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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, 2011

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, 78,608,883 shares outstanding as of May 3, 2011.



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NORTHSTAR REALTY FINANCE CORP.  QUARTERLY REPORT  For the Three Months Ended March 31, 2011

TABLE OF CONTENTS



Index



PagePart I.

Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010


3Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and March 31, 2010


4Condensed Consolidated Statements of Stockholders' Equity as of March 31, 2011 (unaudited) and December 31, 2010


5Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and March 31,
2010


6Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and March 31, 2010


7Notes to the Condensed Consolidated Financial Statements (unaudited)


8Item 2.

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


50Item 3.

Quantitative and Qualitative Disclosures about Market Risk


69Item 4.

Controls and Procedures


73Part II.

Other Information


74Item 6.

Exhibits


74Signatures


78


2

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

March 31,
2011

December 31,
2010(unaudited)ASSETS:Cash and cash equivalents

$
192,938

$
125,439Restricted cash (includes $207,655 and $263,314 from consolidated VIEs, respectively)


284,452


309,384Operating real estate, net


896,838


849,499Available for sale securities, at fair value (includes $1,856,742 and $1,668,217 from consolidated VIEs, respectively)


1,900,295


1,691,054Real estate debt investments, net (includes $1,683,850 and $1,659,882 from consolidated VIEs, respectively)


1,793,175


1,826,239Real estate debt investments, held-for-sale (includes $18,806 and $18,661 from consolidated VIEs, respectively)


18,806


18,662Investments in and advances to unconsolidated ventures (includes $ and $66,959 from consolidated VIEs, respectively)


87,795


94,412Receivables, net of allowance of $2,409 in 2011 and $2,642 in 2010 (includes net $27,993 and $26,337 from consolidated VIEs, respectively)


33,997


32,329Unbilled rents receivable


10,306


10,404Derivative instruments, at fair value (includes $55 and $42 from consolidated VIEs, respectively)


55


59Deferred costs and intangible assets, net


54,679


49,811Assets of properties held for sale (includes $5,100 and $13,141 from consolidated VIEs, respectively)


96,174


104,866Other assets (includes $5,943 and $14,277 from consolidated VIEs, respectively)


32,152


39,833Total assets

$
5,401,662

$
5,151,991LIABILITIES:Mortgage notes and loans payable


765,155


729,212Exchangeable senior notes


249,535


126,889Bonds payable, at fair value (includes $2,495,062 and $2,258,805 from consolidated VIEs, respectively)


2,495,062


2,258,805Secured term loans


14,682


36,881Liability to subsidiary trusts issuing preferred securities, at fair value


220,004


191,250Accounts payable and accrued expenses (includes $16,356 and $15,668 from consolidated VIEs, respectively)


42,742


49,792Escrow deposits payable (includes $42,016 and $60,163 from consolidated VIEs, respectively)


42,510


60,710Derivative liability, at fair value (includes $174,924 and $190,993 from consolidated VIEs, respectively)


201,728


220,689Liabilities of properties held for sale (includes $ and $131 from consolidated VIEs, respectively)


74,393


74,061Other liabilities (includes $7,900 and $8,654 from consolidated VIEs, respectively)


26,809


31,189Total liabilities


4,132,620


3,779,478Contingently redeemable non-controlling interest


97,831


94,822EQUITY: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, 2011
and December 31, 2010, 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, 2011
and December 31, 2010, respectively


183,505


183,505Common stock, $0.01 par value, 500,000,000 shares authorized, 78,608,319 and 78,104,753 shares issued and outstanding at March 31, 2011 and
December 31, 2010, respectively


786


781Additional paid-in capital


740,303


723,102Retained earnings


181,782


293,382Accumulated other comprehensive loss


(34,344
)

(36,119
)Total NorthStar Realty Finance Corp. Stockholders' Equity


1,129,899


1,222,518Non-controlling interest


41,312


55,173Total equity


1,171,211


1,277,691Total liabilities and stockholders' equity

$
5,401,662

$
5,151,991


See accompanying notes to condensed consolidated financial statements

3

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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, 2011

Three Months Ended
March 31, 2010Revenues and other income:Interest income

$
97,640

$
57,575Rental and escalation income


32,927


19,289Commission income


918


Other revenue


333


2,194Total revenues


131,818


79,058Expenses:Interest expense


33,420


32,163Real estate propertiesoperating expenses


12,497


1,601Asset management expenses


1,680


711Commission expense


717


Asset management feesrelated parties





450Provision for loan losses


24,500


36,316Provision for equity investment losses


4,482


General and administrative:Salaries and equity-based compensation(1)


12,741


16,532Auditing and professional fees


2,419


2,158Other general and administrative


4,163


4,077Total general and administrative


19,323


22,767Depreciation and amortization


8,082


7,785Total expenses


104,701


101,793Income/(loss) from operations


27,117


(22,735
)Equity in (loss)/earnings of unconsolidated ventures


(2,228
)

1,349Unrealized (loss) on investments and other


(152,218
)

(439
)Realized gain on investments and other


20,872


1,433Loss from continuing operations


(106,457
)

(20,392
)Income from discontinued operations


409


289Gain on sale from discontinued operations


5,031


Consolidated net loss


(101,017
)

(20,103
)Less: net loss allocated to the non-controlling interests


5,464


411Preferred stock dividends


(5,231
)

(5,231
)Contingently redeemable non-controlling interest accretion


(3,009
)

Net loss attributable to NorthStar Realty Finance Corp. common stockholders

$
(103,793
)
$
(24,923
)Net (loss) per share from continuing operations (basic/diluted)


(1.40
)

(0.33
)Income per share from discontinued operations (basic/diluted)


0.01


0.00Gain per share on sale of discontinued operations (basic/diluted)


0.06


Net loss per common share attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)

$
(1.33
)
$
(0.33
)Weighted average number of shares of common stock:Basic


78,196,016


75,068,654Diluted


82,534,563


82,217,223


(1)The
three months ended March 31, 2011 and 2010 include $2,034 and $5,058 of equity-based compensation expense, respectively. 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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Amounts in Thousands)

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, 2009

$
100


74,883

$
749

$
904,077

$


$
(92,670
)
$
460,915

$
1,273,171

$
90,647

$
1,363,818VIE consolidation begining balance adjustments

















41,332


110,790


152,122


30,535


182,657Acquisition of N-Star IX




















147,626


147,626





147,626Amortization of deferred compensation











17











17


16,673


16,690Non-controlling interest contribution to joint venture


























11,336


11,336Dividend reinvestment and stock purchase plan





92


1


282











283





283Stock awards/LTIP awards





99


1


299











300





300Equity component of warrants











61











61





61Comprehensive loss

















15,219





15,219


1,290


16,509Conversion of LTIP units





3,031


30


61,445











61,475


(61,475
)

Cash dividends on common stock




















(30,483
)

(30,483
)

(8,299
)

(38,782
)Cash dividends on preferred stock




















(20,925
)

(20,925
)

(10,500
)

(31,425
)Redemption of membership interest











(1,807
)










(1,807
)

1,800


(7
)Equity in private fund


























(1,815
)

(1,815
)Net loss




















(374,541
)

(374,541
)

(15,019
)

(389,560
)Balance at December 31, 2010

$
100


78,105

$
781

$
964,374

$


$
(36,119
)
$
293,382

$
1,222,518

$
55,173

$
1,277,691Reclassification equity compensation a liability


























(2,136
)

(2,136
)Non-controlling interest contribution to joint venture


























144


144Dividend reinvestment and stock purchase plan





15





76











76





76REO Equity valuation adjustment





























Amortization of equity based compensation











4











4


2,030


2,034Contingently redeemable non-controlling interest accretion




















(3,009
)

(3,009
)




(3,009
)Equity component of exchangeable notes











12,277











12,277





12,277Amortization of OCI

















1,775





1,775


99


1,874Conversion of LTIP units





488


5


4,844











4,849


(4,849
)

Cash dividends on common stock




















(7,807
)

(7,807
)

(1,060
)

(8,867
)Cash dividends on preferred stock




















(5,231
)

(5,231
)

(2,625
)

(7,856
)Net loss




















(95,553
)

(95,553
)

(5,464
)

(101,017
)Balance at March 31, 2011 (unaudited)

$
100


78,608

$
786

$
981,575

$


$
(34,344
)
$
181,782

$
1,129,899

$
41,312

$
1,171,211


See accompanying notes to condensed consolidated financial statements

5

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

Three Months Ended
March 31, 2011

Three Months Ended
March 31, 2010Consolidated net loss

$
(101,017
)
$
(20,103
)Unrealized loss on available for sale securities





(44
)Change in fair value of derivatives





(857
)Reclassification adjustment for gains included in net income


1,874


1,739Comprehensive loss


(99,143
)

(19,265
)Less: Comprehensive loss attributable to non-controlling interests


(5,365
)

(316
)Comprehensive loss attributable to NorthStar Realty Finance Corp.

$
(93,778
)
$
(18,949
)


See
accompanying notes to condensed consolidated financial statements

6

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

Three Months Ended
March 31, 2011

Three Months Ended
March 31, 2010Cash flows from operating activities:Net cash used in operating activities

$
(700
)
$
(3,929
)Cash flows from investing activities:Improvement of operating real estate


(16
)

(402
)Acquisition of available for sale securities


(93,070
)

(87,355
)Proceeds from disposition of available for sale securities


91,310


38,884Available for sale securities repayments


7,433


6,240Originations/acquisitions of real estate debt investments


(48,814
)

(10,320
)Real estate debt investment repayments


53,884


24,536Proceeds from the sale of real estate debt investments


11,941


611Net proceeds from disposition of operating real estate


14,939


Restricted cash used in investment activities


3,753


(1,989
)Deferred costs and intangible assets


(73
)

(220
)Investment in and advances to unconsolidated ventures


(392
)

(502
)Distributions from unconsolidated ventures


163


2,109Net cash provided by (used in) investing activities


41,058


(28,408
)Cash flows from financing activities:Purchase of interest rate cap





(243
)Settlement of derivative





(283
)Collateral held by swap counter party


3,000


4,749Mortgage notes and loan borrowings


20,920


58,200Mortgage notes principal repayments


(21,458
)

(52,733
)Proceeds from bonds


5,000


9,000Bond repayments


(44,480
)

(13,225
)Bond repurchases


(34,170
)

(218
)Borrowing under secured term loan





24,631Secured term loan repayment


(22,199
)

(1,345
)Payment of deferred financing costs


(9,692
)

(1,348
)Restricted cash from financing activities


12,066


352Proceeds from exchangeable senior notes


172,500


Repurchase exchangeable senior notes


(37,698
)

Proceeds from dividend reinvestment and stock purchase plan


76


89Dividends (common and preferred) and distributions


(13,039
)

(12,720
)Deferred offering costs





(1,100
)Offering costs





(69
)Distributions to non-controlling interest


(3,685
)

(3,557
)Net cash provided by financing activities


27,141


10,180Net (decrease) increase in cash & cash equivalents


67,499


(22,157
)Cash and cash equivalentsbeginning of period


125,439


138,928Cash and cash equivalentsend of period

$
192,938

$
116,771


See
accompanying notes to condensed consolidated financial statements

7

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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 its predecessor. 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").

