CDO financings
were unconsolidated CDO financings prior to January 1, 2010.

The
following is a summary of the Company's available for sale securities at December 31, 2009:

December 31, 2009(1)

Carrying
Value

Losses in
Accumulated
OCI

Cumulative
Unrealized
(Loss)/Gain on
Investments

Fair
Value(2)CMBS

$
443,568

$


$
(193,985
)
$
249,583N-Star CDO notes


34,115


(13,517
)

(14,723
)

5,875Third party CDO notes


21,750





(12,235
)

9,515REIT debt


26,760





3,820


30,580N-Star CDO equity


72,926


(40,998
)




31,928Trust preferred securities


12,264





(3,525
)

8,739Total

$
611,383

$
(54,515
)
$
(220,648
)
$
336,220


(1)December 31,
2009 does not include the third party available for sale securities of N-Star I, II, III and V, as these CDO financings were
unconsolidated financings prior to January 1, 2010.(2)Approximately
$212.4 million of these investments serve as collateral for the Company's only consolidated securities CDO transaction at
December 31, 2009 and the balance is financed under other borrowing facilities.


At
December 31, 2009, the maturities of the available for sale securities ranged from one to 42 years.

21

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments

At March 31, 2010 and December 31, 2009, the Company held the following real estate debt investments:

March 31, 2010

Carrying
Value(1)

Allocation by
Investment Type

Average
Fixed Rate

Average Spread
Over LIBOR

Number of
InvestmentsWhole loans, floating rate(2)

$
1,045,760


54.9
%


%

2.85
%

51Whole loans, fixed rate


22,359


1.2


6.66





6Subordinate mortgage interests, floating rate


181,853


9.5





2.71


11Subordinate mortgage interests, fixed rate


24,343


1.3


7.25





2Mezzanine loans, floating rate(3)


522,822


27.4





3.32


19Mezzanine loan, fixed rate


81,457


4.3


8.90





5Other loansfloating


13,588


0.7





2.42


3Other loansfixed


13,123


0.7


6.43





3Total/Weighted average

$
1,905,305


100.0
%

8.05
%

2.97
%

100


(1)Approximately
$1.3 billion of these investments serve as collateral for the Company's CDO financings and the balance is financed under other
borrowing facilities or unleveraged. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling
$69.4 million related to these investments. The Company expects that a minimum of $46.0 million of these future fundings will be funded within the Company's existing CDO financings and
require no additional capital from the Company. Based upon currently approved advance rates on the Company's credit facility and CDOs and assuming that all loans that have future fundings meet the
terms to qualify for such funding, the Company's equity requirement on the remaining $23.4 million of future funding requirements would be approximately $6.5 million.(2)Includes
$8.5 million in real estate debt investments, held for sale.(3)Includes
$32.0 million in real estate debt investments, held for sale.


22

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)




December 31, 2009(1)

Carrying
Value(2)

Allocation by
Investment Type

Average
Fixed Rate

Average Spread
Over LIBOR

Number of
InvestmentsWhole loans, floating rate

$
1,014,028


52.3
%


%

2.70
%

52Whole loans, fixed rate


62,373


3.2


6.89





7Subordinate mortgage interests, floating rate


193,275


10.0





2.69


11Subordinate mortgage interests, fixed rate


24,722


1.3


7.25





2Mezzanine loans, floating rate


538,173


27.8





3.35


20Mezzanine loan, fixed rate(3)


90,558


4.7


8.89





7Other loansfloating


8,610


0.4





2.24


2Other loansfixed


5,354


0.3


5.53





1Total/Weighted average

$
1,937,093


100.0
%

7.90
%

2.90
%

102


(1)December 31,
2009 does not include the real estate debt investments of N-Star III, as the CDO financing was an unconsolidated financing
prior to January 1, 2010.(2)Approximately
$1.3 billion of these investments served as collateral for the Company's three commercial real estate debt CDO financings and the
balance was financed under other borrowing facilities. The Company had future funding commitments, which were subject to certain conditions that borrowers must have met to qualify for such fundings,
totaling $80.0 million related to these investments.(3)Includes
$0.6 million in real estate debt investments, held for sale.


Contractual
maturities of real estate debt investments at March 31, 2010 are as follows:

Years Ending December 31:

Initial
Maturity(1)

Maturity
Including
Extensions2010 (remainder)

$
826,834

$
305,9842011


304,659


373,9202012


482,076


539,1082013





239,3792014


184,633


223,836Thereafter


222,871


338,846Total


2,021,073


2,021,073


(1)The
year ending December 31, 2010, contains a whole loan with an initial maturity of October 1, 2008 and a principal balance of
$21.4 million, a junior participation in a first mortgage with an initial maturity of March 1, 2009 and a principal balance of $28.5 million, a whole loan with an initial maturity
of April 1, 2009 and a principal balance of $13.9 million, a junior participation in a first mortgage with an initial maturity of September 9, 2009 and a principal balance of
$10.0 million and a whole loan with an initial maturity of December 31, 2009 and a principal balance of $10.5 million that remain outstanding as of March 31, 2010.


23

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)




Actual
maturities may differ from contractual maturities because certain borrowers have the right to prepay with or without prepayment penalties. The contractual amounts differ from the
carrying amounts due to unamortized origination fees and costs and unamortized premiums and discounts being reported as part of the carrying amount of the investment. Maturity Including Extensions
assumes that all loans with extension options will qualify for extension at initial maturity according to the conditions stipulated in the related loan agreements.

Non-Performing Loans and Provision for Loan Losses



As of March 31, 2010, the Company had five non-performing loans totaling $84.3 million which consisted of a
first mortgage having a principal balance of $21.4 million and an initial maturity date of October 1, 2008, a junior participation in a first mortgage having a principal balance of
$28.5 million and an initial maturity date of March 1, 2009, a first mortgage having a principal balance of $13.9 million and an initial maturity date of April 1, 2009, a
junior participation in a first mortgage having a principal balance of $10.0 million and an initial maturity date of September 9, 2009 and a first mortgage having a principal balance of
$10.5 million and an initial maturity date of December 31, 2009, representing approximately 4.2% of the Company's total commercial real estate debt investments. The Company's maximum
additional exposure to loss related to these loans of $45.2 million is equal to the outstanding principal balance of the loans, less reserves.



For the three months ended March 31, 2010, the Company recorded a $36.3 million credit loss provision relating to eight
loans and included a $0.8 million credit for a loan held for sale with a fair market value in excess of its carrying amount. For the three months ended March 31, 2009, the Company
recorded a $21.5 million credit loss provision relating to 10 loans. As of March 31, 2010, loan loss reserves totaled $108.7 million.

8. Investment in and Advances to Unconsolidated Ventures

The Company has non-controlling, unconsolidated ownership interests in entities that are accounted for using the equity method. Capital contributions, distributions, and
profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and
limited liability company agreements. Such allocations may differ from the stated percentage interests, if any, in such entities as a result of preferred returns and allocation formulas as described
in such agreements.

CS/Federal Venture

In February 2006, the Company, through a joint venture with an institutional investor, acquired a portfolio of three adjacent
class A office/flex buildings located in Colorado Springs, Colorado for $54.3 million. The joint venture financed the transaction with two non-recourse, first mortgage loans
totaling $38.0 million and the balance in cash. The loans mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%. The Company contributed $8.4 million for a
50% interest in the

24

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment in and Advances to Unconsolidated Ventures (Continued)

joint
venture and incurred $0.3 million in costs related to its acquisition, which are capitalized to the investment account. These costs will be amortized over the useful lives of the assets
held by the joint venture. The Company accounts for its investment under the equity method of accounting. At March 31, 2010 and December 31, 2009, the Company had an investment in
CS/Federal of approximately $6.8 million and $6.9 million, respectively. The Company recognized equity in earnings $0.1 million for each of the three months ended March 31,
2010 and 2009.

G-NRF, LTD

On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market corporate lending platform. Upon
completion of the recapitalization transaction, the new investor became the controlling manager of the assets and the Company deconsolidated the joint venture. The Company currently uses the equity
method of accounting to account for the recapitalized joint venture and has elected the fair value option for its equity investment. As of March 31, 2010 and December 31, 2009, the fair
market value of the Company's investment in the corporate lending venture was $9.6 million and $8.9 million, respectively. For the three months ended March 31, 2010 and 2009, the
Company recognized an unrealized gain of $2.7 million and an unrealized loss of $25.2 million, respectively, related to the fair value adjustment on its equity investment. The Company
conducted its quarterly comprehensive credit review of this investment and as a result, concluded that due to the uncertainty of the underlying cash flows, the Company will utilize the cost recovery
method of accounting for income recognition on this investment.

NorthStar Real Estate Securities Opportunity Fund

In July 2007, the Company closed on $109.0 million of equity capital for its Securities Fund, an investment vehicle in which the
Company conducts most of its real estate securities investment business.

The
Company is the manager and general partner of the Securities Fund. The Company receives base management fees ranging from 1.0% to 2.0% per annum on third-party capital and is
entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary
depending on the investor capital lockup periods and we do not expect to earn any incentive management fees from the Securities Fund in the future.

At
March 31, 2010 and December 31, 2009, the carrying value of the Company's investment in the Securities Fund was $6.3 million and $7.2 million,
respectively, each representing a 31.2% interest in the Securities Fund.

For
the three months ended March 31, 2010 and 2009, the Company recognized equity in losses of $0.9 million and $2.3 million, respectively. The Company also earned
$0.1 million in management fees from the Securities Fund for the three months ended March 31, 2009.

25

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment in and Advances to Unconsolidated Ventures (Continued)

LandCap Investment

On October 5, 2007, the Company entered into a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007
("Whitehall"), to form LandCap Partners, which is referred to as LandCap. LandCap was established to opportunistically invest in single family residential land through land loans, lot option
agreements and select land purchases. The joint venture is managed by a third party management group which has extensive experience in the single family housing sector. The Company and Whitehall
agreed to provide no additional new investment capital in the LandCap joint venture. At March 31, 2010 and December 31, 2009 the Company's investment in LandCap is carried at
$10.1 million. For the three months ended March 31, 2010 and 2009,
the Company recognized equity in loss of $0.5 million and $2.4 million, respectively. At March 31, 2010 and December 31, 2009, LandCap had investments totaling
$39.1 million. In addition, the Company has advanced approximately $4.9 million under a loan agreement to LandCap, which bears interest at a fixed rate of 12% and is included in other
assets in the consolidated balance sheets.

Midwest Care Holdco TRS I LLC

In June 2009, the Company restructured its net lease relationship with one of its healthcare operators to take advantage of new REIT
legislation which now allows a taxable REIT subsidiary affiliate to become the lessee of healthcare- related properties. The restructuring resulted in one of the Company's unconsolidated affiliate
Midwest Care Holdco TRS I LLC ("Midwest") becoming the lessee of the properties and Midwest simultaneously entering into a management contract with a third party operator. The management
agreement is terminable by Midwest upon 60 days notice. This new structure allows the Company to participate in operating improvements of the underlying properties not previously available
under the prior structure. The Company owns a 49% interest in Midwest and does not control the major decisions and as a result, the Company does not consolidate the operations of Midwest. The
Company's investment in Midwest is accounted for using the equity method. At March 31, 2010 and December 31, 2009, the Company had an investment in Midwest of approximately
$1.4 million and $1.0 million, respectively. The Company recognized equity in earnings related to Midwest of $2.4 million for the three months ended March 31, 2010.

26

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings

The following is a table of the Company's outstanding borrowings as of March 31, 2010 and December 31, 2009:

Initial
Stated
Maturity

Interest
Rate

Contractual
Balance at
March 31,
2010

Contractual
Balance at
December 31,
2009(1)Term LoansWA Secured Term Loan(2)


10/28/2012

LIBOR + 3.50%


246,940


246,884Euronote


10/28/2012

3 month Euribor + 3.50%


79,759


85,218LB Term Loan


2/9/2011

LIBOR + 1.50%


22,199


22,199Term Asset Backed Securities Loan Facility


10/29/2014

2.64%


14,682


14,682Term Asset Backed Securities Loan Facility


3/29/2015

3.63%


23,480


Total Credit Facilities & Term Loans







387,060


368,983Mortgage notes payable (non-recourse)Salt Lake City


9/1/2012

5.16%


15,367


15,471EDS


10/8/2015

5.37%


46,782


46,977Executive Center(3)


1/1/2016

5.85%


51,480


51,480Green Pond


4/11/2016

5.68%


17,058


17,119Indianapolis


2/1/2017

6.06%


28,050


28,142Northstar Healthcare GE


8/30/2010

6.93%





44,163Northstar Healthcare GE


5/1/2015

3 month LIBOR + 5.95%


58,200


Northstar HealthcarePark National


1/11/2014

5.94%


32,837


32,944Northstar HealthcareGEWLK


1/11/2017

6.99%


159,138


159,138Northstar HealthcareGETusc & Harmony


1/11/2017

7.09%


7,843


7,843Northstar HealthcareHarmony FNMA


2/1/2017

6.39%


74,783


75,001Northstar HealthcareGrove City


2/1/2038

5.45%


1,828


1,835Northstar HealthcareLancaster


6/1/2037

6.40%


2,563


2,571Northstar HealthcareMarysville


6/1/2037

6.40%


1,645


1,651Northstar HealthcareWashington


10/1/2038

6.65%


1,947


1,952Northstar HealthcareMiller Merril


6/30/2012

7.07%


117,875


118,320Northstar HealthcareARL Mob Wachovia


5/11/2017

5.89%


3,379


3,389Northstar HealthcareSt Francis


9/10/2010

LIBOR + 2.00%





11,400Aurora


7/11/2016

6.22%


32,877


32,982DSG


10/11/2016

6.17%


33,673


33,795Keene


2/1/2016

5.85%


6,666


6,693Fort Wayne


1/1/2015

6.41%


3,378


3,399Portland


6/17/2014

7.34%


4,605


4,652Milpitas


3/6/2017

5.95%


21,988


22,107Fort Mill


4/6/2017

5.63%


27,700


27,700Reading


1/1/2015

5.58%


13,841


13,905Reading


1/1/2015

6.00%


5,000


5,000Alliance


12/6/2017

6.48%


23,469


23,543Mezzanine loan payable (non-recourse)Fort Mill


4/6/2017

6.21%


2,676


2,743Exchangeable Senior Notes(4)


6/15/2027

7.25%


68,165


68,165Exchangeable Senior Notes ("NNN Notes")(4)


6/15/2013

11.50%


60,750


60,750


27

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

Initial
Stated
Maturity

Interest
Rate

Contractual
Balance at
March 31,
2010

Contractual
Balance at
December 31,
2009(1)Bonds payable(5)N-Star I


8/1/2038

3 month LIBOR + 1.83%
(average spread)


254,932


N-Star II


6/1/2039

LIBOR + 1.31% (average spread)


262,727


N-Star III


6/1/2040

LIBOR + 0.57% (average spread)


352,988


N-Star IV


7/1/2040

LIBOR + 0.60% (average spread)


282,500


282,500N-Star V


9/5/2045

LIBOR + 0.55% (average spread)


443,465


N-Star VI


6/1/2041

3 month LIBOR + 0.53%
(average spread)


282,057


279,057N-Star VII


6/22/2051

LIBOR + 0.35% (average spread)


499,200


499,200N-Star VIII


2/1/2041

LIBOR + 0.48% (average spread)


595,645


590,645Liability to subsidiary trusts issuing preferred securities(5)(6)Trust I


3/30/2035

8.15%


41,240


41,240Trust II


6/30/2035

7.74%


25,780


25,780Trust III


1/30/2036

7.81%


41,238


41,238Trust IV


6/30/2036

7.95%


50,100


50,100Trust V


9/30/2036

3 month LIBOR
2.70%


30,100


30,100Trust VI


12/30/2036

3 month LIBOR
2.90%


25,100


25,100Trust VII


4/30/2037

3 month LIBOR
2.50%


31,475


31,475Trust VIII


7/30/2037

3 month LIBOR
2.70%


35,100


35,100$
4,566,270

$
3,225,348


(1)December 31,
2009 does not include the bonds payable of N-Star I, II, III and V as these CDO financings were unconsolidated financings
prior to January 1, 2010.(2)The
Company had an additional $17.0 million of availability under the delay draw term facility of the WA Secured Term Loan.(3)The
Company has a limited recourse obligation with respect to this loan. The amount of such obligation will vary based upon the tenancy of the property. The
Company believes such obligation will not exceed $2.5 million.(4)The
contractual amounts may differ from the carrying value on the consolidated balance sheets due to the equity component of the debt.(5)Contractual
amounts due may differ from the carrying value on the consolidated balance sheets due to the election of the fair value option. See
Note 4.(6)The
liability to subsidiary trusts for Trusts I, II, III and IV have a fixed interest rate for the first ten years after which the interest rate will float
and reset quarterly at rates ranging from LIBOR plus 2.70% to 3.25%. The Company entered into interest rate swap agreements on Trusts V, VI, VII and VIII which fix the interest rates for
10 years at 8.16%, 8.02%, 7.60% and 8.29%, respectively.


28

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)




Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of March 31, 2010:

Total

Mortgage and
Mezzanine Loans

Secured Term
Loan

Liability to
Subsidiary
Trusts Issuing
Preferred
Securities

Exchangeable
Senior Notes(1)

Bonds Payable2010

$
5,848

$
5,848

$


$


$


$
2011


33,314


11,115


22,199








2012


534,367


139,503


326,699





68,165


2013


71,778


11,028








60,750


2014


60,442


45,760


14,682








Thereafter


3,860,521


583,394


23,480


280,133





2,973,514Total

$
4,566,270

$
796,648

$
387,060

$
280,133

$
128,915

$
2,973,514


(1)$68.2 million
of the Company's 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the
holders repurchase rights which may require the Company to repurchase the notes on June 15, 2012. At
March 31, 2010, the Company was in compliance with all covenants under its borrowings.




As of March 31, 2010 and December 31, 2009, the total carrying amount of the equity components of the exchangeable senior
notes was $4.9 million. The principal amount of the exchangeable senior notes liabilities was $128.9 million as of March 31, 2010 and December 31, 2009. The unamortized
discount of the liability components was $2.7 million and $2.9 million at March 31, 2010 and December 31, 2009, respectively. The net carrying amount of the liability
components was $126.2 million and $126.0 million at March 31, 2010 and December 31, 2009, respectively. Interest expense for the three months ended March 31, 2010 and 2009
related to the exchangeable senior notes was $3.4 million and $5.2 million, respectively, of which $3.0 million and $4.5 million was related to contractual interest,
respectively, and $0.4 million and $0.7 million was attributable to amortization of the debt discount and deferred financing costs, respectively.



On March 31, 2010, the Company closed on a $65.0 million loan with General Electric Capital Corporation. The proceeds
will be primarily used to refinance $52.0 million of loans maturing in 2010 on nine of the Company's healthcare-related net leased assets. The excess proceeds from the financing will be used
for working capital and general corporate purposes. The loan has a five-year term with a one-year interest only period and principal and interest payments thereafter. The
interest rate is 90-day LIBOR + 5.95% with a 1% LIBOR floor.

29

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

10. Related Party Transactions

Advisory Fees

The Company has agreements with each of its N-Star CDO financings to perform certain advisory services. The Company earned
total fees on these agreements of approximately $0.4 million for the three months ended March 31, 2010. The Company earned total fees on these agreements of approximately
$1.6 million for the three months ended March 31, 2009. As of January 1, 2010, the advisory fee income related to N-Star I, N-Star II, N-Star
III and N-Star V is eliminated as a result of the consolidation of the respective CDO financings.

The
Company has an agreement with NorthStar Income Opportunity REIT I, Inc., a commercial finance REIT, to perform certain advisory services. The Company earned total fees on
these agreements of approximately $0.1 million for the three months ended March 31, 2010.

The
Company has an agreement with the Securities Fund to receive base management fees ranging from 1.0% to 2.0% per year on third-party capital. For the three months ended
March 31, 2009, the Company earned $0.1 million in management fees.

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc. to perform certain
management services. The Company incurred $0.5 million and $0.9 million in management fees for the three months ended March 31, 2010 and 2009, respectively, which are recorded in
asset management fees-related parties in the condensed consolidated statement of operations. Pursuant to the December 2009 membership interest redemption and sale agreement, the Company
amended the management agreement with Wakefield Capital Management Inc. The amended management fee will be equal to one-twelfth of
one percent of the daily weighted average amount of NRFC Healthcare Holding Company, LLC's equity for each previous month.

11. Equity Based Compensation

Omnibus Stock Incentive Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock
Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock
options, and stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests
("LTIP Units") or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company and, prior to October 29,
2005, employees pursuant to the shared facilities and services agreement. An aggregate of 8,933,038 shares of common stock of the Company are currently reserved and authorized for issuance under the
Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. As of March 31, 2010, the Company has issued an aggregate of 8,283,340 LTIP Units, net of
forfeitures of 60,368 LTIP Units. An aggregate of 1,677,175 LTIP Units were converted to commons stock and 482,989 shares of common stock were issued pursuant to the Stock Incentive Plan.

30

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation (Continued)

Of
the 8,283,340 LTIP Units, so long as the recipient continues to be an eligible recipient, 4,976,957 will vest to the individual recipient at a rate of one-twelfth of the total amount
granted as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29, July 29, or October 29 for the
three-year vesting period, 2,154,029 will
vest over 16 consecutive quarters with the first quarter being January 29, 2008, 701,058 will cliff vest on December 31, 2010, and 170,801 are subject to no vesting requirements. The
Company accelerated the vesting of 280,495 LTIP Units as part of the termination agreements provided to employees. In addition, the LTIP Unit holders are entitled to dividends on the entire grant
beginning on the date of the grant.

The
Company has recognized compensation expense of $4.7 million and $5.0 million for the three months ended March 31, 2010 and 2009, respectively. As of
March 31 2010, there were approximately 2,677,845 unvested LTIP Units and no LTIP Units were forfeited during the period. The related compensation expense to be recognized over the remaining
vesting period of the Omnibus Incentive Plan LTIP grants is $16.4 million, provided there are no forfeitures.

The
status of all of the LTIP grants as of March 31, 2010 and December 31, 2009 is as follows:

March 31, 2010

December 31, 2009LTIP
Grants

Weighted
Average
Grant Price

LTIP
Grants

Weighted
Average
Grant PriceBalance at beginning of year(1)


7,323

$
9.85


8,067

$
9.86Granted











Converted to common stock


(519
)

9.93


(744
)

9.83Forfeited











Ending balance(2)


6,804

$
9.84


7,323

$
9.85


(1)Reflects
balance at January 1, 2010 and January 1, 2009 for the periods ended March 31, 2010 and December 31, 2009,
respectively.(2)Reflects
balance at March 31, 2010 and December 31, 2009, respectively.


Incentive Compensation Plan

On July 21, 2009, the Compensation Committee of the Board of Directors (the "Committee") of the Company approved the material
terms of a new Incentive Compensation Plan for the Company's executive officers and other employees (the "Plan"). Under the Plan, a potential incentive compensation pool is expected to be established
each calendar year. The size of the incentive pool will be calculated as the sum of (a) 1.75% of the Company's "adjusted equity capital" and (b) 25% of the Company's adjusted funds from
operations, as adjusted ("AFFO"), above a 9% return hurdle on adjusted equity capital. Payout from the incentive pool is subject to achievement of additional performance goals summarized below.

The
incentive pool is expected to be divided into the following three separate incentive compensation components: (1) an annual cash bonus, tied to annual performance of the
Company and

31

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation (Continued)

paid
after year end at or around completion of the year end audit; (2) a deferred cash bonus, determined based on the same year's performance, but paid 50% following the close of each of the
first and second years after such incentive pool is determined, subject to the participant's continued employment through each payment date; and (3) a long-term incentive, paid at
the end
of a three-year period based on the Company's achievement of cumulative performance goals for the three-year period, subject to the participant's continued employment through
the payment date. Performance goals for each component will be set by the Committee initially upon the adoption of the Plan and at the beginning of each subsequent calendar year for each new cycle.
The goals will generally be divided into ranges of performance, each of which will correspond to a pay-out level equal to a percentage of a participant's pool allocation for such
component.

The
annual bonus component for 2010 will be calculated based on AFFO and liquidity targets (weighted 50% and 25%, respectively) with the remaining 25% of the 2010 annual bonus determined
in the Committee's discretion. Additionally, the Committee has also allocated $2.0 million under the Plan for 2010 discretionary cash bonuses. The deferred bonus component will be calculated
based on the same performance measures as the annual bonus, but paid as described above. For the long-term incentive component, each participant will initially be granted a number of
restricted stock units determined by dividing the value of the participant's pool allocation for this component by the 20-day average closing price of the Company's common stock at the end
of the first year of the grant cycle (such amount, the "Initial Long-Term Allocation"). Upon the conclusion of the three-year performance period, the participant will receive a
payout equal to the value of one share of common stock at the time of such payout, with respect to a share of common stock during the three-year performance period, for each unit actually
earned based on the Company's achievement of cumulative AFFO and/or a stock price goal during the performance period (the "Long-Term Payout"). The Long-Term Payout will be made
in the form of shares of common stock to the extent available under the Company's equity compensation plans or, if all or a portion of such shares are not available, in cash; provided, that the amount
of cash paid to any participant with respect to the 2010 long-term incentive component shall not exceed such participant's Initial Long-Term Allocation.

The
Company recorded $0.3 million in equity-based compensation expense related to the long term incentive component of the Plan for the three months ended March 31, 2010.

12. Stockholders' Equity

Dividend Reinvestment and Stock Purchase Plan

In April 2007, the Company implemented a Dividend Reinvestment and Stock Purchase Plan (the "Plan"), pursuant to which it registered
with the SEC and reserved for issuance 15,000,000 shares of its common stock. Under the terms of the Plan, stockholders who participate in the Plan may purchase shares of the Company's common stock
directly from it, in cash investments up to $10,000. At the Company's sole discretion, it may accept optional cash investments in excess of $10,000 per month, which may qualify for a discount from the
market price of 0% to 5%. Plan participants may also automatically reinvest all or a portion of their dividends for additional shares of the Company's stock.

32

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

The
Company expects to use the proceeds from any dividend reinvestments or stock purchases for general corporate purposes.

During
the three months ended March 31, 2010, the Company issued a total of 23,975 common shares pursuant to the Plan for a gross sales price of approximately $0.1 million.
During the three months ended March 31, 2009, the Company issued a total of 4,968 common shares pursuant to the Plan.

Equity Distribution Agreements

In May 2009, the Company entered into an equity distribution agreement with JMP Securities LLC ("JMP"). In accordance with the
terms of the agreement, the Company may offer and sell up to 10,000,000 shares of its common stock from time to time through JMP. JMP will receive a commission from the Company of up to 2.5% of the
gross sales price of all shares sold through it under the equity distribution agreement. For the three months ended March 31, 2010, the Company did not sell any common shares pursuant to its
equity distribution agreement with JMP.

In
May 2008, the Company entered into an equity distribution agreement with Wachovia Capital Markets, LLC ("Wachovia"). In accordance with the terms of the agreement, the Company
may offer and sell up to 10,000,000 shares of its common stock from time to time through Wachovia. Wachovia will receive a commission from the Company of up to 2.5% of the gross sales price of all
shares sold through it under the equity distribution agreement. For the three months ended March 31, 2010 and 2009, the Company did not sell any common shares pursuant to its equity
distribution agreement with Wachovia.

Dividends

On January 19, 2010, the Company declared a dividend of $0.10 per share of common stock. The dividends were paid on
February 12, 2010 to the stockholders of record as of February 5, 2010.

33

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

Earnings Per Share

Earnings per share for the three months ended March 31, 2010 and 2009 is computed as follows (in thousands):

Three Months
Ended
March 31, 2010

Three Months
Ended
March 31, 2009Numerator (Income)Basic EarningsNet (loss)/income attributable to NorthStar Realty Finance Corp. common stockholders

$
(24,923
)
$
84,636Effect of dilutive securities:(Loss)/income allocated to non-controlling interest


(2,373
)

10,400Dilutive net income available to stockholders

$
(27,296
)
$
95,036Basic Earnings:Shares available to common stockholders


75,069


64,348Effect of dilutive securities:OP/LTIP units


7,148


7,907Dilutive Shares


82,217


72,255


The
earnings per share calculation takes into account the conversion of LTIP units into common shares. The LTIPS convert on a one-for-one basis into commons
shares
and share equally in the Company's earnings. Depending on the timing of LTIP conversions and the amount of LTIPS converted, relative to the timing of the Company's earnings allocated to the LTIP
non-controlling interest, and the weighting of the common shares, the LTIP conversions may result in an anti-dilutive effect on earnings per share.