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, 2010, as amended, 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, 2010 consolidated financial statements included in its annual report on Form 10-K, as amended.

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 consolidated financial statements. Actual results could differ materially from these estimates.

Reclassifications

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

8

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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)

Recently Issued Pronouncements

The Company has determined that there have been no recently issued accounting standards that will have a material impact on its
condensed consolidated financial statements.

3. Variable Interest Entities

The Company has evaluated its real estate debt investments, liability to subsidiary trusts issuing preferred securities, its investments in each of its nine CDO transaction issuers, its
investment in CSE RE 2006-A and its investments in securities of non-sponsored securitizations in which the Company holds the controlling class 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 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, 2011, the Company identified interests in 21 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

9

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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)

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 scenarios.

Based
on management's analysis, the Company is not the primary beneficiary of 11 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, 2011. The Company reassesses its determination of whether it is the
primary beneficiary of a VIE each reporting period.

Consolidated VIEs (the Company is the primary beneficiary)

The Company has originated, acquired 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.

In
March 2011, the Company's existing investment in securities of a securitization, with a fair value of $3.6 million as of March 31, 2011, became the controlling class of
a securitization, which it did not sponsor. The securitization was formed in April 2000 and the Company's investment is generally passive in nature. The ownership of more than 50% of the controlling
class and the special servicer naming rights, gives the Company the power to direct the activities that impact the economic performance of the VIE. This entity should be consolidated, but the Company
is unable to determine the fair value of the collateral due to lack of available information. The Company has made, and continues to make, exhaustive efforts to obtain information about this entity
and has excluded it from the application of ASC 810-10 due to lack of essential information to determine the accounting required to consolidate the entity. Since the securitization was
created in 2000, it is pre 2003 and the Company has therefore applied the scope exemption available in ASC 810-10-15-17(C). The Company will continue to
request this information, but the master servicer is not legally obligated to provide the non-public documentation and has not provided the information related to the collateral requested
by the Company.

10

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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)

The
principal amount of the assets and liabilities each is approximately $29.3 million. The bonds are non-recourse to the Company and the Company's maximum exposure to
loss is its investment in the securities in the securitization of $3.6 million as of March 31, 2011.

N-Star
I, II, III, IV, V, VI, VII, VIII, IX and CSE RE 2006-A are consolidated CDO financings.

The
following table displays the classification and carrying amounts of assets and liabilities of consolidated VIEs as of March 31, 2011 (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

N-Star IX

CSE RE
2006-A

TotalAssets of consolidated VIEs:Restricted cash

$
1,960

$
624

$
2,580

$
10,241

$
6,170

$
27,767

$
2,222

$
25,201

$
30,384

$
100,506

$
207,655Available for sale securities, at fair value


206,826


192,816


269,641


35,283


316,271


14,288


337,014


31,869


384,087


68,647


1,856,742Real estate debt investments, net








30,874


303,270





310,860


19,299


641,700


45,311


332,536


1,683,850Real estate debt investments, held-for-sale


























5,396


13,410


18,806Receivables, net of allowance


1,872


1,881


2,167


1,285


3,146


1,063


3,046


2,427


3,854


7,252


27,993Derivative instruments, at fair value




















32





20


3


55Assets of properties held for sale





























5,100


5,100Other assets


41


20


8


731


15


2,852


24


456


241


1,555


5,943Total assets of consolidated VIEs(1):


210,699


195,341


305,270


350,810


325,602


356,830


361,637


701,653


469,293


529,009


3,806,144Liabilities of consolidated VIEs:Bonds payable, at fair value


188,507


149,396


158,272


191,329


191,270


190,918


244,209


370,956


257,460


552,745


2,495,062Accounts payable and accrued expenses


1,262


101


1,004


380


517


373


367


1,396


1,936


9,020


16,356Escrow deposits payable











7,254





11,876





10,282


759


11,845


42,016Derivative liability, at fair value


12,116


12,680


16,375





28,599


7,981


37,294


17,113


32,594


10,172


174,924Other liabilities




















343





7,557





7,900Total liabilities of consolidated VIEs(2):


201,885


162,177


175,651


198,963


220,386


211,148


282,213


399,747


300,306


583,782


2,736,258Net assets

$
8,814

$
33,164

$
129,619

$
151,847

$
105,216

$
145,682

$
79,424

$
301,906

$
168,987

$
(54,773
)
$
1,069,886


(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.


11

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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)




The Company did not provide financial support to any of its consolidated VIEs during the three months ended March 31, 2011 and 2010. At
March 31, 2011, there are no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its consolidated VIEs.

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

Real Estate Debt Investments

The Company has identified one real estate debt investment with a principal amount of $19.4 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.

NorthStar Realty Finance Trusts

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.

Available For Sale Securities

The Company has identified two available for sale securities with a par amount of $8.6 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 available for sale securities, the Company has
determined that it does not hold a variable interest in these investments and, as such, the Company has continued to account for all available for sale securities as debt securities.

12

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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)

The
following table displays the classification, carrying amounts and maximum exposure of unconsolidated VIEs as of March 31, 2011 (in thousands):

Variable Interest EntityTrusts Issuing
Preferred
Securities, at
Fair Value

Real Estate Debt
Investments

Available For
Sale Securities

Total

Maximum Exposure
to Loss(1)Real estate debt investments

$


$
19,401

$


$
19,401

$
19,401Available For Sale Securities








4,496


4,496


4,496Total assets





19,401


4,496


23,897


23,897Liability to subsidiary trusts issuing preferred securities, at fair value


220,004








220,004


N/ATotal liabilities


220,004








220,004


N/ANet assets

$
(220,004
)
$
19,401

$
4,496

$
(196,107
)
$
23,897


(1)The
Company's maximum exposure to loss at March 31, 2011, 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, 2011 and 2010. At March 31, 2011, there were no
explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

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.

13

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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)

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 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.

14

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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 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 available for sale securities 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.



CDO bonds payable are measured 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 a market approach with prices obtained from an
experienced pricing service and is generally measured using pricing models 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

15

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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)

assets
and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2011, by level within the fair value hierarchy:

Assets and Liabilities at Fair ValueLevel 1

Level 2

Level 3

TotalAssets:Available for sale securities:CMBS

$


$
1,263,912

$
326,318

$
1,590,230CMBSInterest only








5,211


5,211Third party CDO notes








52,991


52,991REIT debt





205,006


6,838


211,844Trust preferred securities








24,352


24,352Agency debentures





15,667





15,667Derivative asset





55





55Total assets

$


$
1,484,640

$
415,710

$
1,900,350Liabilities:N-Star CDO bonds payable








2,495,062

$
2,495,062Liability to subsidiary trusts issuing preferred securities








220,004


220,004Derivative liability





201,728





201,728Total liabilities

$


$
201,728

$
2,715,066

$
2,916,794


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

16

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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)

preferred
securities which are measured at fair value on a recurring basis at March 31, 2011, for which the Company has utilized Level 3 inputs to determine fair value:

Available
for Sale
Securities

N-Star
CDO Bonds
Payable

Liability to
Subsidiary
Trusts Issuing
Preferred
SecuritiesBeginning balance:

$
492,576

$
2,258,805

$
191,250Total net transfers into/out of Level 3


(101,367
)Purchases, sales, issuance and settlements, net


(30,842
)

(65,851
)

Total losses (realized or unrealized):Included in earnings


14,483


302,108


28,754Included in other comprehensive loss








Total gains (realized or unrealized):Included in earnings


69,826





Included in other comprehensive loss








Ending balance

$
415,710

$
2,495,062

$
220,004The 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

$
55,343

$
(302,108
)
$
(28,754
)


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 consistent accounting application.

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

17

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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)

for
that instrument. The following table sets forth the Company's financial instruments for which the fair value option was elected:

March 31,
2011

December 31,
2010Financial Instruments, at Fair ValueAssets:Available for sale securities:CMBS

$
1,590,230

$
1,392,099CMBSInterest only


5,211


Third party CDO notes


52,991


37,213REIT debt


211,844


236,958Trust preferred securities


24,352


24,784Agency debentures


15,667


Total assets

$
1,900,295

$
1,691,054Liabilities:CDO bonds payable


2,495,062


2,258,805Liability to subsidiary trusts issuing preferred securities


220,004


191,250Total liabilities

$
2,715,066

$
2,450,055


18

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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,
2011

Amount
Due Upon
Maturity

DifferenceAssets:Available for sale securities:CMBS

$
1,590,230

$
2,803,915

$
(1,213,685
)CMBSInterest only(1)


5,211


n/a


n/aThird party CDO notes


52,991


228,317


(175,326
)REIT debt


211,844


200,447


11,397Trust preferred securities


24,352


40,000


(15,648
)Agency debentures


15,667


63,000


(47,333
)Total assets

$
1,900,295

$
3,335,679

$
(1,440,595
)Liabilities:CDO bonds payable


2,495,062


4,312,748


(1,817,686
)Liability to subsidiary trusts issuing preferred securities


220,004


280,117


(60,113
)Total Liabilities

$
2,715,066

$
4,592,865

$
(1,877,799
)


(1)CMBS
Interest only securities have no amounts due upon maturity but have notional amounts upon which cash flows are paid and received as interest only.


For
the three months ended March 31, 2011 and 2010, the Company recognized a net loss of $143.5 million and a net gain of $33.3 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
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 loss of $330.9 million and a net gain of $65.6 million, respectively, for the three months ended March 31, 2011 and 2010. The Company attributes
changes in the fair value of floating rate liabilities to changes in instrument-specific credit spreads. For fixed rate liabilities, the Company allocates changes in fair value between interest
rate-related changes and credit spread-related changes based on changes in interest rates.

19

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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

On March 9, 2011, the Company foreclosed on a $7.2 million mezzanine loan secured by a 32 building office/flex park in Indianapolis, IN and recognized the following
assets and liabilities in its condensed consolidated balance sheet (in thousands):

March 9,
2011(unaudited)ASSETS:Cash and cash equivalents

$
79Restricted cash


2,075Operating real estate, net


56,639Other assets


216Total assets

$
59,009LIABILITIES:Mortgage notes and loans payable

$
36,252Accounts payable and accrued expenses


1,251Other liabilities


14,152Total liabilities


51,655Total equity


7,354Total liabilities and stockholders' equity

$
59,009


The
Company has estimated the fair value of the assets and liabilities acquired at the date of acquisition. The Company is in the process of valuing certain intangible assets. As a
result, the allocation of the purchase price is subject to refinement.

Since
March 9, 2011, the Company has recognized $0.6 million of rental revenue and $0.2 million of net income related to the foreclosed property.



The supplemental pro forma financial information set forth below is based upon the Company's historical condensed consolidated
statements of operations for the three months ended March 31, 2011 and 2010, adjusted to give effect of this transaction as of January 1, 2010.

Three Months
Ended
March 31, 2011

Three Months
Ended
March 31, 2010Pro Forma revenues

$
133,415

$
81,096Pro Forma net income


(103,425
)

(24,367
)Pro Forma net income per common sharebasis/diluted

$
(1.32
)
$
(0.32
)


20

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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 (Continued)

The supplemental pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the
transaction occurred January 1, 2010, nor does it purport to represent the results of future operations.