13. Non-controlling Interest

Operating Partnership

Non-controlling interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership
held by limited partners (the "Unit Holders"). Income allocated to the non-controlling interest is based on the Unit Holders ownership percentage of the Operating Partnership. The
ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total number of dilutive shares. The issuance of additional shares of beneficial interest (the
"Common Shares" or "Share") or OP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option of the Company,
it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders' equity and non-controlling
interest in the accompanying consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of March 31, 2010 and
December 31, 2009,

34

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

13. Non-controlling Interest (Continued)

non-controlling
interest related to the aggregate limited partnership units of 6,804,130 and 7,323,310, represented an 8.27% and 8.91% interest in the Operating Partnership, respectively.
Income allocated to the operating partnership non-controlling interest for the three
months ended March 31, 2010 and 2009 was a loss of $2.4 million and income of $10.4 million, respectively.

Joint Ventures

In May 2006, the Company formed NRF Healthcare, LLC with Chain Bridge. On July 9, 2008, NRF Healthcare, LLC sold a
$100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. In December 2009, the Company completed a membership interest redemption with NRF
Healthcare, LLC, NRFC Healthcare Holding Company, LLC, NorthStar Healthcare Investors, Inc., Chain Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or Midwest Holdings,
and certain individuals, pursuant to which NRF Healthcare, LLC redeemed the 5.4% membership interest of Chain Bridge and its affiliates in NRF Healthcare, LLC for $2.0 million and
its membership interest in certain assets. As a result of the redemption, NorthStar holds 100% of the equity interests in NRF Healthcare, LLC, other than the convertible preferred membership
interests held by Inland. Accordingly, NRF Healthcare, LLC's financial statements are consolidated into the Company's consolidated financial statements and Inland American's capital is treated
as a non-controlling interest. Income allocated to the non-controlling interests for the three months ended March 31, 2010 and 2009 was $2.6 million and
$2.5 million, respectively.

In
one of the Company's CDO financings, the Company sold 16.7% of the equity notes to a third party. The equity notes held by the third party are reflected as non-controlling interest in
the Company's condensed consolidated financial statements.

14. Risk Management and Derivative Activities

Derivatives

The Company uses derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest
rate swap agreements and the primary objective is to minimize interest rate risks associated with the Company's investment and financing activities. The counterparties of these arrangements are major
financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties and
it monitors their financial condition; however, the Company currently does not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings and
financial support from the U.S. Government. The objective in using interest rate derivatives is to add stability to interest expense and to manage exposure to interest rate movements.

The
effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is
subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2010 and 2009, such derivatives were used
to hedge the variable cash flows associated with certain variable-rate debt. The ineffective portion of the change in fair value of the

35

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

derivatives
is recognized directly in earnings. During the three months ended March 31, 2010 and 2009, the Company recorded immaterial amounts of hedge ineffectiveness in earnings.

Amounts
reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's
variable-rate debt. During the remainder of 2010, the Company estimates that an additional $6.3 million will be reclassified as an increase to interest expense.

The
following tables summarize the Company's derivative financial instruments that were designated as cash flow hedges of interest rate risk as of March 31, 2010 and
December 31, 2009:

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of March 31, 2010


8

$
75,884

$
(8,206
)
4.18% - 5.08%

December 2010 - August 2018As of December 31, 2009


10

$
90,749

$
(7,691
)
4.18% - 5.08%

March 2010 - August 2018


In
January 2008, the Company elected the fair value option for its bonds payable and its liability to subsidiary trusts issuing preferred securities. As a result, the changes in fair
value of these financial instruments are now recorded in earnings and the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting given that the
underlying debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will
be reclassified into earning over the shorter of either the life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings.

Derivatives
not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet strict hedge
accounting requirements. For the three months ended March 31, 2010 and 2009, the Company recorded, in earnings, a mark-to-market unrealized loss of $33.7 million
and an unrealized loss of $2.9 million, respectively, for the non-qualifying interest rate swaps. For the three months ended March 31, 2010 and 2009, the Company recorded a
$1.4 million and a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

36

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

The
following tables summarize the Company's derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of March 31, 2010 and
December 31, 2009:

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of March 31, 2010


36

$
2,001,491

$
(139,184
)
0.36% - 7.00%


May 2010 - June 2018As of December 31, 2009(1)


22

$
897,335

$
(59,353
)
0.34% - 5.63%


May 2010 - June 2018


(1)December 31,
2009 does not include the interest rate swaps of N-Star I, II, III and V, as these CDO financings were unconsolidated
financings prior to January 1, 2010.


The
following table presents the fair value of the Company's derivative financial instruments as well as their classification on its balance sheet as of March 31, 2010 and
December 31, 2009:

Tabular Disclosure of Fair Values of Derivative Instruments

Asset Derivatives

Liability DerivativesAs of
March 31, 2010

As of
December 31,
2009(1)

As of
March 31, 2010

As of
December 31,
2009(1)Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
ValueDerivatives designated as hedging instrumentsInterest rate products

Derivative
instrument,
at fair value

$


Derivative
instrument,
at fair value

$


Derivative
liability,
at fair value

$
(8,206
)
Derivative
liability,
at fair value

$
(7,691
)Total derivatives designated as hedging instruments



$




$




$
(8,206
)


$
(7,691
)Derivatives not designated as hedging instrumentsInterest rate products

Derivative
instrument,
at fair value

$
57

Derivative
instrument,
at fair value

$


Derivative
liability,
at fair value

$
(139,241
)
Derivative
liability,
at fair value

$
(59,353
)Total derivatives not designated as hedging instruments



$
57



$




$
(139,241
)


$
(59,353
)


(1)December 31,
2009 does not include the derivative instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated
financings prior to January 1, 2010.


37

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)




The following tables present the effect of the Company's derivative financial instruments on its statement of operations for the three months
ended March 31, 2010 and 2009:

Derivatives in Cash Flow Hedging Relationships

Location of Gain/(loss)
recognized in income

Three
Months
Ended
March 31,
2010

Three
Months
Ended
March 31,
2009(1)Interest rate productsAmount of gain or (loss) in OCI on derivative (effective portion)

n/a

$
(857
)
$
2Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion)

Interest Expense

$
(335
)
$
(1,397
)


(1)The
three months ended March 31, 2009 does not include gains or loses and amounts reclassified from accumulated OCI into income on the derivative
instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.


Derivatives Not Designated as Hedging Instruments

Location of Gain/(loss)
recognized in income

Three
Months
Ended
March 31,
2010

Three
Months
Ended
March 31,
2009(1)Interest rate productsAmount of gain or (loss) recognized in income

Unrealized gain (loss) on investment and other

$
(33,749
)
$
2,940Amount of gain or (loss) reclassified from accumulated OCI into income

Unrealized gain (loss) on investment and other

$
(1,404
)
$



(1)The
three months ended March 31, 2009 does not include gains or loses and amounts reclassified from accumulated OCI into income on the derivative
instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.


At
March 31, 2010, the Company's counterparties hold approximately $23.1 million of cash margin as collateral against its swap contracts.

Credit Risk Concentrations

Concentrations of credit risk arise when a number of borrowers, tenants or issuers related to the Company's investments are engaged in
similar business activities or located in the same geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential
concentrations of credit risks. The Company has no one borrower or one

38

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

tenant
that generates 10% or more of its total revenue. However, approximately 34.7% of the Company's rental and escalation revenue for the three months ended March 31, 2010 is generated from
three tenants in the Company's healthcare net lease portfolio. The Company believes the remainder of its net lease portfolio is reasonably well diversified and does not contain any unusual
concentration of credit risks.

15. Segment Reporting

The Company's real estate debt segment is focused on originating, structuring and acquiring senior and subordinate debt investments secured primarily by commercial real estate
properties. The Company generates revenues from this segment by earning interest income from its debt investments and its operating expenses consist primarily of interest costs from financing the
assets. This segment generates income from operations by earning a positive spread between the yield on its assets and the interest cost of its debt. The Company evaluates performance and allocates
resources to this segment based upon its contribution to income from continuing operations.

The
Company's operating real estate segment is focused on acquiring commercial real estate facilities located throughout the U.S. that are primarily leased under long-term
triple-net leases to corporate tenants. Triple-net leases generally require the lessee to pay all costs of operating the facility, including taxes and insurance and maintenance
of the facility. The Company's net-leased facilities are currently located in New York, Ohio, California, Utah, Pennsylvania, New Jersey, Indiana, Illinois, New Hampshire, Massachusetts,
Kansas, Maine, South Carolina, Michigan, Colorado, North Carolina, Florida, Washington, Oregon, Wisconsin, Georgia, Oklahoma, Nebraska, Tennessee, Texas and Kentucky. Revenues from these assets are
generated from rental income received from lessees of the facilities, and operating expenses, which include interest costs related to financing the assets, operating expenses, real estate taxes,
insurance, ground rent and repairs and maintenance. The segment generates income from operations by leasing these facilities at a higher rate than the costs of owning and financing the assets.

The
Company's real estate securities segment is focused on investing in a wide range of commercial real estate debt securities, including CMBS, REIT unsecured debt, credit tenant loans
and unsecured subordinate securities of commercial real estate companies. The Company generates revenues from this segment by earning interest income and advisory fees from owning and managing these
investments. Its operating expenses consist primarily of interest costs from financing its securities. The segment generates income from operations by earning advisory fees and a positive spread
between the yield on its assets and the interest cost of its debt.

39

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

15. Segment Reporting (Continued)

The
following table summarizes segment reporting for the three months ended March 31, 2010 and 2009:

Real Estate
Debt

Operating
Real Estate

Real Estate
Securities(1)

Healthcare
Real Estate
Joint
Venture

Corporate
Investments
and
Other(2)

Consolidated
TotalTotal revenues for the three months endedMarch 31, 2010

$
21,654

$
9,725

$
38,020

$
12,082

$
68

$
81,549March 31, 2009


28,225


11,158


15,331


14,041


(432
)

68,323Consolidated net (loss)/income for the three months endedMarch 31, 2010


(31,946
)

(2,442
)

57,209


(81
)

(42,843
)

(20,103
)March 31, 2009


89,504


(7,621
)

23,421


(1,210
)

(1,968
)

102,126Consolidated net (loss)/income after non-controlling interests and before preferred dividend for the three months endedMarch 31, 2010


(29,168
)

(2,230
)

52,907


(2,715
)

(38,486
)

(19,692
)March 31, 2009


79,709


(6,787
)

20,858


(3,069
)

(844
)

89,867Total assets as ofMarch 31, 2010

$
2,113,427

$
411,580

$
1,251,211

$
625,362

$
96,235


4,527,815


(1)Total
revenues for the three months ended March 31, 2010 and 2009 excludes $0.4 million in net realized and unrealized losses and
$127.6 million in net realized and unrealized gains, respectively.(2)Corporate
Investments and Other includes corporate level investments, corporate level interest income, interest expense and unallocated general &
administrative expenses.


40

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)




16. Supplemental Disclosure of Non-Cash Investing and Financing Activities

A summary of non-cash investing and financing activities for the three months ended March 31, 2010 and 2009 is presented below:

2010

2009Consolidation of assets of N-Star I, II, III and V CDO financings

$
(812,166
)
$
Consolidation of liabilities of N-Star I, II, III and V CDO financings


628,595


Consolidation of non-controlling interest in N-Star I CDO financing


3,216


Distribution of operating real estate to non-controlling interest


9,525


Assumption of mortgage notes and loans payable to non-controlling interest


(4,734
)

Deconsolidation of non-controlling interest in NorthStar Income Opportunity REIT I, Inc


(1,815
)

Stock dividend





10,646


17. Fair Value of Financial Instruments

The following disclosures of estimated fair value were determined by the Company, using available market information and appropriate valuation methodologies. Considerable judgment is
necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition
of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

As
of March 31, 2010 and December 31, 2009, cash equivalents, accounts receivable, accounts payable, repurchase agreements with major banks and securities firms and the
master repurchase agreement balances reasonably approximate their fair values due to the short-term maturities of these items. The available for sale securities and securities sold, not
yet purchased are carried on the balance sheet at their estimated fair value.

For
the real estate debt investments the fair value of the fixed and floating rate investments was approximated comparing yields at which the investments are held to estimated yields at
which loans originated with similar credit risks or market yields at which a third party might require to purchase the investment by discounting future cash flows at such market yields. Prices were
calculated assuming fully extended maturities regardless of if structural or economic tests required to achieve such extended maturities. At March 31, 2010 the fair market value was
$1.6 billion with a gross principal amount of $2.0 billion. At December 31, 2009, the fair market value was $1.7 billion with a gross principal amount of
$2.0 billion.

For
the exchangeable senior notes, the Company uses available market information, which includes quoted market prices or recent transactions, if available to estimate their fair value.
At March 31, 2010, the fair market value of the 7.25% exchangeable senior notes was $57.5 million, with a carrying amount of $67.1 million and the fair market value of the 11.50%
exchangeable senior notes was $52.8 million with a carrying amount of $59.1 million. At December 31, 2009, the fair market value of the 7.25% exchangeable senior notes was
$34.8 million with a carrying amount of $67.0 million and the fair

41

---



Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

17. Fair Value of Financial Instruments (Continued)

market
value of the 11.50% exchangeable senior notes was $28.1 million with a carrying amount of $59.0 million.

For
fixed rate mortgage loans payable, the Company uses rates currently available to them with similar terms and remaining maturities to estimate their fair value. At March 31,
2010, the fair market value was $805.8 million with a carrying amount of $796.6 million. At December 31, 2009, the fair market value was $800.1 million with a carrying
amount of $795.9 million.

Disclosure
about fair value of financial instruments is based on pertinent information available to management as of March 31, 2010 and December 31, 2009. Although
management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that
date and current estimates of fair value may differ significantly from the amounts presented herein.

18. Commitments and Contingencies

Chatsworth Property

One of the Company's net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth,
CA and was 100% leased to Washington Mutual Bank, FA ("WaMu"). The tenant vacated the buildings as of March 23, 2009, and the leases (the "WaMu Leases") were disaffirmed by the FDIC. The assets
were financed with a non-recourse $42.9 million first mortgage loan (the "WaMu Loan") and a $9.2 million mezzanine loan which was collateral for one of the Company's
securities term financings. In the fourth quarter of 2008, the Company took an impairment charge relating to these properties and in the third quarter of 2009 the lender, GECCMC 2005-CI
Plummer Office Limited Partnership (the "Lender"), foreclosed on the property.

On
August 10, 2009, the Lender filed a complaint against NRFC NNN Holdings, Inc. ("NNN") and NRFC Sub Investor IV, LLC, which are subsidiaries of ours, in the
Superior Court of the State of California, County of Los Angeles. In the complaint, the Lender alleges, among other things, that the WaMu Loan is a recourse obligation of NNN due to the FDIC's
disaffirmance of the WaMu Leases. The Company believes this case is without merit and is defending this suit vigorously.