Midwest Holdings

On March 31, 2011, the Company sold its 100% common membership interest in Midwest Holdings and assigned all of its rights,
title, obligations and other interests in Midwest Holdings to the purchaser and contemporaneously entered into a new lease agreement with an affiliate of the purchaser.

Dispositions2011

In March 2011, the Company completed the sale of a leasehold interest containing approximately 17,655 square feet of retail space
located in New York, NY to a private investor group for approximately $7.4 million, representing a gain of approximately $5.0 million, and the sale of a real estate owned ("REO") office
building containing 142,988 square feet located in Philadelphia, PA to a private investor group for approximately $8.3 million, representing an immaterial gain.

Discontinued Operations

The CSE RE 2006-A CDO financing had, as of March 31, 2011, three foreclosed assets consisting of two parcels of land
located in Arizona with a combined fair market value at the time of acquisition of approximately $1.6 million and a multifamily property located in Georgia having a fair market value at the
time of acquisition of approximately $3.9 million. As of
March 31, 2011, the Company recorded as held for sale the two REO parcels of land located in Arizona and the multifamily property located in Georgia.

In
April 2011, the Company completed a sale of a portfolio of 18 healthcare net lease assisted living facilities located in Wisconsin to a third party investor for approximately
$101.5 million. The purchaser assumed $73.5 million of mortgage debt secured by the assets in the portfolio. As a result of the sale, the Company recorded as held for sale the assets and
liabilities of the portfolio as of March 31, 2011.

21

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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 (Continued)

The
following table summarizes income from discontinued operations and related gain on sale of discontinued operations for the three months ended March 31, 2011 and 2010:

Three Months
Ended
March 31, 2011

Three Months
Ended
March 31, 2010Revenue:Rental and escalation income

$
2,828

$
2,491Interest and other


40


Total revenue


2,868


2,491Expenses:Property operating expenses


579


168Interest expense


846


1,314Auditing and professional fees


57


Other general and administrative expenses


312


7Depreciation and amortization


665


713Total expenses


2,459


2,202Income from discontinued operations


409


289Gain on disposition of discontinued operations


5,031


Total income from discontinued operations

$
5,440

$
289


The
following table sets forth the major classes of assets and liabilities of properties classified as held for sale at March 31, 2011:

March 31
2011

December 31,
2010ASSETS:Operating real estatenet

$
93,142

$
101,704Deferred costs and intangible assets, net


3,032


3,162Assets of properties held for sale


96,174


104,866LIABILITIES:Mortgage notes and loans payable


73,673


73,902Accounts payable and accrued expenses


703


87Escrow deposits payable


17


1Other liabilities





71Liabilities of properties held for sale

$
74,393

$
74,061


22

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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

The following is a summary of the Company's available for sale securities at March 31, 2011:

March 31, 2011

Carrying
Value

Cumulative
Unrealized
(Loss)/Gain on
Investments

Fair
Value(1)CMBS

$
2,019,198

$
(428,969
)
$
1,590,230CMBSinterest only


5,626


(415
)

5,211Third party CDO notes


190,882


(137,891
)

52,991REIT debt


197,271


14,574


211,844Trust preferred securities


34,960


(10,608
)

24,352Agency debentures


16,029


(362
)

15,667Total

$
2,463,966

$
(563,671
)
$
1,900,295


(1)Approximately
$1.9 billion in fair value of these investments serve as collateral for the Company's consolidated CDO transactions and the balance is
either financed under other borrowing facilities or unleveraged.


At
March 31, 2011, the maturities of the available for sale securities ranged from two weeks to 45.3 years.

During
the three months ended March 31, 2011, proceeds from the sale and redemption of available for sale securities was $91.3 million. The net realized gain on the sale
and redemption of available for sale securities was $14.3 million. 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 of available for sale securities was $2.9 million.

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

December 31, 2010

Carrying
Value

Cumulative
Unrealized
(Loss)/Gain on
Investments

Fair
Value(1)CMBS

$
2,040,582

$
(648,483
)
$
1,392,099Third party CDO notes


174,537


(137,324
)

37,213REIT debt


222,112


14,846


236,958Trust preferred securities


34,917


(10,133
)

24,784Total

$
2,472,148

$
(781,094
)
$
1,691,054


(1)Approximately
$1.7 billion in fair value of these investments served as collateral for the Company's consolidated CDO transactions and the balance
was either financed under other borrowing facilities or unleveraged.


At
December 31, 2010, the maturities of the available for sale securities ranged from three months to 46 years.

23

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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, 2011, the Company held the following real estate debt investments:

March 31, 2011

Principal
Balances

Carrying
Value(1)(2)

Allocation by
Investment Type

Average
Fixed Rate

Average
Spread Over
LIBOR(3)

Average
Spread
Over
Prime

Number of
InvestmentsWhole loans, floating rateLIBOR

$
1,535,807

$
1,053,783


58.2
%


%

2.75
%


%

70Whole loansfloating rateprime


100,778


13,987


0.8
%







3.31
%

3Whole loans, fixed rate


210,703


107,571


5.9
%

5.74
%







27Subordinate mortgage interests, floating rate


174,625


125,642


6.9
%




3.25
%




9Subordinate mortgage interests, fixed rate


74,412


46,890


2.6
%

7.62
%







3Mezzanine loans, floating rate


380,146


279,861


15.4
%




2.21
%




15Mezzanine loan, fixed rate


156,690


144,767


8.0
%

5.53
%







7PreferredFloat


17,094


17,094


0.9
%




4.00
%




1Other loansfloating


11,237


10,587


0.6
%




2.50
%




2Other loansfixed


11,799


11,799


0.7
%

6.45
%







3Total/Weighted average

$
2,673,291

$
1,811,981


100.0
%

5.99
%

2.71
%

3.31
%

140


(1)Approximately
$1.7 billion in carrying value of these investments serve as collateral for the Company's CDO financings and the remainder is
unleveraged. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $60.1 million related to these
investments. The Company expects that a minimum of $57.7 million of these future fundings will be funded within the Company's existing CDO financings and require no additional capital from the
Company. Assuming that all loans that have future fundings meet the terms to qualify for such funding, the Company's equity requirement on future funding requirements would be approximately
$2.4 million.(2)Includes
five loans totaling $18.8 million in carrying value in real estate debt investments, held for sale.(3)Approximately
$474.9 million of the Company's real estate debt investments have a weighted-average LIBOR rate floor of 2.28%.


24

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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)




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

December 31, 2010

Principal
Balances

Carrying
Value(1)(2)

Allocation by
Investment Type

Average
Fixed Rate

Average
Spread Over
LIBOR(3)

Average
Spread
Over
Prime

Number of
InvestmentsWhole loans, floating rateLIBOR

$
1,533,352

$
1,042,194


56.5
%


%

2.79
%


%

71Whole loansfloating rateprime


106,279


17,417


0.9
%







3.32
%

3Whole loans, fixed rate


211,565


107,419


5.8
%

5.76
%







27Subordinate mortgage interests, floating rate


220,444


143,153


7.8
%




3.06
%




10Subordinate mortgage interests, fixed rate


74,443


46,805


2.5
%

7.62
%







3Mezzanine loans, floating rate


387,183


305,901


16.6
%




2.76
%




16Mezzanine loan, fixed rate


153,027


140,956


7.7
%

5.65
%







7Preferredfloating


17,444


17,444


0.9
%




4.00
%




1Other loansfloating


11,460


11,460


0.6
%




2.50
%




2Other loansfixed


12,152


12,152


0.7
%

6.44
%







3Total/Weighted average

$
2,727,349

$
1,844,901


100.0
%

6.05
%

2.82
%

3.32
%

143


(1)Approximately
$1.7 billion in carrying value of these investments served as collateral for the Company's CDO financings, $44.0 million was
financed under a borrowing facility and the remainder was unleveraged. The Company had future funding commitments, which were subject to certain conditions that borrowers must meet to qualify for such
fundings, totaling $48.5 million related to these investments. The Company expected that a minimum of $45.5 million of these future fundings would be funded within the Company's existing
CDO financings and require no additional capital from the Company. Assuming that all loans that have future fundings meet the terms to qualify for such funding, the Company's equity requirement on
future funding requirements would be approximately $3.0 million.(2)Includes
five loans having $18.7 million in carrying value in real estate debt investments, held for sale.(3)Approximately
$525.2 million of the Company's real estate debt investments have a weighted-average LIBOR rate floor of 2.08%


25

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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)




Contractual maturities of principal balances of real estate debt investments at March 31, 2011 are as follows:

Years Ending December 31:

Initial
Maturity(1)

Maturity
Including
Extensions2011

$
954,365

$
686,9132012


749,239


458,7702013


106,692


294,0232014


258,496


344,3502015


249,198


393,575Thereafter


355,301


495,660Total

$
2,673,291

$
2,673,291


(1)The
year ending December 31, 2011, contains seven whole loans with initial maturities prior to December 31, 2010, having an aggregate
principal balance of $184.7 million and one junior participation in a first mortgage with an initial maturity prior to December 31, 2010, having a principal balance of
$28.5 million, that remain outstanding as of March 31, 2011. The aggregate carrying value of these maturity-defaulted loans is $17.6 million as of March 31, 2011.


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. At March 31, 2011, the
Company had $682.1 million of unamortized discounts and deferred fees. 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.

26

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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)

As of March 31, 2011, the status of the Company's performing and non-performing loans(1) was as follows:

Carrying Amount as of March 31, 2011

Carrying Amount as of December 31, 2010Loan
Count

Performing
Loans

Loan
Count

Non-
Performing
Loans

Total(4)

Loan
Count

Performing
Loans

Loan
Count

Non-
Performing
Loans

TotalOriginated and Acquired Debt InvestmentsWhole loans


51

$
864,354


1

$
12,500

$
876,854


52

$
892,950


1

$
12,500

$
905,450Subordinate mortgage interests


10


160,626


1


28,462


189,088


10


182,685


3


51,988


234,673Mezzanine loans


22


536,398








536,398


23


539,527








539,527Preferred


1


17,094








17,094


1


17,444








17,444Other loans


5


22,386








22,386


5


23,612








23,612Total Originated and Acquired Debt Investments


89


1,600,858


2


40,962


1,641,820


91


1,656,218


4


64,488


1,720,706Provision for Loan Losses


16


(149,783
)

2


(38,782
)

(188,565
)

14


(158,417
)

2


(38,783
)

(197,200
)Total Originated and Acquired Debt Investments, net





1,451,075





2,180


1,453,255





1,497,801





25,705


1,523,506CSE RE 2006-AWhole loans(2)


41


304,010


7


15,861
(5)

319,871


38


252,347


9


30,216


282,563Subordinate mortgage interests(3)


1


38,855








38,855


1


38,832








38,832CSE RE 2006-A


42


342,865


7


15,861


358,726


39


291,179


9


30,216


321,395Provision for Loan Losses





























CSE RE 2006-A





342,865





15,861


358,726





291,179





30,216


321,395Total Debt Investments


131


1,943,723


9


56,823


2,000,546


130


1,947,397


13


94,704


2,042,101Total Provision for Loan Losses


16


(149,783
)

2


(38,782
)

(188,565
)

14


(158,417
)

2


(38,783
)

(197,200
)Total Debt Investments, net




$
1,793,940




$
18,041

$
1,811,981




$
1,788,980




$
55,921

$
1,844,901


(1)The
Company designates a loan as non-performing at such time as the loan becomes 90 days delinquent on contractual debt service payments
or the loan has a maturity default.(2)CSE
RE 2006-A whole loans have an aggregate outstanding principal amount of approximately $969.0 million at March 31, 2011.(3)CSE
RE 2006-A subordinate mortgage interests have an aggregate outstanding principal amount of approximately $53.1 million at
March 31, 2011.(4)Includes
$18.8 million of real estate debt investments classified as held for sale.(5)Includes
$6.2 million of non-controlling interest.


The Company's maximum additional exposure to loss related to the non-performing loans is approximately $18.0 million.



For the three months ended March 31, 2011, the Company recorded a $24.5 million loan loss provision relating to eight
loans. For the three months ended March 31, 2010, the Company recorded a $36.3 million loan loss provision relating to eight loans and included a $0.8 million credit for a loan
sold with a fair market value in excess of its carrying amount. As of March 31, 2011, loan loss reserves totaled $188.6 million.

27

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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)

Activity
in the allowance for loan losses on real estate debt investments for three months ended March 31, 2011, is as follows:

Loan Loss ReserveBalance at December 31, 2010

$
197,200Provision for loan losses


24,500Write- off


(33,135
)Balance at March 31, 2011

$
188,565


At
March 31, 2011, the loan loss reserve is comprised of the following:

Class of Loan

# of Loans

Principal Amount

Carrying Amount

Loan Loss ProvisionWhole loans


3

$
69,143

$
47,589

$
(21,383
)Subordinate mortgage interests


4


96,112


31,442


(55,410
)Mezzanine loans


11


274,289


162,310


(111,772
)Total


18

$
439,544

$
241,341

$
(188,565
)


The
Company's commercial real estate loans are typically secured by liens on real estate properties or by interests in entities that directly own real estate properties, which serve as
the primary source of cash for the payment of principal and interest. The Company differentiates the relative credit quality of its loans based upon whether the collateral is currently paying
contractual debt service, and whether the Company believes it will be able to do so in the future. Those loans for which the Company expects to receive full payment of contractual principal and
interest payments are categorized as "performing." The Company groups weaker credit quality loans that are currently performing, but for which it believes there is an impairment such that future
collection of all principal and interest is in doubt, in a
category called "performing, with credit reserves." The Company's weakest credit quality loans are generally non-performing loans ("NPL"). NPLs typically have a maturity default and/or are
past due at least 90 days on their contractual debt service payments.

The
following table is a summary of real estate debt investments by credit quality indicator as of each applicable balance sheet date:

Credit Quality Indicator

Carrying Amount
March 31, 2011

Carrying Amount
December 31, 2010Non-performing loans

$
18,041

$
55,921Performing loans with a credit reserve


239,162


156,287Performing loans


1,554,778


1,632,693Total

$
1,811,981

$
1,844,901


At
March 31, 2011, the Company had real estate debt investments with an aggregate carrying amount of $73.4 million on non-accrual status.

28

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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)

At
March 31, 2011, the Company's loan portfolio principal and interest aging is as follows (inclusive of its non-performing loans) (in thousands):

1 - 90 Days

90+ Days$749

$17,629


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 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, 2011 and December 31, 2010, the Company had an
investment in CS/Federal of approximately $6.0 million and $6.2 million, respectively. The Company recognized equity in earnings of $0.1 million for each of the three months ended
March 31, 2011 and 2010.

NorthStar Real Estate Securities Opportunity Fund

A subsidiary of the Company, as general partner of the Securities Fund, is currently in the process of determining the Securities
Fund's final net asset value and expects to complete the process of dissolving the Securities Fund during the first half 2011.

At
March 31, 2011 and December 31, 2010, the carrying value of the Company's investment in the Securities Fund was $0.6 million and $0.7 million,
respectively, each representing a 31.2% interest in the Securities Fund.

For
the three months ended March 31, 2010, the Company recognized equity in losses of $0.9 million.

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

29

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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)

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, 2011 and December 31, 2010 the Company's investment in LandCap is
carried at $8.4 million and $8.8 million, respectively. At March 31, 2011 and December 31, 2010, LandCap had investments totaling $34.8 million and
$34.9 million, respectively. 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. For the three months ended March 31, 2011 and 2010, the Company recognized equity in losses of $0.4 million and
$0.5 million, respectively.

Midwest Care Holdco TRS I LLC

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

The
Company recognized equity in earnings of $2.4 million for the three months ended March 31, 2010.

NorthStar Income Opportunity REIT I, Inc.

On October 18, 2010, NorthStar Income Opportunity REIT I, Inc. ("NIOR"), an unconsolidated entity in which the Company
has an equity investment, completed a merger with NorthStar Real Estate Income Trust, Inc. ("NSREIT"), a consolidated subsidiary of the Company and each a commercial finance REIT sponsored by
the Company. NSREIT became the surviving entity of the merger. As of October 18, 2010, the Company deconsolidated, and has an equity investment in, NSREIT and accounts for its investment in
NSREIT under the equity method of accounting.

NorthStar Real Estate Income Trust, Inc.

At March 31, 2011 and December 31, 2010, the Company had an investment in NSREIT, the surviving entity, of approximately
$2.2 million and $1.8 million, respectively. The Company recognized equity in earnings on this investment of an immaterial amount and $0.1 million for the three months ended
March 31, 2011 and 2010, respectively.

Meadowlands One, LLC

The Company owned a $109.7 million interest in Meadowlands Two, LLC, which holds 100% of Meadowlands One, LLC
which is secured by a retail/entertainment complex located in East Rutherford, NJ (the "NJ Property"). During the third quarter 2010, the lender group took effective ownership of the NJ Property. The
Company accounts for its 22% equity interest in the investment under the equity method of accounting. At March 31, 2011 and December 31, 2010, the carrying value of the Company's
investment was approximately $66.0 million and $72.6 million, respectively. For the three months ended March 31, 2011, the Company recognized a provision for investment loss of
$4.5 million and equity in losses of $2.1 million from its investment.

30

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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, 2011 and December 31, 2010:

Initial
Stated
Maturity

Interest Rate (11)

Contractual
Balance at
March 31,
2011

Contractual
Balance at
December 31,
2010Term Loans (recourse)LB Term Loan(1)

2/9/2011

LIBOR + 1.50%





22,199Term Loans (non-recourse)Term Asset Backed Securities Loan Facility

10/29/2014

2.64%


14,682


14,682Total Credit Facilities & Term Loans






14,682


36,881Exchangeable Senior Notes (recourse)(2)(3)

6/15/2027

7.25%


31,915


68,165Exchangeable Senior Notes ("7.5% Notes") (recourse)(2)(4)

3/15/2031

7.50%


172,500


Exchangeable Senior Notes ("NNN Notes") (recourse)(2)(5)

6/15/2013

11.50%


60,750


60,750Liability to subsidiary trusts issuing preferred securities (subordinate recourse)(6)(7)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%


31,459


31,475Trust VIII

7/30/2037

3 month LIBOR 2.70%


35,100


35,100Mortgage notes payable (non-recourse)Salt Lake City

9/1/2012

5.16%


14,950


15,059EDS

10/8/2015

5.37%


46,014


46,218Executive Center(8)

1/1/2016

5.85%


51,480


51,480Green Pond

4/11/2016

5.68%


16,820


16,884Indianapolis

2/1/2017

6.06%


27,692


27,789Northstar Healthcare GE

5/1/2015

3 month LIBOR + 5.95%


58,200


58,200Northstar HealthcarePark National

1/11/2014

5.94%


32,424


32,537


31

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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 (11)

Contractual
Balance at
March 31,
2011

Contractual
Balance at
December 31,
2010Northstar HealthcareGEWLK

1/11/2017

6.99%


159,136


159,135Northstar HealthcareGETusc & Harmony

1/11/2017

7.09%


7,843


7,842Northstar HealthcareHarmony FNMA(9)

2/1/2017

6.39%


73,673


73,901Northstar HealthcareGrove City

3/30/2016

6.00%


4,393


3,040Northstar HealthcareLancaster

3/30/2016

6.00%


6,694


6,280Northstar HealthcareMarysville

3/30/2016

6.00%


5,022


5,393Northstar HealthcareWashington

3/30/2016

6.00%


4,812


5,223Northstar HealthcareMiller Merril

6/30/2012

7.07%


116,806


116,806Northstar HealthcareARL Mob Wachovia

5/11/2017

5.89%


3,337


3,349Northstar HealthcareSt Francis

9/10/2010

LIBOR + 2.00%





Aurora

7/11/2016

6.22%


32,473


32,583DSG

10/11/2016

6.17%


33,194


33,325Keene

2/1/2016

5.85%


6,559


6,588Fort Wayne

1/1/2015

6.41%


3,291


3,313Portland

6/17/2014

7.34%


4,416


4,466Milpitas

3/6/2017

5.95%


21,513


21,639Fort Mill

4/6/2017

5.63%


27,700


27,700Reading

1/1/2015

5.58%


13,575


13,643Reading

1/1/2015

6.00%


5,000


5,000Alliance

12/6/2017

6.48%


23,160


23,239Castelton ParkA Note(10)

10/9/2010

LIBOR + 1.66%


36,252


Mezzanine loan payable (non-recourse)Fort Mill

4/6/2017

6.21%


2,399


2,482Bonds payable (non-recourse)(6)N-Star I

8/1/2038

3 month LIBOR + 2.13%
(average spread)


199,580


225,701N-Star II

6/1/2039

LIBOR + 1.33%
(average spread)


192,369


197,212


32

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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 (11)

Contractual
Balance at
March 31,
2011

Contractual
Balance at
December 31,
2010N-Star III

6/1/2040

LIBOR + 0.58%
(average spread)


294,909


313,907N-Star IV

7/1/2040

LIBOR + 0.60%
(average spread)


257,849


258,769N-Star V

9/5/2045

LIBOR + 0.53%
(average spread)


434,095


434,633N-Star VI

6/1/2041

3 month LIBOR + 0.52%
(average spread)


271,698


271,698N-Star VII

6/22/2051

LIBOR + 0.35%
(average spread)


499,200


499,200N-Star VIII

2/1/2041

LIBOR + 0.45%
(average spread)


586,460


586,460N-Star IX

8/7/2052

LIBOR + 0.40%
(average spread)


701,480


744,960CapSource

1/20/2037

3 month LIBOR + 0.42%
(average spread)


875,108


916,005$
5,711,540

$
5,697,588


(1)The
Company repaid the outstanding balance of $22.2 million on March 9, 2011.(2)The
contractual amounts may differ from the carrying value on the consolidated balance sheets due to the equity component of the debt.(3)The
holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2012.(4)The
holders have repurchase rights which may require the Company to repurchase the notes on March 15, 2016.(5)Approximately
$9.9 million is held in an escrow account that is earmarked to repay the notes.(6)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.(7)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.