19. Subsequent Events

Dividends

On April 20, 2010, the Company declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A
preferred stock and $0.51563 per share of Series B
preferred stock. The dividends will be paid on May 14, 2010 to the stockholders of record as of the close of business on May 4, 2010.

Midwest Care Holdco TRS I LLC

In April 2010, pursuant to the membership redemption agreement entered into in December 2009, the Company acquired the 51% membership
interest in Midwest owned by Chain Bridge for $1.0 million in cash. As a result of the acquisition, the Company now holds 100% of the common membership interest in Midwest and controls all
major decisions. Accordingly the operations of Midwest, which were previously accounted for under the equity method, will be consolidated.

42

---





Table of Contents

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and notes thereto included in this report.

Forward-Looking Statements

This report contains information that may constitute "forward-looking statements." Such forward-looking
statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology
such as "may," "will," "should," "potential," "intend," "expect," "seek," "anticipate," "estimate," "believe," "could," "project," "predict," "continue" or other similar words or
expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of
results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain. Although
we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in
the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those
forward looking statements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

Factors that could have a material adverse effect on our operations and future prospects are set forth in "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2009, and those described from time to time in our future reports filed with the Securities and Exchange Commission. The factors set
forth in the Risk Factors section could cause our actual results to differ significantly from those contained in any forward- looking statement contained in this report.

Introduction

We primarily derive revenues from interest income on the real estate debt investments that we originate with borrowers or acquire from
third parties and our real estate securities in which we invest. We generate rental income from our net lease investments. Other income comprises a much smaller and more variable source of revenues
and is generated principally from fees associated with early loan repayments.

We
primarily derive income on a recurring basis through the difference between the interest and rental income we are able to generate from our investments, and the cost at which we are
able to obtain financing for our investments. In order to protect this difference, or "spread", we seek to match-fund our investments using secured sources of long term financing such as
CDO financings, mortgage financings and long-term unsecured subordinate debt. Match-funding means that we try to obtain debt with maturities equal to our asset maturities, and borrow funds
at interest rate benchmarks similar to our assets. Match-funding results in minimal impact to spread when interest rates are rising and falling and minimizes refinancing risk since our asset
maturities match those of our debt. We may also acquire investments which generate attractive returns with no long-term financing. Realized gains have more recently been a significant
source of income and have been primarily derived by selling securities at premiums to our carrying values and by repurchasing our issued debt at discounts to contractual face amounts. Both of these
activities are opportunistic in nature and are very dependent on market conditions; therefore it is difficult to predict whether realized gains may be a significant part of income in the future.

43

---



Table of Contents

Profitability and Performance Metrics

We calculate several metrics to evaluate the profitability and performance of our business.



Credit
risk management is our ability to manage our assets in a manner that preserves principal and income and minimizes credit losses that would decrease income.

Corporate
expense management influences the profitability of our business. We must balance making appropriate investments in our infrastructure and employees with the recognition that
our accounting, finance, legal and risk management infrastructure does not directly generate quantifiable revenues for us. We frequently refer to general and administrative expenses, excluding
stock-based compensation expense, divided by total revenues as a measure of our efficiency in managing expenses.

Availability
and cost of capital will impact our profitability and earnings since we must raise new capital to fund a majority of our AUM growth.

Outlook and Recent Trends

U.S. macroeconomic, financial and real estate sector conditions have remained poor since 2007, when the subprime residential lending
and single family housing market collapse quickly spread broadly into the capital markets. The resulting virtual shutdown of the credit and equity markets pushed the U.S. economy into recession, with
the unemployment rate increasing from a low of 4.4% in 2007 to 9.7% at March 31, 2010. Several major financial institutions failed or had to be rescued in 2008, 140 banks failed in 2009 and 57
banks have failed through April 23, 2010. The U.S. Government responded in early 2009 to deteriorating conditions by creating several programs such as the Troubled Asset Relief Program and the
Public-Private Investment Program (TARP and TALF, respectively), designed to create demand for financial instruments and to re-equitize weaker banks. Congress also passed in early 2009 a
$787 billion economic stimulus package, and the U.S. Federal Reserve lowered the Fed Funds target rate from over 5% in 2007 to 0-0.25% in 2009 (where it remains as of
March 31, 2010) and introduced massive amounts of cash liquidity into the banking system.

The
corporate bond, consumer asset-backed debt and equity markets began to recover during 2009 and continued to improve during the first quarter of 2010, although macroeconomic
statistics remained weak and the commercial mortgage-backed markets remained virtually closed. Other traditional commercial real estate lenders such as banks and life companies severely curtailed
their lending between mid-2007 and 2009, resulting in a severe shortage of debt capital for real estate investors and those needing to refinance maturing loans. Several large commercial
banks have begun to rebuild their commercial mortgage lending operations, but new loan volume remains low, and new loans are being offered at leverage levels much lower than were available prior to
the recession. The lack of available credit for commercial real estate has generally depressed values and resulted in increasing loan defaults and restructurings throughout the industry. Furthermore,
poor economic conditions have generally

44

---



Table of Contents

resulted
in declining cash flow from commercial real estate, further depressing values and increasing the difficulty in finding new capital.

During
2009 the TALF program began providing 85% three and five-year non-recourse financing for the highest rated commercial mortgage-backed securities (CMBS) in
order to decrease credit spreads and with the expectation that the subsidized financing would eventually enable the CMBS markets to begin functioning. The program for legacy CMBS securities ended
March 31, 2010, and the program for new issue CMBS securities, which was used for only one transaction, were modestly successful in reducing yields on the highest rated securities. In April
2010, the first multi-borrower CMBS securitization since mid-2008 was completed ($310 million), but the underlying first mortgage collateral represented very low leverage levels
relative to loans underwritten before the financial crisis. The new issue market will have to grow dramatically and investors will have to become more risk tolerant in order to meet the needs of a
majority of borrowers who have pre-existing loans on their properties.

Despite
these conditions, REITs have collectively raised nearly $30 billion of debt and equity capital, and the Morgan Stanley REIT Index returned approximately 28.6% for 2009 and
approximately 20% year-to-date through April 26, 2010. In addition, three newly-formed REITs with a real estate debt focus raised approximately $1.5 billion of
capital in 2009. Notwithstanding the ability of the public REIT market to raise capital, this market is very small relative to the size of the estimated $1.5 trillion commercial real estate finance
market. More recently, U.S. economic conditions appear to be improving (based on GDP growth), however, the unemployment rate remains high indicating a low rate of business expansion, which drives
commercial real estate cash flows. Commercial real estate tends to lag economic recoveries and we expect commercial real estate fundamentals to continue to deteriorate through 2010.



Virtually all commercial real estate property types have been adversely impacted by this prolonged economic recession and liquidity
crisis, including hotel, retail, office, industrial and multi-family properties. Land, condominium and other commercial property types have also been severely impacted. As a result, cash flows and
values associated with properties serving as collateral for our loans are generally weaker than expected when we originated the loans. Business and retailer failures increased during 2009 and into
2010 and are expected to negatively impact occupancy rates in the future. Our credit loss provisioning levels for 2009 and the first quarter of 2010 were higher than in the past due to the impact of
these conditions. The degree to which commercial real estate values are impacted by weaker economic conditions and the level of credit losses in our asset base will be determined primarily by the
length that such conditions persist, the scarcity and cost of new debt capital, the absolute level of one-month LIBOR and the severity of the economic contraction, among other things.

Most
of our real estate loans bear interest rates based on a spread to one-month LIBOR, a floating rate index based on rates that banks charge each other to borrow.
One-month LIBOR as of March 31, 2010 is 0.24%, well below its 3.35% average over the past five years. Lower LIBOR means lower debt service costs for our borrowers which have
partially offset decreasing cash flows caused by the economic recession, and extended the life of interest reserves for those loans that require interest reserves to service debt while the collateral
properties are being repositioned by our borrowers. Lower interest rates also theoretically support real estate valuations because a lower discount rate is applied to underlying future real estate
cash flow assumptions in valuing a property, although the availability and cost of debt capital appears to have a much more significant impact on property values. Currently, a lack of readily
available financing, economic uncertainty and higher returning alternative investment opportunities have increased investor return expectations resulting in much higher risk premiums and, despite the
lower interest rate, lower valuations for commercial real estate properties. The conditions are adversely impacting the performance of our real estate loans and securities and the related

45

---



Table of Contents

collateral
properties. The deep economic recession combined with a crippled banking sector has resulted in weakening cash flows from collateral properties and extreme difficulties in obtaining
repayments at maturity.

For
existing loans, when credit spreads widen, which was the case in 2008 and early 2009, the economic value of existing loans decreases. If a lender were to originate a similar loan
today, such loan would carry a greater credit spread than the existing loan. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed,
the economic value of the loan may be negatively impacted by the incremental interest foregone from the widened credit spread. Accordingly, when a lender wishes to sell or finance the loan, the
reduced value of the loan will impact the total proceeds that the lender will receive.

Our
real estate securities investments are also negatively impacted by weaker real estate market and economic conditions. Within the underlying loan pools, slowdown in economic
conditions is reducing tenants' ability to make rent payments in accordance with the terms of their leases. Additionally, to the extent that market rental rates are reduced, property-level cash flows
are negatively affected as existing leases renew at lower rates. Finally, declining occupancy rates also impact cash flow and reduce borrowers' ability to service their outstanding loans.

Real
estate securities values are also influenced by credit ratings assigned to the securities by accredited rating agencies. In 2009, the rating agencies changed their ratings
methodologies for all securitized asset classes, including commercial real estate, in light of questionable ratings previously assigned to residential mortgage portfolios. Combined with a poor
economic outlook, their reviews have resulted in, large amounts of ratings downgrade actions for CMBS in 2009 and to date in 2010, negatively impacting market values of CMBS and in some cases
negatively impacting the CDO financing structures used by us and others to leverage these investments.

Our
net leased assets are also adversely impacted by a weaker economy as well. Corporate space needs are contracting resulting in lower lease renewal rates and longer releasing periods
when leases are not renewed. Poor economic conditions may negatively impact the creditworthiness of our tenants, which could result in their inability to meet the terms of their leases.



We responded to these difficult conditions by decreasing investment activity and aggressively raising corporate capital when we
observed deteriorating market conditions. We expect credit to continue to be challenging through 2010 and we continue to focus our company resources on portfolio management activities to preserve our
invested capital and liquidity. We anticipate that most of our investment activity and uses of available unrestricted cash liquidity for the foreseeable future will be focused on discounted
repurchases of our previously issued debt securities which generally have been available in the market at very attractive prices, for amortization of bank debt and for growth in our asset management
portfolio.

The
relative lack of supply and high demand for capital is allowing investors with cash to make investments with very attractive returns compared to historical levels. For this reason,
we are working to raise equity capital through alternative channels, especially in the nonlisted REIT market. We have filed a registration statement on Form S-11 for NorthStar Real
Estate Income Trust, Inc., a commercial finance REIT that will be managed by us and will not be listed on a major exchange, and we built NRF Capital Markets, our wholesale broker dealer, to
distribute the equity for this new REIT and other non-listed REITs sponsored by us. We are also raising equity under an SEC Regulation D exemption for NorthStar Income Opportunity
REIT I, Inc., a commercial finance REIT also managed by us. We expect to use our broad commercial real estate investment and management platform to operate these companies and to earn
management fees in return for our services.

46

---



Table of Contents

REITs
focused on healthcare properties are currently being attractively valued, compared to historical levels, by the public equity markets, and at a much lower cost of capital than us.
In December 2009, we filed a registration statement on Form S-11 for NRF Healthcare Investors, Inc. (NRH), a newly formed REIT containing a majority of our net leased
healthcare real estate business having a net book value of approximately $604.6 million at March 31, 2010. We expect that if NRH goes public it would also be managed by us and we would
earn a management fee for our services.

Both
the private REITs and the NRH filing reflect our strategy of accessing alternative sources of equity capital, leveraging our existing platform to generate fee revenues and to become
less reliant on the public markets to grow our business.



As of March 31, 2010, approximately $3.5 billion of our collateralized debt obligations permit reinvestment of capital
proceeds which means when the underlying assets repay we are able to reinvest the proceeds in new assets without having to repay the liabilities. We also have assets with a net book value of
approximately $450.6 million financed on a bank term loan with an outstanding balance of $326.7 million at March 31, 2010. On October 28, 2009, we completed a
three-year extension of this bank term loan and we repaid approximately $52.5 million of the outstanding balance by using uninvested cash contained within our CDO financings. The
bank debt requires six semi-annual amortization payments of $15 million, representing aggregate paydowns totaling $90 million over its term. Approximately
$826.9 million of our funded loan commitments have their initial maturity date during the remainder of 2010; however, most of the loans contain extension options of at least one year (many
subject to performance criteria). We also expect that a majority of the $306.0 million of loans having final maturities during the remainder of 2010 will have their maturities extended beyond
2010 with the expectation that future periods will have more attractive economic conditions and cheaper debt capital. It is therefore difficult to estimate how much capital, if any, will be generated
in our CDO financings from loan repayments during the remainder of 2010 to create availability to further amortize the bank loan.

Our
CDO structures do not have corporate financial covenants but require that the underlying loans and securities meet interest coverage and collateral value coverage (as defined by the
indentures) in order for us to receive regular cash flow distributions. If the tests are not met cash flow is diverted from us to repay the liabilities until the tests are back into compliance. In
some cases, our ability to reinvest can be adversely impacted if these tests are not in compliance. Ratings downgrades and defaults of CMBS and other securities can reduce the deemed value of the
security in measuring collateral coverage, depending on the level of the downgrade. Also, defaults in our loans can reduce the collateral coverage of the defaulted loan in our CDO structures. As
economic conditions remain weak and capital for commercial real estate remains scarce, we expect credit quality in our assets and across the commercial real estate sector to continue to weaken. While
we have devoted a majority of our resources to managing our existing asset base, a continued poor environment and additional credit ratings downgrades will make maintaining compliance with the CDO
structures more difficult, jeopardizing regular cash flow distributions to our company.

We
believe that liquidity will eventually return more broadly to the commercial real estate finance markets and corporate debt capital is currently available to the stronger equity
REITs. Three single-borrower CMBS transactions were completed in the fourth quarter of 2009 and, more importantly, a $310 million multi-borrower CMBS transaction, the first since
mid-2008, was completed in April 2010. Other sources of capital could include term loans from financial institutions and life insurance companies, more restrictive commercial real estate
finance structures, which may not permit reinvestment from asset repayments, and financing provided by motivated sellers
of assets. We also believe that the CMBS markets will eventually heal and once again become an important source of secured, non-recourse debt capital for commercial real estate.