33

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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)

(8)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.(9)Mortgage
note payable is classified as a liability held for sale on the condensed consolidated balance sheet as of March 31, 2011.(10)Mortgage
note payable was obtained through foreclosure of a mezzanine loan having a principal amount of approximately $7.2 million and a maturity
default as of January 15, 2011.(11)See
Note 14 regarding the Company's derivative financial instruments which are used to manage interest rate exposure.


Scheduled
principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of March 31, 2011:

Total

Mortgage and
Mezzanine
Loans

Secured Term
Loan

Liability to
Subsidiary
Trusts Issuing
Preferred
Securities

Exchangeable
Senior Notes(1)

Bonds Payable2011

$
43,739

$
43,739

$


$


$


$
2012


173,743


141,828








31,915


2013


72,006


11,256








60,750
(2)

2014


60,908


46,226


14,682








2015


175,181


175,181











Thereafter


5,185,963


420,598





280,117


172,500


4,312,748Total

$
5,711,540

$
838,828

$
14,682

$
280,117

$
265,165

$
4,312,748


(1)$31.9 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.(2)$9.9 million
is held in an escrow account that is earmarked to repay the Company's 11.5% exchangeable senior notes.


At
March 31, 2011, the Company was in compliance with all covenants under its borrowings.



In March 2011, the Operating Partnership issued $172.5 million of 7.50% exchangeable senior notes (the "7.50% Notes") due in
2031. The 7.50% Notes were offered in a private offering exempt from registration in reliance on Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). The 7.50% Notes
pay interest semi-annually in arrears on March 15 and September 15, at a rate of 7.50% per annum, and mature on March 15, 2031. The 7.50% Notes have an initial
exchange rate representing an exchange price of $6.44 per share of the Company's common stock, subject to

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

adjustment
under certain circumstances. The 7.50% Notes are senior unsecured obligations of the Operating Partnership and may be exchangeable at any time prior to the close of business on the second
business day immediately preceding the maturity date for cash or common stock of the Company, or a combination of cash and common stock of the Company, at the Company's option. The 7.50% Notes are
redeemable, at the Company's option, on and after March 15, 2016. The Company may be required to repurchase the 7.50% Notes upon the occurrence of certain events. The net proceeds from the
offering were approximately $164.0 million.

As
of March 31, 2011 and December 31, 2010, the total carrying amount of the equity components of $249.5 million of exchangeable senior notes was
$17.0 million and $4.9 million, respectively. The principal amount of the exchangeable senior notes liabilities was $265.2 million and $128.9 million as of March 31,
2011 and December 31, 2010, respectively. The unamortized discount of the liability components was $15.6 million and $2.0 million at March 31, 2011 and December 31,
2010, respectively. The net carrying amount of the liability components was $249.5 million and $126.9 million at March 31, 2011 and December 31, 2010, respectively.
Interest expense for the three months ended March 31, 2011 related to the exchangeable senior notes was $4.3 million, of which $3.6 million was related to contractual interest,
respectively, and $0.7 million was attributable to amortization of the debt discount and deferred financing costs. Interest expense for the three months ended March 31, 2010 related to
the
exchangeable senior notes was $3.4 million, of which $3.0 million was related to contractual interest, respectively, and $0.4 million was attributable to amortization of the debt
discount and deferred financing costs.



During the three months ended March 31, 2011, the Company repurchased approximately $36.3 million face amount, having a
carrying amount of $35.9 million, of its 7.25% exchangeable senior notes for a total of $37.7 million and $96.3 million face amount, having a carrying amount of
$26.4 million, of its N-Star CDO bonds payable for a total of $34.2 million. The Company recorded a total net realized loss of $8.4 million in connection with the
repurchase of its notes and bonds for three months ended March 31, 2011.



On March 31, 2011, the Company closed on a $20.9 million loan with General Electric Capital Corporation. The proceeds
were primarily used to refinance $19.9 million of loans bearing an interest rate of 9.25% and maturing in 2015 on four of its healthcare-related net leased assets. 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.



The Company owns a partially vacant net lease property located in Cincinnati, Ohio. In November 2010, the mortgage lender declared a
payment default and, in December 2010, began foreclosure proceedings on the property. At March 31, 2011, the Company was in discussions with the lender to transfer the property to the lender
via a deed in lieu of foreclosure. At March 31, 2011, the Company had a reserve of $5.2 million and had no additional exposure related to this property.

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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 and its CSE RE 2006-A CDO financing to
perform certain advisory services. 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 earned total fees on these agreements of approximately $0.4 million for the three months ended
March 31, 2010, which is recorded in other income in the condensed consolidated statement of operations.

The
Company has an agreement with NSREIT and had an agreement with NSIO REIT prior to its merger, both commercial finance REITs, to perform certain advisory services. For each of the
three months ended March 31, 2011 and 2010, the Company earned $0.1 million of fees on these agreements.

Legacy Fund

The Company has two real estate debt investments with a subsidiary of Legacy Partners Realty Fund I, LLC (the "Legacy Fund"), as
borrower, totaling $33.4 million in principal amount. In January 2010, the Company extended the $19.2 million loan through January 2012, with three additional one-year
extension options. In June 2010 the Company modified the $14.1 million loan. The interest rate was increased to LIBOR plus 450 and extended the maturity date to April, 2013, with two
one-year extension options. One of the Company's directors, Preston Butcher, is the chairman of the Board of Directors and chief executive officer and owns a significant interest in Legacy
Partners Commercial, LLC, which indirectly owns an equity interest in, and owns the manager of, the Legacy Fund. The loans are included in real estate debt investments in the consolidated
balance sheets.

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, 2011, the Company has issued an aggregate of 8,196,068 LTIP Units, net of
forfeitures of 147,640 LTIP Units. An aggregate of 4,596,509 LTIP Units were converted to common stock and 581,669 shares of common stock were issued pursuant to the Stock Incentive Plan. Of the
8,196,068 LTIP Units, so long as the recipient continues to be an eligible recipient, 4,974,034 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,

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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)

July 29,
or October 29 for the three-year vesting period, 2,069,680 will vest over 16 consecutive quarters with the first quarter being January 29, 2008, 701,058 cliff
vested 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 $1.7 million and $4.7 million for the three months ended March 31, 2011 and 2010, respectively. As of
March 31, 2011, there were approximately 458,725 unvested LTIP Units and 84,349 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 Unit grants is $3.1 million, provided there are no forfeitures.

In
February 2011 the Company granted 370,370 LTIP Units to certain officers and employees of the Company. These LTIP Units vest to the individual recipient at a rate of
one-twelfth of the total amount granted as of the end of each quarter, beginning on April 29, 2011. The Company has recognized $0.1 million in compensation expense related to
these LTIP Units for the three months ended March 31, 2011.

The
status of all of the LTIP Unit grants as of March 31, 2011 and December 31, 2010 is as follows:

March 31, 2011

December 31, 2010LTIP
Grants

Weighted
Average
Grant Price

LTIP
Grants

Weighted
Average
Grant PriceBalance at beginning of year(1)


4,289

$
7.92


7,323

$
9.85Granted


370


5.13





Converted to common stock


(489
)

6.81


(3,031
)

12.59Forfeited


(84
)

10.67


(3
)

8.55Ending balance(2)


4,086

$
7.74


4,289

$
7.92


(1)Reflects
balance at January 1, 2011 and January 1, 2010 for the periods ended March 31, 2011 and December 31, 2010,
respectively.(2)Reflects
balance at March 31, 2011 and December 31, 2010, 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

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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)

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 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 or four-year period based on the Company's achievement of cumulative performance goals for the
three or four-year period, subject to the participant's continued employment through the payment date. The Committee expects to evaluate the Plan on an annual basis and consider
alternatives to the foregoing as the Committee deems appropriate and in the best interests of the Company. 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.

In
January of 2009 and 2010, an aggregate of 3,147,454 and 2,209,998 restricted stock units ("RSUs"), respectively, were allocated to executive officers of the Company under the
long-term incentive component of the Plan. The RSUs are subject to the Company achieving cumulative performance hurdles or target stock prices established by the Committee for the three
year periods ending December 31, 2011 and December 31, 2012. Upon the conclusion of the applicable three-year performance period, each executive officer will receive a
payout, if any, equal to the value of one share of common stock at the time of such payout, inclusive of the dividends paid with respect to a share of common stock during the second and third year of
the applicable three-year performance period, for each restricted stock unit actually earned (the "Long-Term Amount"). The Long-Term Amount, if any, will be paid in
the form of shares of common stock or LTIP Units to the extent available under the Company's equity compensation plans or, if all or a portion of such shares or LTIP Units are not available, in cash;
provided, that the amount of cash paid to any executive officer with respect to the Long-Term Amount shall not exceed certain maximum amounts set forth in the Plan.

At
March 31, 2011, the Company believes that it will meet the performance hurdle established for the period ending December 31, 2011 that would entitle the recipient to 50%
of the RSUs granted. The Company does not believe that it will have a sufficient amount of common stock or LTIP Units to settle these RSUs and, accordingly, believes that these RSUs will be settled in
cash. The Company has already recorded $2.1 million of equity-based compensation expense relating to these RSUs based upon the fair value of the target stock price component of the Plan on the
dates that the RSUs were initially allocated to the executive officers. Prior to March 31, 2011, no compensation expense has been recorded relating to the performance hurdles under the Plan.
When the Company determines that the performance hurdles are likely to be achieved, the Company is required to record a catch up adjustment to compensation expense for the amount of expense that would
have been recorded if recognized ratably over the performance period. In addition, a cash settlement of a share-based payment classified as an equity instrument is required to be accounted for as a
repurchase of the equity

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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)

instrument
at its fair value. In accordance with the guidance, the Company recorded an adjustment to compensation expense of $2.9 million, based on the closing price of the Company's common
shares on March 31, 2011. The award to be paid in cash is currently classified as a liability and will be re-measured each reporting period based upon the stock price at the end of
the reporting period and the Company's performance expectations for the duration of the performance period.

At
March 31, 2011, the Company does not currently have sufficient information to believe that the performance hurdle for the RSUs granted in 2010 are likely to be achieved and,
accordingly, did not recognize compensation relating to the performance hurdles under the Plan for the performance period ending December 31, 2012. The target stock price component of the Plan
for the period ending December 31, 2012 has been fair valued and the Company has recognized equity-based compensation of $0.2 million. To the extent earned, the Company expects to settle
these RSUs in common stock or LTIP Units.

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. 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, 2011, the Company issued a total of 15,028 common shares pursuant to the Plan for a gross sales price of approximately $0.1 million.
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.

Dividends

On January 19, 2011, the Company declared a dividend of $0.10 per share of common stock. The dividends were paid on
February 14, 2011 to the stockholders of record as of February 4, 2011.