47

---



Table of Contents

Risk Management

We use many methods to actively manage our asset base to preserve our income and capital. Generally, for loans and net lease assets,
frequent dialogue with borrowers/tenants and inspections of our collateral and owned properties have proven to be an effective process for identifying issues early and prior to missed debt service and
lease payments. Many of our loans also require borrowers to replenish cash reserves for items such as taxes, insurance and future debt service costs. Late replenishments of cash reserves also may be
an early indicator there could be a problem with the borrower or collateral property. We also may negotiate modifications to loan terms if we believe such modification improves our ability to maximize
principal recovery. Modifications may include changes to contractual interest rates, maturity dates and other borrower obligations. Generally, when we make a concession such as reducing an interest
rate or extending a maturity date, we seek to get additional collateral and/or fees in return for the modification although as challenging real estate conditions continue, obtaining additional
collateral from struggling borrowers has become more difficult. In some cases we may issue default notices and begin foreclosure proceedings when the borrower is not complying with the loan terms and
we believe taking control of the collateral is the best course of action to protect our capital. For net leases, we may seek to obtain up-front or accelerated payment in return for an
early cancelation of the lease if we believe the tenant's creditworthiness has significantly deteriorated and that taking control of the property and re-leasing it maximizes value.

In
certain circumstances, we may pursue loan sales and payoffs at discounts to our book value. Generally, we may agree to discounted sales or payoffs where we believe there is an
economic benefit from monetizing the asset in advance of its contractual maturity date. For example, we may accept a discounted payoff where we believe the cash proceeds can be reinvested at a much
higher rate of return (including the capital loss from the payoff), where we believe there is significant risk of collateral value or cash flow erosion through maturity, or where we believe
refinancing risk at maturity is very high. When evaluating sales and payoffs at discounts to book value, we also consider the impact such transactions have on our financing structures, corporate debt
covenants and earnings.

Securities
investments generally have a more liquid market than loans and net lease assets, but we typically have very little control over restructuring decisions when there are problems
with the underlying collateral. Generally, we manage risk in the securities portfolio by selling the asset when we can obtain a price that is attractive relative to its risk. In certain situations, we
may sell an asset
because there is an opportunity to reinvest the capital into a new asset with a more attractive risk/return profile.

We
conduct a quarterly comprehensive credit review which is designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a
portfolio-wide basis as an "early warning system." Nevertheless, we cannot be certain that our review will identify all issues within our portfolio due to, among other things, adverse
economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from assets that are not identified by our credit reviews. During the quarterly
reviews, assets are put on non-performing status and identified for possible impairment based upon several factors, including missed or late contractual payments, significant declines in
collateral performance, and other data which may indicate a potential issue in our ability to recover our capital from the investment.

48

---





Table of Contents

At March 31, 2010, our loan portfolio had the following credit statistics (in thousands):

Non-Performing Loans(1)

Number
of Loans

Aggregate
Balance

Reserves

Aggregate
Net Balance

Collateral Types and Locations (% by loan balance)First mortgages


3

$
45,798

$
16,065

$
29,732

77% land located in New York, NY and 23% hotel located in
Omaha, NE.Junior participations in first mortgages


2


38,462


23,000


15,462

74% land located in Orlando, FL and 26% retail located in
Kingston & West Seneca, NY.Total


5

$
84,260

$
39,065

$
45,194Performing loans with loan loss reservesFirst mortgages(2)


4

$
105,114

$
26,480

$
78,634

90% office located in Philadelphia, PA, Austin, TX, San Jose &
Livermore, CA, 7% land located in Livermore, CA and 3%
retail located in Pleasant Hill, IA.Junior participations in first mortgages


1


33,727


7,000


26,727

100% land located in Las Vegas, NV.Mezzanine


4


108,504


36,171


72,333

46% hotel located throughout the USA, 32% retail located in
Phoenix, AZ and 22% multi-family located in Ventura, CA.Total


9

$
247,345

$
69,651

$
177,694Total NPLs and performing loans with loan loss reserves


14

$
331,605

$
108,716

$
222,888


(1)A
loan is classified as non-performing at such time as the loan becomes 90 days delinquent in interest or principal payments or the loan
has a maturity default.(2)Includes
a first mortgage and mezzanine loan held by NorthStar, having a combined $33 million outstanding balance and having the same collateral
base, considered a single first mortgage for purposes of this table.


At March 31, 2010, our loan portfolio principal and interest aging is as follows (inclusive of our non-performing loans) (in
thousands):

1 - 30 Days

31 - 60 Days

61 - 90 Days

90+ Days$77

$65

$10,562

$73,826


For
the three months ended March 31, 2010, we recorded $37.1 million of credit loss provisions relating to eight loans and recorded a $0.8 million credit for a loan
held for sale with a fair market value in excess of its carrying amount. During March 2010 NorthStar foreclosed on a $15.0 million defaulted first mortgage loan backed by hotel collateral
located in Phoenix, AZ and NorthStar simultaneously sold the hotel for approximately $9.6 million. In prior periods NorthStar had recorded $5.0 million of credit loss reserves for this
asset and it was a NPL at December 31, 2009. As of March 31, 2010, loan loss reserves totaled $108.7 million and related to 12 loans having an aggregate $311.1 million book
value (exclusive of the related reserve).

Activity
in the allowance for credit losses on real estate debt investments for the three months ended March 31, 2010, is as follows:

Credit Loss ReserveBalance at December 31, 2009

$
77,400Provision for credit losses


36,316Write-offs


(5,000
)Balance at March 31, 2010

$
108,716


At
March 31, 2010, we had five loans totaling $84.3 million on non-performing status due to maturity defaults, and $39.1 million of our credit loss
reserves were allocated to these loans. First mortgages represent approximately 54.4% of the book value of these loans (exclusive of reserves), and 75.7% of the loans are backed by land collateral.
There can be no assurance that there will be

49

---



Table of Contents

acceptable
outcomes under our non-performing loans and accordingly, we may determine that more reserves are required for these loans.

In
April 2010, NorthStar sold a $13.9 million first mortgage loan backed by land collateral located in New York, NY for approximately $8.5 million. The mortgage was a NPL
and in prior periods NorthStar had recorded $6.3 million of loan loss reserves for this asset. In April 2010 NorthStar also sold a $39.1 million mezzanine loan backed by a portfolio of
hotel properties for approximately $32.1 million. NorthStar had recorded $7.0 million of loan loss reserves for this asset. During April 2010 NorthStar also foreclosed on an
$18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA. NorthStar had in prior periods recorded $8.8 million of loan loss reserves for this asset.

Overall,
the prolonged poor economic conditions and the continuing lack of commercial real estate debt capital is resulting in increasing stress levels for commercial real estate credit.
A shrinking economy generally results in decreasing real estate cash flows as corporations and consumers reduce their real estate needs, travel and spending. While the overall economy has seen some
signs of growth, because market volume remains very low, and banks and life companies have drastically curtailed new lending activity, real estate owners are having difficulty refinancing their assets
at maturity. Many owners are also having trouble achieving their business plans to the extent they acquired a property to reposition it or otherwise invest capital to increase the property's cash
flows. Property values have also
generally decreased over the past few years because of scarcity of financing, which when it is available the terms generally are at much lower leverage and higher cost than available in prior years,
uncertainty regarding future economic conditions and higher returning investment opportunities available in other asset classes. Decreasing values make it difficult for real estate investors to sell
their properties and to recoup their capital. As a result of the weak commercial real estate market, many lenders, including us, are concluding that extending loans at original maturity, rather than
foreclosure and sale, may be the most attractive path for maximizing value.

For
the three months ended March 31, 2010, we modified the contractual interest rates of loans as part of restructuring or extension negotiations and, in some cases, we
discontinued the recognition of income for interest accrual rates in excess of the stated cash pay rates. In the aggregate, these changes, as well as loans which were non-performing during
the quarter, resulted in an approximate $2.9 million reduction to interest income ($12.2 million on an annualized basis).

Many
of our loans were made to borrowers who had a business plan to improve the collateral property and who therefore needed a flexible balance sheet lender. In many cases we required
the borrowers to pre-fund reserves to cover interest and operating expenses until the property cash flows increased sufficiently to cover debt service costs. We also generally required the
investor to refill these reserves if they became deficient due to underperformance and if the borrower wanted to exercise extension options under the loan. Despite low interest rates, we expect that
in the future some of our borrowers may have difficulty servicing our debt because they cannot achieve their business plan in this economic environment. If any of our borrowers are unable to replenish
reserves and otherwise ultimately achieve their business plans, the related loans may become non-performing. In addition, even if a borrower's business plan is achieved, current real
estate valuations and the financing environment may result in a borrower being unable to recoup its invested capital and a default under the loan causing a partial or full loss of our loan principal.

Each
of our loan investments, while primarily backed by commercial real estate collateral, is unique and requires customized asset management strategies for dealing with potential credit
situations. The complexity of each situation depends on many factors, including the number of collateral properties, the type of property, macro and local market conditions impacting the demand, cash
flow and value of the of the collateral, and the financial condition of our borrowers and their willingness to support our collateral properties. Additionally, in many cases there are multiple lenders
involved with

50

---



Table of Contents

specific
collateral properties and these lenders may have different objectives which influence their preferred strategy for dealing with a credit situation.

Our
impairment analyses often requires that we make assumptions regarding collateral values and the timing regarding when we will receive debt service payments, including principal
recovery. In a difficult environment for commercial real estate, our impairment analyses may lead us to the determination that extending and working out a loan, rather than pursuing foreclosure, is
the best course of action to maximize total and long-term value. However, in situations where there are multiple
creditors in large capital structures, it can be particularly difficult to assess the most likely course of action that a lender group or the borrower may take. Consequently, there could be a wide
range of potential principal recovery outcomes, the timing of which can be unpredictable, based on the strategy pursued by a lender group and/or by a borrower. Our impairment analysis in each of these
situations is based on our assessment of the facts and circumstances currently known to us and because these situations often involve complicated collateral and complex creditor and borrower dynamics,
our assessment of recovery value may change more dramatically and quickly and without the visibility that may be available in other situations. These multiple creditor situations tend to be associated
with larger loans, and NorthStar has been and continues to be involved in situations such as these, although Northstar, as one of a group of lenders and often a lender on a subordinated basis, does
not independently control the decision making. The discussion below summarizes the largest credit situations that currently meet some of the foregoing characteristics.



We own a $92.5 million pari passu participation in a $498.6 million first mortgage that is secured by a
retail/entertainment complex located in East Rutherford, NJ (the "NJ Loan"). The NJ Loan was most recently modified as of March 31, 2010 and the maturity date of the NJ Loan was extended to
August 2010 to provide the borrower additional time to seek new capital for the project. There can be no assurance that the borrower will be successful in attracting the capital necessary for the
project and that the NJ Loan will not default in the future. If the NJ Loan were to default, we may lose a substantial amount of our investment, which could have a material adverse effect on our
business and operations.



We own a €72.5 million participation in a mezzanine loan that is collateralized by a German retail portfolio
that is net leased to a single tenant (the "Tenant") that has filed for bankruptcy in Germany (the "German Loan"). There are ongoing negotiations relating to a restructuring of the German Loan, as
well as ongoing discussions relating to a potential sale of the Tenant by the German bankruptcy administrator. There can be no assurance that the restructuring will be successful and that the German
Loan will not default in the future. There can also be no assurance that the bankruptcy administrator will be successful in selling the Tenant. An unsuccessful sale of the Tenant would result in the
Tenant's liquidation and termination of the leases on the retail portfolio that serve as collateral for the German Loan. If the German Loan were to default or the Tenant were liquidated, we may lose
all of our investment, which could have a material adverse effect on our business and operations.



We own an $89.0 million mezzanine loan that is secured by the Hard Rock Hotel and Casino in Las Vegas, NV (the "NV
Loan"). The NV Loan was most recently restructured in December 2009. The final maturity date of the NV Loan was extended to February 2014 to provide additional time for market conditions
to improve and for performance at the property to stabilize. As part of the extension, interest reserves were also established to support the NV Loan. There can be no assurance that market
conditions will improve in the future or that the performance at the property will improve

51

---



Table of Contents

such
that its cash flow can support the NV Loan. If the NV Loan were to default or the interest reserves are depleted and the borrower is not willing to provide additional capital for
the property, we may lose all of our investment, which could have a material adverse effect on our business and operations.

Critical Accounting Policies

Refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2009 entitled
"Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting policies" for a full discussion of our critical accounting policies.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board ("FASB) issued guidance requiring additional disclosures about fair value
measurements regarding transfers between fair value categories as well as purchases, sales, issuances and settlements related to fair value measurements of financial instruments with
non-observable inputs. This update was effective and was adopted without a material impact on our financial condition or results of operations for interim and annual periods beginning
after December 15, 2009 except for disclosures about purchases, sales, issuances and settlements of financial instruments with non-observable inputs, which are effective for years
beginning after December 15, 2010. The additional disclosures required by this update will be included in the note on fair value measurements upon adoption. We do not expect these additional
disclosures to have a material impact on our financial condition or results of operations.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2010 to the Three Months Ended March 31, 2009

Revenues



Interest income for the three months ended March 31, 2010 totaled $57.6 million, representing an increase of
$20.8 million, or 57%, compared to $36.8 million for the three months ended March 31, 2009. For the three months ended March 31, 2010, the increase in interest income was
primarily attributable to: (i) the addition of $24.0 million in interest income as the result of the January 1, 2010 consolidation of the N-Star I, N-Star
II, N-Star III and N-Star V CDO financing's available for sale securities and real estate debt investments; and (ii) the acquisition of higher yielding commercial real
estate securities subsequent to March 31, 2009 resulting in $4.5 million of higher interest, partially offset by: (i) the modification of the contractual interest rates on loans
as part of restructuring or extension negotiations resulting in a decrease of approximately $5.4 million in interest income; (ii) the discontinuation of the recognition of income for
interest accrual rates in excess of the stated cash pay rates related to loans which were non-performing during the quarter resulting in a decrease of approximately $2.0 million in
interest income; and (iii) a lower average one-month LIBOR of approximately 22 basis points and lower comparable asset balances resulting in a decrease of approximately
$0.3 million in interest income.



Interest income from related parties for the three months ended March 31, 2010 totaled $0.6 million, representing a
decrease of $3.9 million, or 87%, compared to $4.5 million for the three months ended March 31, 2009. As of January 1, 2010, the consolidation of the N-Star I,
N-Star II, N-Star III and N-Star V CDOs financing the non-investment grade notes are no longer accounted for

52

---



Table of Contents

as
available for sale securities, resulting in a decrease in interest incomerelated parties of $3.9 million.



Rental and escalation income for the three months ended March 31, 2010 totaled $21.8 million, representing a decrease of
$3.4 million, or 13%, compared to $25.2 million for the three months ended March 31, 2009. The decrease was primarily attributable to decreases of $1.9 million related to
the change of our net lease relationship with one of our healthcare operators, which resulted in one of our unconsolidated affiliates becoming the lessee of the properties and our unconsolidated
affiliate simultaneously entered into a management agreement with a third party operator, $1.0 million related to lower rents and remaining vacancy on the lease renewal for the Cincinnati, OH
property and $0.6 million related to the Chatsworth, CA property lease disaffirmation and foreclosure of the properties by the first mortgage lender in 2009, partially offset by an increase in
rental income of $0.1 million related to a new lease on one of our properties.



Advisory fees from related parties for the three months ended March 31, 2010 totaled $0.5 million, representing a
decrease of approximately $1.2 million, or 71%, compared to $1.7 million for the three months ended March 31, 2009. As of January 1, 2010, the related party advisory and
management fee income earned on the N-Star I, N-Star II, N-Star III and N-Star V CDO financings is eliminated as a result of the consolidation of the
respective CDO financings. The decrease in advisory and management fee incomerelated parties is attributable to the elimination of the advisory and management fee income earned on the
previously non-consolidated CDO financings.



Other revenue for the three months ended March 31, 2010 totaled $1.1 million, representing an increase of
$0.9 million, or 450%, compared to $0.2 million for the three months ended March 31, 2009. Other revenue for three months ended March 31, 2010 consisted primarily of
$0.9 million in early redemption fees on debt securities available for sale and $0.2 million in other fees. Other revenue for the three months ended March 31, 2009 consisted
primarily of $0.1 million in exit fees and $0.1 million in unused credit line fees.

Expenses



Interest expense for the three months ended March 31, 2010 totaled $32.1 million, representing a decrease of
$1.1 million, or 3%, compared to $33.2 million for the three months ended March 31, 2009. The decrease in interest was primarily the result of: (i) $3.3 million
lower interest on our issued CDO notes and trust preferred debt due to lower average LIBOR rates, 2009 debt repurchases and repayments; (ii) $1.8 million lower interest on our 11.50% and
7.25% exchangeable senior notes due to 2009 repurchases; (iii) $0.8 million lower interest as a result of the foreclosure by the first mortgage lender of our Chatsworth, CA properties;
(iv) $0.4 million in lower interest rates on our Euro-note; and (v) $0.1 million lower interest related to the termination of our unsecured revolving credit
line. The decrease in interest expense was partially offset by; (i) the addition of $4.6 million in interest expense as the result of the January 1, 2010 consolidation of the
N-Star I, N-Star II, N-Star III and N-Star V CDO financing bonds payable; (ii) 0.3 million in additional interest related to asset
acquisitions under the Term Asset-Backed Securities Loan Facility, or TALF program; and (iii) $0.4 million higher interest relating to an increased spread on our amended WA Secured Term
Loan.

53

---



Table of Contents



Real estate property operating expenses for three months ended March 31, 2010 totaled $1.8 million, representing a
decrease of $0.3 million, or 14%, compared to $2.1 million for three months ended March 31, 2009. The decrease was primarily attributable to $0.3 million in lower expenses
as a result of the first mortgage lender foreclosing on the Chatsworth, CA properties in during the third quarter of 2009.



Advisory fees for related parties for the three months ended March 31, 2010 totaled $0.5 million, representing a decrease
of $0.4 million, or 44%, compared to $0.9 million for the three months ended March 31, 2009. The decrease was primarily related to the reduced asset management fee rate pursuant
to the amended management agreement with Wakefield Capital Management Inc. We incurred $0.4 million and $0.9 million of management fees to Wakefield Capital Management for the
three months ended March 31, 2010 and 2009, respectively.



Provision for loan losses for the three months ended March 31, 2010 totaled $36.3 million for eight loans and included a
$0.8 million credit for a loan held for sale with a fair market value in excess of its carrying amount. The provision for loan losses for the three months ended March 31, 2010 included
$6.1 million for first mortgage whole loans, $14.0 million for subordinated mortgage interests, $17.0 million for mezzanine loans and a $0.8 million credit for a first
mortgage whole loan. Provision for loan losses for the three months ended March 31, 2009 totaled $21.5 million for ten loans and included $12.0 million for mezzanine loans,
$6.5 million for whole loans and $3.0 million for subordinated mortgage interests.



General and administrative expenses for the three months ended March 31, 2010 totaled $23.5 million, representing an
increase of $6.1 million, or 35%, compared to $17.4 million for the three months ended March 31, 2009. The primary components of our general and administrative expenses were the
following:

Salaries
and equity-based compensation for the three months ended March 31, 2010 totaled $16.5 million, representing an increase of approximately $4.9 million, or
42%, compared to $11.6 million, for the three months ended March 31, 2009. The increase was attributable to a $5.0 million increase related to salaries and accrued cash incentive
compensation costs and a $0.1 million decrease related to equity-based compensation. The $5.0 million increase in salaries and accrued compensation was attributable to a
one-time expense of $3.5 million relating to the separation and consulting agreement with our former COO and higher staffing levels in 2010 primarily relating to our broker-dealer
subsidiary and internalizing management of our healthcare net lease assets. The $0.1 million decrease in equity-based compensation expense was attributable to a $1.3 million decrease in
expense from equity-based awards issued under our 2004 Omnibus Stock Incentive Plan becoming fully vested. The decease was partially offset by an additional $1.0 million of equity-based
compensation expense related to the accelerated vesting of equity-based awards in connection with the separation agreement with our former COO and a $0.2 million of equity-based compensation
expense related to the long-term incentive component of our incentive compensation plan.

Auditing
and professional fees for the three months ended March 31, 2010 totaled $3.0 million, representing an increase of $0.7 million, or 26%, compared to
$2.3 million for the three months ended March 31, 2009. The increase was primarily attributable to approximately a $0.2 million increase in legal fees related to our
non-listed and private REITs, a $0.2 million increase in legal fees related to

54

---



Table of Contents

the
Chatsworth property foreclosure, a $0.1 million increase in fees relating to capital raising and asset sales in our healthcare portfolio and a $0.1 million increase in legal fees for
general corporate work, and portfolio management.

Other
general and administrative expenses for the three months ended March 31, 2010 totaled $4.1 million, representing an increase of approximately $0.5 million, or
14%, compared to $3.6 million for the three months ended March 31, 2009. The increase was primarily attributable to increased overhead costs resulting from higher staffing levels during
the three months ended March 31, 2010.



Depreciation and amortization expense for the three months ended March 31, 2010 totaled $8.5 million, representing a
decrease of $5.8 million, or 41%, compared to $14.3 million for the three months ended March 31, 2009. The decrease was primarily attributable to a decrease of $5.4 million
related to charges associated with the 2009 foreclosure by the first mortgage lender of the Chatsworth, CA property, a decrease of $0.3 million related to the membership redemption agreement
with Chain Bridge pursuant to which we contributed certain assets and a decrease of $0.1 million related to several assets in our net lease portfolio being fully depreciated.



Equity in earnings (loss) for the three months ended March 31, 2010 was net earnings of $1.3 million, representing an
increase of $5.7 million, compared to a loss of $4.4 million for the three months ended March 31, 2009. For the three months ended March 31, 2010, we recognized equity in
earnings of $2.4 million from our unconsolidated affiliated lessee formed in 2009, resulting from the termination of a lease to a third party in our healthcare real estate portfolio and
$0.1 million in connection with a net lease joint venture. The equity in earnings were partially offset by equity in losses of $0.9 million from the Securities Fund (which includes both
realized and unrealized gains from asset sales and mark-to-market adjustments) and $0.5 million from the LandCap joint venture. For the three months ended
March 31, 2009, we recognized equity in losses of $2.3 million from the LandCap joint venture and equity in losses of $2.3 million from the Securities Fund (which includes both
realized and unrealized gains from asset sales and mark-to-market adjustments). The losses were partially offset by equity in earnings of $0.2 million in connection with
a net lease joint venture.



Unrealized gain (loss) on investments and other decreased by approximately $92.5 million for the three months ended
March 31, 2010 to a loss of $1.8 million, compared to a gain of $90.7 million for the three months ended March 31, 2009. The unrealized gain on investments and other for
the three months ended March 31, 2010 consisted primarily of $96.4 million mark-to-market adjustment gains on various available for sale securities and
mark-to-market adjustment gains of $2.6 million on our corporate lending joint venture (which is an equity investment that is marked to market), partially offset by
unrealized mark-to-market adjustment losses of $41.8 million on various issued CDO bonds payable, $35.2 million unrealized losses on interest rate swap
derivatives no longer qualifying, or not designated as, hedging instruments and mark-to-market
adjustment losses of $23.8 million on liability to subsidiary trusts issuing preferred. The unrealized gain on investment for the three months ended March 31, 2009 consisted primarily of
unrealized gains related to mark-to-market adjustments of $135.6 million on various N-Star CDO bonds payable, unrealized gains of $1.5 million on
interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments and unrealized gains of $1.9 million on liability to subsidiary trusts issuing preferred
securities. The increase was partially offset by unrealized losses related to mark-to-market adjustments of $23.2 million on various available for sale securities and
unrealized losses of $25.2 million on our corporate lending joint venture (which is an equity investment that is marked to market).

55

---



Table of Contents



The realized gain of $1.4 million for the three months ended March 31, 2010 consisted primarily of net realized gains of
$3.3 million on the sale of certain real estate debt securities available for sale offset partially by a net foreign currency translation loss of $1.2 million related to our
Euro-denominated investment, net losses of $0.4 million on the redemption of certain available for sale securities and a loss of $0.3 million on the termination of an
interest rate swap in connection with the GE refinancing. The realized gain on investments and other of $36.9 million for the three months ended March 31, 2009, was attributable to net
realized gains of $34.4 million on the repurchase of $61.0 million of our 7.25% exchangeable senior notes and net realized gains of $2.5 million on the sale of certain debt
securities available for sale, offset partially a foreign currency translation gain of $0.1 million related to our Euro-denominated investment.



Income from discontinued operations represents the operations of properties sold or held for sale during the period. In December 2009,
our healthcare venture sold a portfolio of 18 assisted living facilities located in North Carolina. Accordingly, income of $0.6 million related to the operations of these properties was
reclassified to income from discontinued operations for the three months ended March 31, 2009.

Liquidity and Capital Resources

We require significant capital to fund our investment activities and operating expenses. Our capital sources may include cash flow from
operations, net proceeds from asset repayments and sales, borrowings under revolving credit facilities, financings secured by our assets such as first mortgage and CDO financings,
long-term senior and subordinate corporate capital such as senior notes, trust preferred securities and perpetual preferred and common stock. As we discussed in "Outlook and Recent
Trends", availability of such capital from all of these sources is extremely scarce (if available at all) for most financial institutions that do not have access to U.S. Government funding sources
such as the Fed Discount window, including commercial mortgage REITs, and we expect this capital to be difficult to obtain during 2010.

Our
total available liquidity at March 31, 2010 was approximately $214.2 million, including $116.8 million of unrestricted cash and cash equivalents and
$97.4 million of uninvested and available funds in our CDO financings, which is available only for reinvestment within the CDO structures. Under the WA Secured Term Loan, we are required to
make semi-annual amortization payments of $15.0 million, and $90.0 million of total aggregate amortization payments over the term of the loan. We expect to fund these
amortization payments from existing cash liquidity, proceeds from future loan repayments and/or asset sales.

As
a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where we do not receive corresponding cash, and we
intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Internal Revenue Code and to avoid federal income tax and the
non-deductible excise tax. In the past, we have maintained high unrestricted cash balances relative to the historical difference between our distributions and cash provided by operating
activities. On a quarterly basis, our Board of Directors determines an appropriate common stock dividend based upon numerous factors, including AFFO, REIT qualification requirements, the amount of
cash flows provided by operating activities, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing
sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our
business or prospects. Although

56

---



Table of Contents

we
significantly reduced the cash portion of quarterly dividends paid in 2009 and 2010 to date relative to prior periods, future dividend levels are subject to further adjustment based upon our
evaluation of the factors described above, as well as other factors that our Board of Directors may, from time to time, deem relevant to consider when determining an appropriate common stock dividend.

We
currently believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs; however, our CDO financing structures
generally require that the underlying collateral and cash flow generated by the collateral to be in excess of ratios stipulated in the related indentures. These ratios are called
overcollateralization, or OC, and interest coverage, or IC, tests. The reinvestment periods, which allow us to reinvest principal payments on the underlying assets into qualifying replacement
collateral and is instrumental in maintaining OC and IC ratios, for our N-Star CDO I, II and III have expired, and, for our N-Star CDO IV, N-Star CDO V,
N-Star CDO VI, N-Star CDO VII, N-Star CDO VIII and N-Star CDO IX will expire in July 2010, September 2010, June 2011, June 2011, February 2012 and June
2012, respectively. Since we are or will be unable to reinvest principal in these CDOs, principal repayments will pay down the senior-most notes, which will de-lever the CDO.
Following the conclusion of the reinvestment period in these CDOs, our ability to maintain the OC and IC ratios will be negatively impacted. In the event these tests are not met, cash that would
normally be distributed to us would be used to amortize the senior notes until the financing is back in compliance with the tests. In the event cash flow is diverted to repay the notes, this could
decrease cash available to pay our dividend and to comply with REIT requirements. Additionally, we may be required to buy assets out of our CDO financings in order to preserve cash flow. As of
March 31, 2010, we were in compliance with all of the OC and IC tests in our CDO financings. We expect that very weak economic conditions, lack of capital for commercial real estate, decreasing
real estate values and credit ratings downgrades of real estate securities will make complying with OC and IC tests more difficult in 2010 and in the future.

The
following is a summary of our CDO cash distribution and coverage tests as of March 31, 2010:

Cash Distributions(1)

Quarterly
Interest Coverage
Cushion(2)

Overcollateralization
CushionPrimary
Collateral
Type

Quarter Ended
March 31,
2010

March 31,
2010

March 31,
2010

At
OfferingN-Star I(3)

CMBS

$
429

$
350

$
8,812

$
8,687N-Star II

CMBS


177


137


4,671


10,944N-Star III

CMBS


1,688


1,904


52,579


13,610N-Star IV

Loans


2,228


2,131


47,973


19,808N-Star V

CMBS


1,269


1,432


54,589


12,940N-Star VI

Loans


1,125


3,510


34,951


17,412N-Star VII

CMBS


2,501


2,192


80,206


13,966N-Star VIII

Loans


3,912


5,055


71,032


42,193N-Star IX(4)

CMBS


1,468


1,501


55,481


24,516


Table
shows cash distributions to the retained income notes. Interest coverage and overcollateralization coverage to the most constrained class. (1)Cash
distributions are exclusive of senior management fees which are not subject to the coverage tests.(2)Quarterly
interest cushion and overcollateralization cushion from remittance report issued on date nearest to March 31, 2010.(3)N-Star
I equity cash flow represents NorthStar's 83% ownership percentage. First quarter 2010 cash distribution excludes a $0.9 million
fee received related to a tender offer.