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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, 2011and 2010 is computed as follows (in thousands, except per share
amounts):

Three Months Ended
March 31,
2011

Three Months Ended
March 31,
2010Numerator (Income)Basic EarningsNet loss attributable to NorthStar Realty Finance Corp. common stockholders

$
(103,793
)
$
(24,923
)Effect of dilutive securities:Loss allocated to non-controlling interest


(5,592
)

(2,373
)Dilutive net income/(loss) available to stockholders

$
(109,385
)
$
(27,296
)Basic Earnings:Shares available to common stockholders


78,196


75,069Effect of dilutive securities:OP/LTIP units


4,339


7,148Dilutive Shares


82,535


82,217Net income/(loss) per share attributable to NorthStar Realty Finance Corp. common stockholdersBasic/Diluted

$
(1.33
)
$
(0.33
)


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 common 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

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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)

underlying
equity in the Operating Partnership. As of March 31, 2011 and December 31, 2010, non-controlling interest related to the aggregate limited partnership units of
4,086,759 and 4,292,199, represented a 4.94% and 5.21% interest in the Operating Partnership, respectively. Income/(loss) allocated to the operating partnership non-controlling interest
for the
three months ended March 31, 2011 and 2010 was a loss of $5.6 million and a loss of $2.4 million, respectively.

Contingently Redeemable Non-controlling Interest

In July, 2010, the Company was notified by Inland American that Inland American desires to have NRF Healthcare, LLC engage in a
sale process for a portfolio of 34 senior housing properties (the "Target Portfolio") or otherwise redeem $50 million of Inland American's convertible preferred membership interest in NRF
Healthcare, LLC by January 9, 2011. NRF Healthcare LLC has commenced a sale process for the Target Portfolio. If NRF Healthcare, LLC has not redeemed $50 million of
the Inland American investment or sold the Target Portfolio by October 9, 2011, then Inland American may undertake a sale process for the Target Portfolio. Inland American may also undertake a
sale process for all of the assets of NRF Healthcare, LLC beginning August 8, 2011, unless at least $25 million of Inland American's preferred interest has been redeemed by
June 10, 2011 and, in any event, beginning August 8, 2011, all future operating cash flow in excess of debt service will be used to redeem the preferred membership interest. On
July 8, 2012, if the preferred membership interest has not been redeemed in full, Inland American may sell the assets of NRF Healthcare, LLC. The Company is currently exploring
alternatives with respect to its healthcare portfolio, including discussing with Inland a potential modification and extension to the terms of the preferred membership interest.

Income
allocated to Inland American's non-controlling interests for the three months ended March 31, 2011 and 2010 was income of $2.6 million and
$2.6 million, respectively.

Joint Ventures

A third party holds 16.7% of the equity notes of N-Star CDO I. 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

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.

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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 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. 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.

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 earnings 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, 2011 and 2010 the Company recorded, in earnings, a mark-to-market unrealized gain of $19.0 million
and an unrealized loss of $33.7 million, respectively, for the non-qualifying interest rate swaps. For the three months ended March 31, 2011 and 2010, the Company recorded a
$1.9 million and a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

The
following tables summarize the Company's derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of March 31, 2011 and
December 31, 2010:

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of March 31, 2011


63

$
2,678,745

$
(201,673
)
0.37% - 7.00%

December 2011 - October 2019As of December 31, 2010


64

$
2,812,409

$
(220,630
)
0.37% - 7.00%

February 2011 - October 2019


The Company had no derivative financial instruments that were designated as hedges in qualifying hedging relationships as of March 31, 2011
and December 31, 2010, respectively.

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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 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, 2011 and
December 31, 2010:

Tabular Disclosure of Fair Values of Derivative Instruments

Asset Derivatives

Liability DerivativesAs of
March 31,
2011

As of
December 31,
2010

As of
March 31,
2011

As of
December 31,
2010Balance
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

$


Derivative liability, at fair value

$
Total derivatives designated as hedging instruments



$




$




$




$
Derivatives not designated as hedging instrumentsInterest rate products

Derivative instrument, at fair value

$
55

Derivative instrument, at fair value

$
59

Derivative liability, at fair value

$
(201,728
)
Derivative liability, at fair value

$
(220,689
)Total derivatives not designated as hedging instruments



$
55



$
59



$
(201,728
)


$
(220,689
)


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, 2011and 2010:

Derivatives in Cash Flow Hedging Relationships

Location of Gain/(loss)
recognized in income

Three Months
Ended
March 31,
2011

Three Months
Ended
March 31,
2010Interest rate productsAmount of gain or (loss) in OCI on derivative (effective portion)

n/a

$


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

Interest Expense

$


$
(335
)


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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 Not Designated as Hedging Instruments

Location of Gain/(loss)
recognized in income

Three Months
Ended
March 31,
2011

Three Months
Ended
March 31,
2010Interest rate productsAmount of gain or (loss) recognized in income

Unrealized gain (loss) on investment and other

$
(18,957
)
$
(33,749
)Amount of gain or (loss) reclassified from accumulated OCI into income

Unrealized gain (loss) on investment and other

$
(1,874
)
$
(1,404
)


At
March 31, 2011, the Company's counterparties hold approximately $23.7 million of cash margin as collateral against its swap contracts.

Credit Risk Concentrations

Concentrations of credit risk arise when a number of borrowers, tenants, operators 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, tenant or operator that generates 10% or more of its total revenue. However, approximately 60.5% of the Company's rental and escalation
revenue for the three months ended March 31, 2011, is generated from one tenant and one operator 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

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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)

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.

The
following table summarizes segment reporting for the three months ended March 31, 2011 and 2010:

Real Estate
Debt

Operating
Real Estate

Real Estate
Securities

Healthcare

Broker-
Dealer

Unallocated(1)

Consolidated
TotalMarch 31, 2011:Interest income

$
46,945

$
4

$
50,609

$
59

$


$
23

$
97,640Rental and escalation income


39


9,578





23,310








32,927Commission income














918





918Other revenue


212


4


4


46


59


8


33347,196


9,586


50,613


23,415


977


31


131,818Interest expense


(8,791
)

(5,681
)

(9,945
)

(10,538
)

(65
)

1,600


(33,420
)Operating expenses





(1,676
)




(10,818
)




(3
)

(12,497
)Commission expense














(717
)




(717
)Realized gain (loss)


11,938





10,071


(535
)




(602
)

20,872Unrealized gain (loss)


(136,655
)




13,072


(16
)




(28,619
)

(152,218
)Equity earning in unconsolidated venture


(2,305
)

9


(8
)







76


(2,228
)Impairment on operating real estate / loan loss reserves


(28,982
)
















(28,982
)Depreciation & amortization


(270
)

(3,971
)




(3,543
)

(15
)

(283
)

(8,082
)G&A and other


(4,091
)

(715
)

(961
)

(1,350
)

(1,959
)

(11,927
)

(21,003
)(169,156
)

(12,034
)

12,229


(26,800
)

(2,756
)

(39,758
)

(238,275
)Income from discontinued operations


(219
)

49





579








409Gain on sale of discontinued operations, net of minority interest


50


4,981














5,031Consolidated net (loss)/income


(122,129
)

2,582


62,842


(2,806
)

(1,779
)

(39,727
)

(101,017
)Net income (loss) attributable to the non-controlling interest


6,606


(140
)

(3,399
)

152


96


2,149


5,464Preferred stock dividends


(6,325
)

134


3,254


(145
)

(92
)

(2,057
)

(5,231
)Contingently redeemable


(3,638
)

77


1,872


(84
)

(53
)

(1,183
)

(3,009
)Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders

$
(125,486
)
$
2,653

$
64,569

$
(2,883
)
$
(1,828
)
$
(40,818
)
$
(103,793
)Total Assets as of March 31, 2011

$
2,209,633

$
400,836

$
1,914,478

$
606,779

$
1,470

$
268,465

$
5,401,662


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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)



Real Estate
Debt

Operating
Real Estate

Real Estate
Securities

Healthcare

Broker-
Dealer

Unallocated(1)

Consolidated
TotalMarch 31,2010:Interest income

$
21,391

$
5

$
36,111

$
57

$


$
11

$
57,575Rental and escalation income


38


9,310





9,941








19,289Commission income




















Other revenue


225


3


1,909








57


2,19421,654


9,318


38,020


9,998





68


79,058Interest expense


(11,213
)

(5,947
)

(7,105
)

(7,503
)




(395
)

(32,163
)Operating expenses


(3
)

(1,549
)




(45
)




(4
)

(1,601
)Commission expense




















Realized gain (loss)


(1,173
)




2,889


(283
)







1,433Unrealized gain (loss)


(1,101
)




25,238








(24,576
)

(439
)Equity earning in unconsolidated venture


(461
)

140


(912
)

2,413





169


1,349Impairment on operating real estate / loan loss reserves


(36,316
)
















(36,316
)Depreciation & amortization


(4
)

(3,977
)




(3,502
)

(2
)

(300
)

(7,785
)G&A and other


(3,328
)

(487
)

(920
)

(1,392
)

(856
)

(16,945
)

(23,928
)(53,599
)

(11,820
)

19,190


(10,312
)

(858
)

(42,051
)

(99,450
)Income from discontinued operations





60





229








289Consolidated net (loss)/income


(31,945
)

(2,442
)

57,210


(85
)

(858
)

(41,983
)

(20,103
)Net income (loss) attributable to the non-controlling interest


3,772


288


(6,755
)

(1,952
)

101


4,957


411Preferred stock dividends


(8,313
)

(635
)

14,887


(22
)

(223
)

(10,925
)

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

$
(36,486
)
$
(2,789
)
$
65,342

$
(2,059
)
$
(980
)
$
(47,951
)
$
(24,923
)Total Assets as of March 31, 2010

$
2,113,427

$
441,580

$
1,251,211

$
625,362

$


$
96,233

$
4,527,813


(1)Corporate
Investments and Other includes corporate level investments, corporate level interest income, interest expense and unallocated general &
administrative expenses.


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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, 2011 and 2010 is presented below:

March 312011

2010Foreclosure of operating real estate


(56,770
)Assumption of mortgage notes and loans payable in connection with foreclosure


36,252Reduction of real estate debt investments in connection with foreclosure


7,215Elimination of real estate debt investments in connection with foreclosure


13,527Increase of restricted cash in connection with foreclosure


(2,075
)Consolidate assets of of Nstar CDO financing





(812,166
)Consolidate liabilities of Nstar CDO financing





628,595Consolidate non-controlling interest





3,216Distribution of operating real estate to non-controlling interest





9,525Distribution of mortgage notes and loans payable to non-controlling interest





(4,734
)Deconsolidate of non-controlling interest





(1,815
)


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, 2011 and December 31, 2010, cash equivalents, accounts receivable and accounts payable, reasonably approximate their fair values due to the
short-term maturities of these items. The available for sale securities 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 structural or economic tests required to achieve such extended maturities. At March 31, 2011 the fair market value was
$1.6 billion with a gross principal amount of $2.7 billion. At December 31, 2010, the fair market value was $1.6 billion with a gross principal amount of
$2.7 billion. Of the $2.7 billion gross principal amount, approximately $997.1 million of gross principal amount in CSE RE 2006-A was recorded at a fair market value
of approximately $321.4 million at December 31, 2010.

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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)

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, 2011, the fair market value of the 7.50% exchangeable senior notes was $158.3 million with a carrying amount of $158.2 million, the fair market value of the 7.25%
exchangeable senior notes was $32.7 million with a carrying amount of $31.7 million and the fair market value of the 11.50% exchangeable senior notes was $64.4 million with a
carrying amount of $59.6 million. At December 31, 2010, the fair market value of the 7.25% exchangeable senior notes was $64.4 million, with a carrying amount of
$67.4 million and the fair market value of the 11.50% exchangeable senior notes was $56.8 million with a carrying amount of $59.4 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,
2011, the fair market value was $850.1 million with a carrying amount of $838.8 million. At December 31, 2010, the fair market value was 818.9 million with a carrying
amount of $803.1 million.

As
of March 31, 2011 the estimated fair value of the Company's TALFs was approximately $15.1 million with a carrying amount of $14.7 million. As of
December 31, 2010 the estimated fair value of the Company's TALFs was approximately $15.3 million with a carrying amount of $14.7 million. The estimated fair value is based on
interest rates available at March 31, 2011 and December 31, 2010, respectively, for issuance of debt with similar terms and remaining maturities. The estimated fair value of the
Company's TALFs is not necessarily indicative of the amounts that the Company could realize in a current market exchange.

Disclosure
about fair value of financial instruments is based on pertinent information available to management as of March 31, 2011 and December 31, 2010. 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, or WaMu. NRFC NNN Holdings, Inc. , or NNN, which is a subsidiary of the Company, is a defendant in a lawsuit, or the Lawsuit, filed by
GECCMC 2005-CI Plummer Office Limited Partnership, or the Lender, in the Superior Court of the State of California, County of Los Angeles, relating to a loan the properties previously
owned by one of the Company's subsidiaries, NRFC Sub IV, that were 100% leased, or the Lease, to WaMu. The Lawsuit alleges, among other things, that the loan provided by Lender to NRFC Sub IV became a
recourse obligation of NNN due to an alleged termination of the Lease. The judge presiding over the Lawsuit granted the Lender's motion for summary judgment and, accordingly, entered a judgment
against NNN in the amount of approximately $45 million, or the Judgment. NNN intends to vigorously pursue an appeal of the decision.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

18. Commitments and Contingencies (Continued)

Pursuant
to the guidance Accounting for Contingencies, an estimated loss from a loss contingency shall be accrued by a charge to income if two conditions are met. First, information
available prior to the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It
is implicit in this condition that it must be probable that one or more future events will occur confirming the facts of the loss. Second, the amount of the loss can be reasonably estimated. The
Company believes it is not probable that the
Lawsuit will result in an unfavorable outcome and, therefore, the Company has not established an accrual relating to the Lawsuit.

In
connection with filing for an appeal, pursuant to California law NNN is required to post a bond in an amount equal to one and a half times the amount of the Judgment, or the Bond.
Accordingly, the Company has entered into a standard General Agreement of Indemnity with an issuer of surety bonds, or the Surety Agreement. On January 7, 2011, as part of the Surety Agreement,
in connection with the issuance of the Bond, the Company posted cash collateral equal to thirty- eight percent of the amount of the Bond, or approximately $26.1 million.

19. Subsequent Events

Dividends

On May 4, 2011, 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 25, 2011, to the stockholders of record as of the close of business on May 18, 2011.

Debt Repurchases

During April 2011, the Company repurchased approximately $8.5 million face amount of its 7.25% exchangeable senior notes for a
total of $8.8 million, $4.0 million face amount of its 11.50% exchangeable senior notes for a total of $4.3 million and $82.3 million face amount of its N-Star
CDO bonds payable for a total of $34.7 million.

B-Piece Transaction

During April 2011, the Company was selected as the winning bidder of the "B-piece" in a new approximately $2 billion
CMBS securitization. The Company expects the transaction to close in the second quarter of 2011 and expects, subject to obtaining certain ratings on the bonds, to utilize approximately
$7 million of unrestricted cash and $20 million of restricted cash in its CDO financings as part of the transaction. The Company intends to appoint itself as special servicer in the
securitization.

Healthcare Net Lease Sale

In April 2011, the Company completed the sale of a portfolio of healthcare net lease assisted living facilities for
$101.5 million. The purchaser assumed $73.5 million of mortgage debt secured by the assets in the portfolio.

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

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

Forward-Looking Statements

Certain items in this report may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments, financing needs, future market opportunities,
financial condition and disclosure in Item 2. of this reportManagement's Discussion and Analysis of Financial Condition and Results of Operations. 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, 2010, as amended, 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.

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 assets at premiums to our carrying values. Realized gains are very dependent on market conditions; therefore, it is difficult to predict
whether realized gains may be a significant part of our income in the future.

Profitability and Performance Metrics

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

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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

Virtually all commercial real estate property types were adversely impacted by the recent economic recession, including core property
types such as hotel, retail, office, industrial and multi-family properties. Land, condominium and other commercial property types have been more 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. Our loan loss provisioning levels for 2009 and 2010 were higher than in
the past due to the impact of these conditions. Despite weak economic conditions, during 2010 and into 2011, investor interest began returning to commercial real estate especially in urban areas
having high concentrations of institutional quality real estate, and in certain asset types such as apartments and hotels that are expected to benefit quickly from recovering economic conditions.
During the remainder of 2011, the degree to which commercial real estate values erode or improve within the local markets in which our real estate collateral is located will impact the level of loan
losses in our asset base.

Many
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, 2011, is 0.24%, well below its 2.93% 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 recent 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. Although investor interest in
real estate has improved into 2011, much of the new capital has been directed to the highest quality, stabilized urban real estate assets and properties expected to benefit quickly from improving
economic conditions. Many of our collateral properties had business plans to improve occupancy and cash flows that have not been accomplished due to the recent economic recession. Weak cash flow
performance and conservative underwriting standards by current market lenders continue to cause difficulties in obtaining repayments at maturity for our loans.

For
existing loans, when credit spreads widen, which was the case in 2008 and early 2009, the economic value of existing loans decreases. Although credit spreads decreased in 2010, if a
lender were to originate a similar loan today, such loan would likely still carry a greater credit spread than the

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existing
loan as a result of the recent economic recession. 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, 2010 and into 2011, negatively impacting market values of CMBS and in many cases
negatively impacting the CDO financing structures used by us and others to leverage these investments. To some extent, we countered the rating agency downgrades by purchasing approximately
$1.2 billion of CMBS in 2009 and 2010 at a weighted average discount to par of approximately 60%.

Our
net leased assets are also adversely impacted by a weaker economy. Corporate space needs contracted 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.

Our Strategy

We responded to these difficult conditions by decreasing investment activity and aggressively raising corporate capital when we
observed deteriorating market conditions and we expect credit to continue to be challenging for the remainder of 2011. We currently anticipate that most of our investment activity and uses of
available unrestricted cash liquidity will be focused on
discounted repurchases of our previously issued debt securities, opportunistic investments and 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 attractive returns compared to historical levels. For this reason, in
addition to raising capital in the public markets, we are working to raise equity capital through alternative channels, especially in the non-listed REIT market. During 2010, we raised
approximately $37.7 million in the non-traded REIT sector for NSREIT and its predecessor, and filed a registration statement for NorthStar Senior Care Trust, Inc. During the
first quarter 2011, we raised $9.3 million, bringing the total raised to date to $40 million for our non-listed REIT effort, with executed selling agreements with
broker-dealers covering an average of approximately 2,700 registered representatives for the quarter. NRF Capital Markets LLC, our wholly-owned broker dealer subsidiary, currently has executed
selling agreements with broker-dealers covering more than 12,000 registered representatives and is in the due diligence phase with firms covering an additional approximately 20,000 registered
representatives. There is no assurance that NRF Capital Markets, LLC will execute selling agreements with all or any of the registered representatives that are currently conducting due
diligence. We are the advisor to these companies and earn management fees which vary based on the amount of assets under management and investment performance. 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

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services,
and the non-traded REIT efforts reflect our strategy of accessing alternative sources of equity capital and leveraging our existing platform to generate fee revenues.

Our Financing Structures

As of March 31, 2011, approximately $4.0 billion of our collateralized debt obligations permit reinvestment of capital
proceeds, which means when the underlying assets repay or are sold we are able to reinvest the proceeds in new assets without having to repay the liabilities. Approximately $954.4 million of
our funded loan commitments have their initial maturity date during the remainder of 2011; however, many of the loans contain extension options of at least one year. We also expect that a majority of
the $686.9 million of loans having final maturities during the remainder of 2011 will have their maturities extended beyond 2011 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 2011.

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 "legacy" commercial real estate assets remains scarce, we expect credit quality in
our assets to remain weak. While we have devoted a majority of our resources to managing our existing asset base, a poor economic 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 is returning to the commercial real estate finance markets and corporate capital is currently available to the stronger REITs. Approximately
$20.3 billion in multi-borrower CMBS transactions were completed during 2010 and the first quarter of 2011, and many industry experts are predicting at least $30-$40 billion
of total CMBS issuance in 2011. Wall Street banks have also begun to more actively provide credit to real estate lenders to originate or purchase new real estate loans. We expect that credit
availability will continue to improve during the remainder of 2011, increasing opportunities for us to access attractive capital.

Risk Management

We use many methods to actively manage our asset base to preserve our income and capital. 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. 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 is 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

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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. 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. We have become a rated special servicer by S&P and Fitch and intend to appoint ourselves as special servicer in CMBS transactions where we become the controlling class
holder in order to, among other things, have more control over restructurings. 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.

On
July 8, 2010, we acquired, as part of the CSE RE 2006-A CDO acquisition, commercial real estate loans having an aggregate $1.1 billion outstanding principal
balance. The loans were recorded as of July 8, 2010, at their estimated $396.0 million fair market value. As of March 31, 2011, the CSE RE 2006-A loans had an
aggregate $888.3 million outstanding principal balance and an aggregate $251.2 million carrying value. The $654.9 million acquisition discount as of March 31, 2011, acts as
a built-in reserve for credit issues and recoveries less than contractual amounts related to these acquired loans. Although fair market values and any related discounts to outstanding
principal balances were determined on a loan-by-loan basis and therefore cannot be allocated to other loans, we believe the overall discount provides protection to our basis
for ongoing credit issues associated with this portfolio.

At
March 31, 2011, we had two loans, exclusive of the CSE RE 2006-A loans, totaling $41.0 million of aggregate outstanding principal amount on
non-performing status due to maturity defaults, and $38.8 million of our loan loss reserves were allocated to these loans. First mortgages represent approximately 30.5% of the gross
book value of these loans (exclusive of reserves),
and 69.5% of the loans are backed by land collateral. There can be no assurance that there will be acceptable outcomes under our non-performing loans and accordingly, we may, in the
future, determine that more reserves are required for these loans.

During
March, 2011, we foreclosed on a mezzanine loan having a principal amount of approximately $7.2 million and a maturity default as of January 15, 2011.

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Overall,
the prolonged poor economic conditions and the scarcity of commercial real estate debt capital resulted 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 recently seen
some signs of growth, generally lower property cash flows than when the existing financing was completed are causing real estate owners to continue to have 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 are generally lower today than when many of our loans were originated. Lower values make it difficult for real estate investors to sell their properties and to recoup their capital. As
a result of the generally weak commercial real estate market, many lenders, including us, are concluding that extending loans at maturity, rather than foreclosure and sale, may be the most attractive
path for maximizing value.

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 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. If any of our borrowers are unable to replenish reserves and otherwise are unable
to 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 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.

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East Rutherford, NJ Retail Construction First Mortgage Loan.