57

---



Table of Contents

(4)NorthStar
indirectly owns approximately 31% of N-Star IX income notes through its interest in the Securities Fund.


We
will seek to meet our long term liquidity requirements, including the repayment of debt and our investment funding needs, through existing cash resources, our existing CDOs and the
liquidation or refinancing of assets at maturity; nonetheless, our ability to meet a long-term (beyond one year) liquidity requirement may be subject to obtaining additional debt and
equity financing. Any decision by our lenders and investors to provide us with financing will depend upon a number of factors, such as our compliance with the terms of its existing credit
arrangements, our financial
performance, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders' and investors' resources and policies concerning the terms under which
they make capital commitments and the relative attractiveness of alternative investment or lending opportunities.



In May, 2009, we entered into an equity distribution agreement with JMP Securities, LLC, or JMP. In accordance with the terms of
the agreement, we may offer and sell up to 10,000,000 shares of our common stock from time to time through JMP. JMP will receive a commission from us of up to 2.5% of the gross sales price of all
shares sold through it under the equity distribution agreement. We may offer and sell shares of our common stock pursuant to our equity distribution agreement if we believe the economics are
attractive, and may use the proceeds for investments, debt repayment or general corporate purposes.

During
the three months ended March 31, 2010, we did not issue any shares pursuant to our equity distribution agreement with JMP.



Effective as of April 27, 2007, we implemented a Dividend Reinvestment and Stock Purchase Plan, or the Plan, pursuant to which
we registered and reserved for issuance 15,000,000 shares of our common stock. Under the terms of the Plan, stockholders who participate in the Plan may purchase shares of our common stock directly
from us, in cash investments up to $10,000. At our sole discretion, we may accept optional cash investments in excess of $10,000 per month, which may qualify for a discount from the market price of 0%
to 5%. Plan participants may also automatically reinvest all or a portion of their dividends for additional shares of our stock. We expect to use the proceeds from any dividend reinvestments or stock
purchases for general corporate purposes.

During
the three months end March 31, 2010, we issued a total of 23,975 common shares pursuant to the Plan for a gross sales price of approximately $0.1 million.



On March 31, 2010, we closed on a $65.0 million loan with General Electric Capital Corporation. The proceeds will be
primarily used to refinance $52.0 million of loans maturing in 2010 on nine of our healthcare-related net leased assets. The excess proceeds from the financing will be used for working capital
and general corporate purposes. The loan has a five-year term with a one-year interest only period and principal and interest payments thereafter. The interest rate is
90-day LIBOR + 5.95% with a 1% LIBOR floor.

Cash Flows

The net cash used by operating activities was $3.9 million for the three months ended March 31, 2010 compared to the net
cash flow provided by operating activities of $8.9 million for the three

58

---



Table of Contents

months
ended March 31, 2009. The decrease was primarily due to the lower LIBOR rates and lower spreads on our lending assets which decreased interest income generated from our asset base.

The
net cash flow used in investing activities was $28.4 million for the three months ended March 31, 2010 compared to the net cash used in investing activities of
$9.9 million for the three months ended March 31, 2009. The primary uses of cash flow used in investing activities in 2010 were the acquisition of available for sale securities and
originations of real estate debt investments. The primary uses of cash flow used by investing activities in 2009 were the origination or acquisition of real estate debt investments, and the
acquisition of real estate securities.

The
net cash flow provided by financing activities was $10.2 million for the three months ended March 31, 2010 compared to cash used by financing activities of
$11.6 million of cash used by financing activities for the three months ended March 31, 2009. The primary source of cash flow by financing activities was mortgage notes and loan
borrowings. Net cash flow used in financing activity in 2009 was primarily related to the repurchase of our bonds and repayments on our credit facilities.

Contractual Obligations and Commitments

As of March 31, 2010, we had the following contractual commitments and commercial obligations (dollars in thousands):

Payments Due by PeriodContractual Obligations

Total

1 year

2-3 years

4-5 years

After 5 YearsMortgage notes

$
793,972

$
5,654

$
149,962

$
56,040

$
582,316Mezzanine loan payable


2,676


194


656


748


1,078Exchangeable senior notes(1)


128,915





68,165


60,750


Bonds payable


2,973,514











2,973,514Secured term loan


387,060





348,898


14,682


23,480Liability to subsidiary trusts issuing preferred securities


280,133











280,133Capital leases(2)


16,008


365


982


1,004


13,657Operating leases


69,398


4,229


10,983


10,968


43,218Outstanding unfunded commitments(3)


69,381


60,776


8,558


47


Estimated interest payments


613,826


85,708


237,465


163,117


127,535Total contractual obligations

$
5,334,883

$
156,927

$
825,668

$
307,356

$
4,044,931


(1)$68.2 million
of our 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the holders
repurchase rights which may require us to repurchase the notes on June 15, 2012.(2)Includes
interest on the capital leases.(3)Our
future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaled $69.4 million,
of which a minimum of $46.0 million will be funded within our existing CDO financings. Fundings are categorized by estimated funding period. We expect that our secured credit facility lender
generally will advance a majority of future fundings that are not otherwise funded within our CDO financings. Based upon currently approved advance rates on our credit facility and CDOs and assuming
that all loans that have future fundings meet the terms to qualify for such funding, our equity requirement on the remaining $23.4 million of future funding requirements would be approximately
$6.5 million over the next two years.


59

---



Table of Contents




Our
debt obligations contain covenants that are both financial and non-financial in nature. Significant financial covenants include a requirement that we maintain a minimum
tangible net worth, a minimum level of liquidity and a minimum fixed charge coverage ratio. As of March 31, 2010, we were in compliance with all financial and non-financial
covenants in our debt agreements.

Recent Developments

Dividends

On April 20, 2010, we declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred
stock and $0.51563 per share of Series B preferred stock. The dividends will be paid on May 14, 2010 to the stockholders of record as of the close of business on May 5, 2010.

Midwest Care Holdco TRS I LLC

In April 2010, pursuant to the membership redemption agreement entered into in December 2009, we acquired the 51% membership interest
in Midwest owned by Chain Bridge for $1.0 million in cash. As a result of the acquisition, we now hold 100% of the common membership interest in Midwest and control all major decisions.
Accordingly the operations of Midwest, which were previously accounted for under the equity method, will be consolidated.

Inflation

Our leases for tenants of operating real estate are generally either:



We
believe that most inflationary increases in expenses will be offset by the expense reimbursements and contractual rent increases described above to the extent of occupancy.

We
believe that the risk associated with an increase in market interest rates on the floating rate debt used to finance our investments in our CDO financings and our direct investments
in real estate debt, will be largely offset by our strategy of matching the terms of our assets with the terms of our liabilities and through our use of hedging instruments.

See
"Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of our Annual Report on Form 10-K for additional information on our exposure to
market risk.

Non-GAAP Financial Measures



Management believes that funds from operations, or FFO, and adjusted funds from operations, or AFFO, each of which are
non-GAAP measures, are additional appropriate measures of the operating performance of a REIT and NorthStar in particular. We compute FFO in accordance with the standards established by
the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss (computed in accordance with GAAP), excluding
gains or losses from sales of depreciable properties, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, and after adjustments for
unconsolidated/uncombined partnerships and joint ventures. AFFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company's cash flow generated by
operations.

60

---



Table of Contents

We
calculate AFFO by subtracting from (or adding) to FFO:



Our
calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs.
Our management utilizes FFO and AFFO as measures of our operating performance, and believes they are also useful to investors, because they facilitate an understanding of our operating performance
after adjustment for certain non-cash expenses, such as real estate depreciation, which assumes that the value of real estate assets diminishes predictably over time and, in the case of
AFFO, equity based compensation. Additionally, FFO and AFFO serve as measures of our operating performance because they facilitate evaluation of our company without the effects of selected items
required in accordance with GAAP that may not necessarily be indicative of current operating
performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways
throughout the REIT industry, we also believe that FFO and AFFO may provide us and our investors with an additional useful measure to compare our financial performance to certain other REITs.

Neither
FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO and AFFO do not represent
amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be
considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

61

---



Table of Contents

Set
forth below is a reconciliation of FFO and AFFO to net income from continuing operations before non-controlling interest for the three months ended March 31, 2010
and 2009 (in thousands):

Three Months
Ended
March 31, 2010

Three Months Ended March 31, 2009Funds from Operations:(Loss)/income from continuing operations

$
(20,103
)
$
102,126Non-controlling interest in joint ventures


(1,962
)

(2,464
)Consolidated net (loss)/income before non-controlling interest in operating partnership


(22,065
)

99,662Adjustments:Preferred stock dividends


(5,231
)

(5,231
)Depreciation and amortization


8,483


14,285Funds from discontinued operations





1,134Real estate depreciation and amortizationunconsolidated ventures


237


247Funds from Operations

$
(18,576
)
$
110,097Adjusted Funds from Operations:Funds from Operations

$
(18,576
)
$
110,097Straight-line rental income, net


(546
)

(472
)Straight-line rental income, discontinued operations





Straight-line rental income and fair value lease revenue, unconsolidated ventures


(26
)

(32
)Amortization of equity-based compensation


5,058


5,144Amortization of above/below market leases


(264
)

(325
)Unrealized (gains)/losses from mark-to-market adjustments


(20,158
)

(94,563
)Unrealized (gains)/losses from mark-to-market adjustments, unconsolidated ventures


625


2,765Adjusted Funds from Operations

$
(33,887
)
$
22,614


Return on Average Common Book Equity

We calculate return on average common book equity ("ROE") on a consolidated basis and for each of our major business lines. We believe
that ROE provides a good
indication of our performance and our business lines because we believe it provides the best approximation of cash returns on common equity invested. Management also uses ROE, among other factors, to
evaluate profitability and efficiency of equity capital employed, and as a guide in determining where to allocate capital within its business. ROEs may fluctuate from quarter to quarter based upon a
variety of factors, including the timing and amount of investment fundings, repayments and asset sales, capital raised and leverage used, and the yield on investments funded.

62

---





Table of Contents

Return on Average Common Book Equity  (including and excluding G&A and one-time items)  (dollars in thousands)

Three Months Ended
March 31,
2010

Annualized
March 31,
2010



Year Ended
December 31,
2009Adjusted Funds from Operations (AFFO)



$
(33,887
)
$
(135,548
)
[A]

$
82,545Plus: General & Administrative Expenses




23,484







70,542Less: Equity-Based Compensation included in G&A




5,058







20,474Less: Bad debt expense included in G&A




323







1,554AFFO, excluding G&A




(15,784
)

(63,136
)
[B]


131,059Average Common Book Equity & Operating Partnership Non-Controlling Interest(1)

[C]

$
1,191,879






$
1,194,310Return on Average Common Book Equity (including G&A)

[A]/[C]


Neg







6.9
%Return on Average Common Book Equity (excluding G&A)

[B]/[C]


Neg







11.0
%


(1)Average
Common Book Equity & Operating Partnership Non-controlling Interest computed using beginning and ending of period balances. ROE
will be impacted by the timing of new investment closings and repayments during the quarter.


Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Although we seek to match-fund our assets and mitigate the risk associated with future interest rate volatility, we are
primarily subject to interest rate risk prior to match-funding our investments and because we generally maintain a net floating rate asset or liability position. To the extent we have net floating
rate assets, our earnings will generally increase with increases in floating interest rates, and decrease with declines in floating interest rates. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Our
interest rate risk sensitive assets, liabilities and related derivative positions are generally held for non-trading purposes. As of March 31, 2010, a hypothetical
100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $23.6 million offset by an increase in our interest
expense of approximately $13.8 million on our variable rate liabilities. Similarly, a hypothetical 100 basis point decrease in interest rates would decrease our annual interest income by the
same net amount.

Real Estate Debt

We invest in real estate debt which is generally secured by commercial and multifamily properties, including first lien mortgage loans,
junior participations in first lien mortgage loans, second lien mortgage loans, mezzanine loans, and preferred equity interests in borrowers who own such properties. We generally hold these
instruments for investment rather than trading purposes. These investments bear interest at either a floating or fixed rate. The interest rates on our floating rate investments typically float at a
fixed spread over an index such as LIBOR. These instruments typically reprice every 30 days based upon LIBOR in effect at that time. Given the frequent and periodic repricing of our floating
rate investments, 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 earnings
from our

63

---



Table of Contents

investments.
Increases in LIBOR will increase the interest income received by us on our investments and therefore increase our earnings. Decreases in LIBOR have the opposite effect.

We
also invest in fixed rate investments. The value of these investments may be affected by changes in long-term interest rates. To the extent that long-term
interest rates increase, the value of long-term fixed rate assets is diminished. Any fixed rate real estate debt investments which we hold would be similarly impacted. We do not generally
seek to hedge this type of risk unless the asset is leveraged as we believe the costs of such a hedging transaction over the term of such an investment would generally outweigh the benefits. If fixed
rate real estate debt is funded with floating rate liabilities, we typically convert the floating rate to fixed through the use of interest rate swaps, caps or other hedges. Because the interest rates
on our fixed rate investments are generally fixed through maturity of the investment, changes in interest rates do not affect the income we earn from our fixed rate investments.

The
value of our fixed and floating rate real estate debt investments changes with market credit spreads. This means that when market-demanded risk premiums, or credit spreads, increase,
the value of our fixed and floating rate assets decrease, and vice versa. Market credit spreads are currently much wider than existed at the time we originated a majority of our real estate debt
investments. These wider market credit spreads imply that our real estate debt investments may be worth less than the amounts at which we carry these investments on our balance sheet, but because we
have typically financed these investments with debt priced in a similar credit environment and intend to hold them to maturity we do not believe that intra- and inter-period changes in value caused by
changing credit spreads material impacts the economics associated with our real estate debt investments.

In
our real estate debt business we are also exposed to credit risk, which is the risk that the borrower under our loan agreements cannot repay its obligations to us in a timely manner.
Our loans are generally collateral dependent, meaning the principal source of repayment is from a sale or refinancing of the collateral securing our loan. Default risk increases in weak economic
conditions because collateral cash flows may be below expectations when the loan was originated. Defaults also increase when, at loan maturity, the cost of debt and equity capital is higher than when
the loan was originated. In the event that a borrower cannot repay our loan, we may exercise our remedies under the loan documents, which may include a foreclosure against the collateral. We describe
many of the options available to us in this situation in "Item 1 Business" of our Annual Report on Form 10-K. To the extent the value of our collateral exceeds the amount of
our loan (including all debt senior to us) and the expenses we incur in collecting on our loan, we would collect 100% of our loan amount. To the extent that the amount of our loan plus all debt senior
to our position exceeds the realizable value of our collateral, then we would incur a loss. We also incur credit risk in our periodically scheduled interest payments which may be interrupted as a
result of the operating performance of the underlying collateral.

We
seek to manage credit risk through a thorough analysis of a transaction before we make such an investment. Our analysis is based upon a broad range of real estate, financial, economic
and borrower-related factors which we believe are critical to evaluating the credit risk inherent in a transaction.

Real Estate Securities

In our real estate securities business, we seek to mitigate credit risk through credit analysis, subordination and diversification. The
CMBS we invest in are generally junior in right of payment of interest and principal to one or more senior classes, but benefit from the support of one or more subordinate classes of securities or
other form of credit support within a securitization transaction. The senior unsecured REIT debt securities we invest in reflect comparable credit risk. Credit risk refers to each individual
borrower's ability to make required interest and principal payments on the scheduled

64

---



Table of Contents

due
dates. While the expected yield on these securities is sensitive to the performance of the underlying assets, the more subordinated securities and certain other features of a securitization, in
the case of mortgage backed securities, and the issuer's underlying equity and subordinated debt, in the case of REIT securities, are designed to bear the first risk of default and loss. The real
estate securities portfolios of our investment grade CDO financings are diversified by asset type, industry, location and issuer. We further seek to minimize credit risk by monitoring the real estate
securities portfolios of our investment grade CDO financings and the underlying credit quality of their holdings.

The
real estate securities underlying our investment grade CDO financings are also subject to credit spread risk. The majority of these securities are fixed rate securities, which are
valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. In other words, their value is dependent on the yield demanded on such securities by the
market, based on their credit relative to U.S. Treasuries. An excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these
securities, resulting in the use of a higher or "wider" spread over the benchmark rate (usually the applicable U.S. Treasury security yield) to value these securities. Under these conditions, the
value of our real estate securities portfolio would tend to decrease. Conversely, if the spread used to value these securities were to decrease or "tighten," the value of our real estate securities
would tend to increase. Such changes in the market value of our real estate securities portfolio may affect our net equity or cash flow either directly through their impact on unrealized gains or
losses on available-for-sale securities by diminishing our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access
capital.

Returns
on our real estate securities are sensitive to interest rate volatility. If interest rates increase, the funding cost on liabilities that finance the securities portfolio will
increase if these liabilities are at a floating rate or have maturities shorter than the assets.

Our
general financing strategy has focused on the use of "match-funded" structures. This means that we seek to align the maturities of our debt obligations with the maturities of our
investments in order to minimize the risk of being forced to refinance our liabilities prior to the maturities of our assets, as
well as to reduce the impact of fluctuating interest rates on earnings. In addition, we generally match interest rates on our assets with like-kind debt, so that fixed rate assets are
financed with fixed rate debt and floating rate assets are financed with floating rate debt, directly or through the use of interest rate swaps, caps or other financial instruments or through a
combination of these strategies. Our investment grade CDO financings utilize interest rate swaps to minimize the mismatch between their fixed rate assets and floating rate liabilities.

Our
financing strategy is dependent on our ability to place the match-funded debt we use to finance our real estate securities at spreads that provide a positive funding spread. Match
funded debt is currently very difficult to obtain, and market-demanded yields on all real estate assets have increased. Our current strategy is to use our existing CDO structures to fund new
investment activity when repayment or sale proceeds are available within the financing, or to acquire securities which generate attractive returns without leverage.

Interest
rate changes may also impact our net book value as our investments in debt securities are marked-to-market each quarter with changes in fair value
reflected in unrealized gains/losses or other comprehensive income (a separate component of owners' equity). Generally, as interest rates increase, the value of fixed rate securities within the CDO
transaction, such as CMBS, decreases and as interest rates decrease, the value of these securities will increase. Conversely, we mark our CDO liabilities to market which causes a partial offset to the
income and balance sheet impact of marking the securities assets to market.

65

---



Table of Contents

Net Lease Properties

Our ability to manage the interest rate risk and credit risk associated with the assets we acquire is integral to the success of our
net lease properties investment strategy. Although we may, in special situations, finance our purchase of net lease assets with floating rate debt, our general policy is to mitigate our exposure to
rising interest rates by financing our net lease property purchases with fixed rate mortgages. We seek to match the term of fixed rate mortgages to our expected holding period for the underlying
asset. Factors we consider to assess the expected holding period include, among others, the primary term of the lease as well as any extension options that may exist.

The
value of our net lease real estate properties may be influenced by long-term fixed interest rates. To derive value, an investor typically forecasts expected future cash
flows to be generated
by the property then discounts the cash flows at a discount rate based upon a long-term fixed interest rate (such as the 10-year U.S. Treasury Note yield) plus a risk premium
based on the property type and creditworthiness of the tenants. Lower risk free rates generally result in lower discount rates and therefore higher valuations and vice versa although the scarcity of
financing for net lease properties and investor concerns over commercial real estate generally have recently decreased commercial real estate valuations, including valuations for net lease properties.
We generally intend to hold our net lease properties for long periods, but the market value of the asset may fluctuate with changes in interest rates, among other things.

We
are subject to the credit risk of the corporate lessee of our net lease properties. We undertake a rigorous credit evaluation of each tenant prior to acquiring net lease asset
properties. This analysis includes an extensive due diligence investigation of the tenant's business as well as an assessment of the strategic importance of the underlying real estate to the tenant's
core business operations. Where appropriate, we may seek to augment the tenant's commitment to the facility by structuring various credit enhancement mechanisms into the underlying leases. These
mechanisms could include security deposit requirements or affiliate guarantees from entities we deem to be creditworthy.

In
June 2009, we restructured our net lease relationship with one of our healthcare operators to take advantage of new REIT legislation which now allows a taxable REIT subsidiary
affiliate to become the lessee of healthcare-related properties. The restructuring resulted in one of our unconsolidated affiliate Midwest Care Holdco TRS I LLC ("Midwest") becoming the lessee
of the properties and Midwest simultaneously entering into a management contract with a third party operator. The management agreement is terminable by Midwest upon 60 days notice. This new
structure allows us to participate in operating improvements of the underlying properties not previously available under the prior structure. Under these arrangements we are less vulnerable to credit
risk with respect to the manager of the facility, but our taxable REIT subsidiary has more exposure to fluctuations in net income at the properties (both reductions and increases) which would not be
the case in a lease to an unaffiliated lessee operating the property.

Derivatives and Hedging Activities

We use derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap
agreements and the primary objective is to minimize interest rate risks associated with the our investment and financing activities. The counterparties of these arrangements are major financial
institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties and we monitor their financial
condition; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings and financial support from the U.S.
Government. At March 31, 2010, our counterparties hold approximately $23.1 million of cash margin as collateral against our swap contracts.

In
January 2008, we elected the fair value option for our bonds payable and our liability to subsidiary trusts issuing preferred securities. As a result, the changes in fair value of
these financial

66

---



Table of Contents

instruments
are now recorded in earnings and the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting given that the underlying debt is
remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified
into earning over the shorter of either the life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings. For the three
months ended March 31, 2010 and 2009, we recorded, in earnings, a mark-to-market unrealized loss of $13.2 million and an unrealized loss of $2.9 million,
respectively, for the non-qualifying interest rate swaps. For the three months ended March 31, 2010 and 2009, we recorded a $1.7 million and a $1.4 million
reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

The
following tables summarize our derivative financial instruments that were designated as cash flow hedges of interest rate risk as of March 31, 2010 and December 31,
2009 (in thousands):

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of March 31, 2010


8

$
75,884

$
(8,206
)
4.18% - 5.08%

December 2010 - August 2018As of December 31, 2009


10

$
90,749

$
(7,691
)
4.18% - 5.08%

March 2010 - August 2018


The
following tables summarize our derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of March 31, 2010 and
December 31, 2009 (in thousands):

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of March 31, 2010


36

$
2,001,491

$
(139,184
)
0.36% - 7.00%


May 2010 - June 2018As of December 31, 2009(1)


22

$
897,335

$
(59,353
)
0.34% - 5.63%


May 2010 - June 2018


(1)December 31,
2009 does not include the interest rate swaps of N-Star I, II, III and V, as these CDO financings were unconsolidated
financings prior to January 1, 2010.


Item 4.    Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation (as required under
Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act), under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our 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 our periodic reports.

Internal Control over Financial Reporting

Changes in internal control over financial reporting.There have not been any changes in our 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 have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.

67

---





Table of Contents

PART II. OTHER INFORMATION

Item 6.    Exhibits

(a)   Exhibits

Exhibit Number

Description of Exhibit3.1

Articles of Amendment and Restatement of NorthStar Realty Finance Corp., as filed with the State Department of Assessments and Taxation of Maryland on October 20, 2004 (incorporated by reference to Exhibit 3.1
to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))3.2

Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))3.3

Amendment No. 1 to the Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 27,
2005)3.4

Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.75% Series A Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty
Finance Corp.'s Registration Statement on Form 8-A, dated September 14, 2006)3.5

Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty
Finance Corp.'s Registration Statement on Form 8-A, dated February 7, 2007)3.6

Articles Supplementary Classifying and Designating Additional Shares of NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to
Exhibit 3.6 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)10.1

Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of October 19, 2004, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and
the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.1 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)10.2

NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)10.3

LTIP Unit Vesting Agreement under the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRF Employee, LLC
(incorporated by reference to Exhibit 10.10 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)10.4

Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.7(a) to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))10.5

NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.13 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)


68

---



Table of Contents

Exhibit Number

Description of Exhibit10.6

Form of Notification under NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.14 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)10.7

Form of Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.15 to the NorthStar Realty Finance Corp. Registration Statement on
Form S-11 (File No. 333-114675))10.8

Amendment No. 1 to Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of March 14, 2006, by and among NorthStar Realty Finance Corp., as sole general partner and
initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.34 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31,
2005)10.9

Second Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of September 14, 2006 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty
Finance Corp. Current Report on Form 8-K filed September 14, 2006)10.10

Third Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of February 7, 2007 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance
Corp. Current Report on Form 8-K filed February 9, 2007)10.11

Amendment No. 1 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to
Form S-8 filed on April 13, 2007)10.12

Amendment No. 2 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 3 to
Form S-8 filed on June 6, 2007)10.13

Note Purchase Agreement, dated as of March 29, 2007, between NRFReindeer Ltd., as seller, and Wachovia Bank, N.A., as purchaser (incorporated by reference to Exhibit 10.13 to NorthStar Realty
Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)10.14

Fourth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 24, 2007 (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance
Corp. Current Report on Form 8-K filed May 29, 2007)10.15

Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership, dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to the
NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-146679))10.16

Indenture dated as of June 18, 2007, between NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp., as Guarantor, and Wilmington Trust Company, as Trustee (incorporated by
reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on June 22, 2007)10.17

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and David T. Hamamoto (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)


69

---



Table of Contents

Exhibit Number

Description of Exhibit10.18

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Andrew C. Richardson (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)10.19

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel R. Gilbert (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)10.20

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Albert Tylis (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current
Report on Form 8-K filed July 27, 2009)10.21

Credit Agreement, dated as of November 6, 2007, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings X, LLC, NRFC WA Holdings XII, LLC,
 as borrowers, NorthStar Realty Finance Corp. and NorthStar Realty Finance L.P., as guarantors, and Wachovia Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.53 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)10.22

Limited Guaranty Agreement, dated as of November 6, 2007, by and among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and Wachovia Bank, National Association, as administrative agent
(incorporated by reference to Exhibit 10.54 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)10.23

First Amendment to Note Purchase Agreement, dated as of November 6, 2007, by and among NRF-Reindeer Ltd., as seller, NorthStar Realty Finance Corp., as guarantor, and Wachovia Bank, N.A., as purchaser, and
consented and agreed to by NRFC Luxembourg Holdings I S.Á R.L., as pledgor (incorporated by reference to Exhibit 10.24 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30,
2009)10.24

Registration Rights Agreement relating to the 11.50% Exchangeable Senior Notes due 2013 of NRFC NNN Holdings, LLC, dated May 28, 2008 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty
Finance Corp. Registration Statement on Form S-3 (File No. 333-152545))10.25

Indenture dated as of May 28, 2008, among NRFC NNN Holdings, LLC, as Issuer, NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, and NRFC Sub-REIT Corp., as Guarantors, and
Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on May 28, 2008)10.26

Fifth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 29, 2008 (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance
Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)10.27

NorthStar Realty Finance Corp. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.31 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009)10.28

Form of Award Agreement (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on September 11, 2009)


70

---



Table of Contents

Exhibit Number

Description of Exhibit10.29

First Amended and Restated Credit Agreement, dated as of October 28, 2009, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings X, LLC and NRFC
WA Holdings XII, LLC, as borrowers, NorthStar Realty Finance Corp., and NorthStar Realty Finance L.P., as guarantors, the lenders party thereto, and Wachovia Bank, National Association, as administrative agent (incorporated by reference to
Exhibit 10.33 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)10.30

First Amended and Restated Guaranty Agreement, dated as of October 28, 2009, by NorthStar Realty Finance Corp., NorthStar Realty Finance L.P., and Wachovia Bank, National Association, as administrative agent
(incorporated by reference to Exhibit 10.34 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)10.31

Second Amendment to Note Purchase Agreement and Repurchase Documents, dated as of October 28, 2009, by and among NRF-Reindeer Ltd., as seller, NorthStar Realty Finance Corp., as guarantor and Wachovia Bank,
N.A., as purchaser, and consented and agreed to by NRFC Luxembourg Holdings I S.Á R.L. and NRFC Sub-REIT Corp., as pledgor (incorporated by reference to Exhibit 10.35 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2009)10.32

Common Stock Purchase Warrant, Certificate No. W-1, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.36 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)10.33

Common Stock Purchase Warrant, Certificate No. W-2, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)10.34

Common Stock Purchase Warrant, Certificate No. W-3, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.38 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)10.35

Separation and Consulting Agreement, dated January 25, 2010, between NorthStar Realty Finance Corp. and Richard J. McCready (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed on January 25, 2010)31.1

Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2

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


71

---





Table of Contents

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 REALTY FINANCE CORP.Date: May 6, 2010

By:

/s/ DAVID T. HAMAMOTO David T. Hamamoto Chief Executive OfficerBy:

/s/ ANDREW C. RICHARDSON Andrew C. Richardson Chief Financial Officer


72

---