We own a 22% interest held in Meadowlands One, LLC that is secured by a retail/entertainment complex located in East Rutherford,
NJ ("NJ Property"), and the lender group is in the process of seeking to recapitalize the NJ Property. While the lender group has selected a developer to complete the NJ Property, there is no
assurance that a recapitalization will be completed or that a recapitalization will be completed on terms acceptable to us, which could have a material adverse effect on our business and operations.

Las Vegas, NV Casino/Hotel Mezzanine Loan.

We own an $89 million mezzanine loan (the "NV Loan") that is secured by the Hard Rock Hotel and Casino in Las Vegas, NV
(the "Hard Rock"). We, along with certain of the other lenders, and the borrower and its affiliates under the NV Loan, have completed a long-term restructuring of the NV
Loan. As part of the restructuring, Brookfield took ownership of the Hard Rock and entered into a seven-year loan with the existing senior
lender, subject to achieving certain tests, and we will retain our $89 million mezzanine loan (or its economic equivalent), as well as an equity participation in the Hard Rock. There is no
assurance that the restructured NV Loan will be successful over time. Accordingly, we may lose all of our investment, which could have a material adverse effect on our business and operations.

German Retail Portfolio Mezzanine Loan Participation

We own a €43.4 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 filed for bankruptcy in Germany (the "German Loan"). The sale of the Tenant by the German bankruptcy administrator to Berrgruen Holdings was
finalized on October 8, 2010 allowing for a restructuring of the German Loan effective as of July 20, 2010. Since the restructuring the loan has been performing, however, there can be no
assurance that the German Loan will not default in the future. We are also subject to foreign currency translation gains or losses based upon the effective exchange rates at the end of each reporting
period. For the period ending March 31, 2011, we recognized a foreign currency translation gain of approximately $3.7 million, which is recorded in realized gains on investments and
other in the condensed consolidated statement of operations.

Critical Accounting Policies

Refer to the section of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2010
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 April 2011, the FASB issued guidance requiring that in evaluating whether a restructuring constitutes a troubled debt restructuring,
a creditor must separately conclude that both of the following exist (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. The
guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. We are
evaluating the effect the guidance will have on our condensed consolidated financial statements.

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Consolidation of Variable Interest Entities

B-Piece Transactions

We may obtain ownership of the controlling class of a securitization through our current investments in "B piece" securities or through
our ownership of CMBS bonds. Ownership of the controlling class may give us the right to appoint the special servicer in the applicable CMBS securitization and certain veto rights. Having the
ownership in the controlling class and the right to appoint the special servicer may require us to consolidate these CMBS securitizations, which would result in recording all the assets and
liabilities of these securitizations in our balance sheet and the revenue and expenses of the securitization in our Statement of Operations.

In
March 2011, our existing investment in securities of a securitization, with a fair value of $3.6 million as of March 31, 2011 became the controlling class of a
securitization we did not sponsor. The securitization was formed in April 2000 and our investment is generally passive in nature. The ownership of more than 50% of the controlling class and the right
to appoint the special servicer, gives us the power to direct the activities that impact the economic performance of the VIE. This entity should be consolidated, but we are unable to determine the
fair value of the collateral due to lack of available information. We have made, and continue to make, exhaustive efforts to obtain information about this entity and have excluded it from the
application of ASC 810-10 due to lack of essential information to determine the accounting required to consolidate the entity. Since the securitization was created in 2000, it is pre 2003
and we have therefore applied the scope exemption available in ASC 810-10-15-17(C). We will continue to request this information, but the master servicer is not
legally obligated to provide us the non-public documentation and has not provided the information related to the collateral requested by us.

The
principal amount of the assets and liabilities each is approximately $29.3 million. The bonds are non-recourse to us and our maximum exposure to loss is our
investment in the securities in the securitization of $3.6 million as of March 31, 2011.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2011 to the Three Months Ended March 31, 2010

Revenues

Interest Income

Interest income for the three months ended March 31, 2011 totaled $97.6 million, representing an increase of
$40.0 million, or 70%, compared to $57.6 million for the three months ended March 31, 2010. For the three months ended March 31, 2011, the increase in interest income was
primarily attributable to: (i) the addition of $33.2 million in interest income, of which $11.9 million was related to contractual interest, $11.8 million related to
accretion of the discount on loans fully repaid and $9.5 million related to accretion of the discount on loans outstanding, as the result of the July 2010 acquisition of CSE RE
2006-A CDO financing's real estate debt investments and available for sale securities and (ii) the addition of $12.4 million in interest income as the result of the
July 7, 2010 consolidation of the N-Star IX CDO financing's available for sale securities and real estate debt investments partially offset by lower average interest rates due to
loan modifications and lower comparable asset balances resulting in a decrease of approximately $5.4 million in interest income.

Rental and Escalation Income

Rental and escalation income for the three months ended March 31, 2011 totaled $32.9 million, representing an increase of
$13.6 million, or 71%, compared to $19.3 million for the three months ended March 31, 2010. The increase was primarily attributable to an increase of approximately

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$13.4 million
related to the acquisition of the 51% membership interest in Midwest Holdings formerly owned by Chain Bridge, an increase of approximately $0.6 million related to an office
park in Indiana as a result of its March, 2011 foreclosure and an increase in rental income of approximately $0.1 million related to a new lease at our Reading, PA property, partially offset by
a decrease of $0.5 million related to lower rents and the remaining vacancy at the Cincinnati, OH property.

Commission Income

Commission income represents income earned by us for selling equity, through our broker-dealer subsidiary, for the NorthStar Real
Estate Income Trust, Inc. For the three months ended March 31, 2011, we recorded $0.9 million in commission income related to these capital raising efforts. We had no such
commission income for the three months ended March 31, 2010.

Other Revenue

Other revenue for the three months ended March 31, 2011 totaled $0.3 million, representing a decrease of
$1.9 million, or 91%, compared to $2.2 million for the three months ended March 31, 2010. Other revenue for the three months ended March 31, 2011 consisted primarily of
$0.2 million in interest income and advisory fees and $0.3 million in various other fees, such as exit fees, draw fees, and late fees. 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, $0.4 million in advisory fees on the N-Star CDO IX
financing, $0.6 million in interest income from securities owed in our CDO financings prior to consolidation and $0.2 million in other fees.

Expenses

Interest Expense

Interest expense for the three months ended March 31, 2011 totaled $33.4 million, representing an increase of
$1.2 million, or 4%, compared to $32.2 million for the three months ended March 31, 2010. The increase in interest was primarily the result of: (i) the addition of
$2.0 million in interest expense as the result of the July 8, 2010 acquisition of CSE RE 2006-A CDO vehicle; (ii) the addition of $1.3 million in interest
expense as the result of the July 7, 2010 acquisition of the N-Star IX CDO financing from our securities fund; (iii) $2.0 million in additional interest related to
refinancing of loans and modifications in our health care portfolio; (iv) $0.6 million in additional interest due to the March 2011 issuance of our 7.50% Notes; and
(v) $0.6 million in additional interest due to various new investments. The increase in interest expense was partially offset by (i) $4.2 million in lower interest as a
result of the June 30, 2010 repayment of the WA Secured Term Loan and Euro-note (ii) $0.6 million in lower expense due to the repurchase of related party bonds; and
(i) $0.3 million lower interest on our 11.50% and 7.25% exchangeable senior notes due to 2010 repurchases.

Real Estate PropertiesOperating Expenses

Real estate property operating expenses for the three months ended March 31, 2011 totaled $12.5 million, representing an
increase of $10.9 million, or 681%, compared to $1.6 million for three months ended March 31, 2010. The increase was primarily attributable to $11.0 million related to our
acquisition of an additional 51% membership interest in Midwest Holdings, formerly owned by Chain Bridge, partially offset by lower expenses of approximately $0.1 million due to reduced
occupancy.

Asset Management Expenses

Asset management expenses for the three months ended March 31, 2011 totaled $1.6 million, representing an increase of
approximately $0.9 million, or 129%, compared to $0.7 million for the three months ended March 31, 2010. Asset management expenses consist of cost incurred related to

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maintaining
existing assets under management, such as legal and consulting fees related to loan modifications and restructurings and acquisition cost related to new investment activity. The increase
in asset management expenses was primarily attributable to additional asset under management related to the acquisition of the CSE RE 2006-A CDO of $0.6 million and additional legal
expenses related to existing asset management of approximately $0.3 million.

Commission Expense

Commission expense represents the portion of commission income which is paid to broker dealers with whom we have distribution
agreements. For the three months ended March 31, 2011, we recorded $0.7 million in commission expense related to capital raising efforts. We had no such commission expense for the three
months ended March 31, 2010.

Asset Management FeesRelated Party

We had no asset management fees-related parties for the three months ended March 31, 2011 due to the internalization of our
healthcare management team. Asset management fees-related parties for the three months ended March 31, 2010 totaled $0.5 million and represented asset management fees associated with our
healthcare portfolio.

Provision for Loan Losses

Provision for loan losses for the three months ended March 31, 2011 totaled $24.5 million for eight loans. The provision
for loan losses as of March 31, 2011 includes $19.1 million for mezzanine loans, $5.0 million for subordinated mortgage interests and $0.4 million for first mortgage whole
loans. 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 Loss on Equity Investment

Provision for Loss on Equity Investment losses for the three months ended March 31, 2011 totaled $ 4.5 million,
representing a permanent impairment on our joint venture investment in the NJ Property. Our investment was permanently impaired as a result of the current recapitalization values.

General and Administrative

General and administrative expenses for the three months ended March 31, 2011 totaled $19.3 million, representing a
decrease of $3.5 million, or 16%, compared to $22.8 million for the three months ended March 31, 2010. The primary components of our general and administrative expenses were the
following:

Salaries
and equity-based compensation for the three months ended March 31, 2011 totaled $12.7 million, representing a decrease of approximately $3.8 million, or
24%, compared to $16.5 million, for the three months ended March 31, 2010. The decrease was attributable to a $0.8 million decrease related to salaries and accrued cash incentive
compensation costs and a $3.1 million decrease related to equity-based compensation. The $0.8 million decrease in salaries and accrued compensation was primarily attributable to the
reversal of $1.3 million of accrued bonus related to our former chief financial officer and a 2010 one-time expense of $3.6 million relating to the separation and consulting
agreement with our former chief operating officer. The decrease was offset set by $2.8 million of compensation expense related to the long-term incentive component of our incentive
compensation plan and an increase of $1.3 million related to our broker-dealer subsidiary. The $3.1 million decrease in equity-based compensation expense was attributable to a 2010
one-time expense of $1.0 million relating to the separation and consulting agreement with our former chief

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operating
officer and $2.3 million decrease in expense from equity-based awards issued under our 2004 Omnibus Stock Incentive Plan becoming fully vested.

Auditing
and professional fees for the three months ended March 31, 2011 totaled $2.4 million, representing an increase of $0.3 million, or 17%, compared to
$2.1 million for the three months ended March 31, 2010. The increase was primarily attributable to approximately a $0.3 million increase in legal fees for general corporate work.

Other
general and administrative expenses for the three months ended March 31, 2011 totaled $4.1 million, representing an increase of approximately $0.1 million, or
3%, compared to $4.0 million for the three months ended March 31, 2010. The increase was primarily attributable to increased overhead costs relating to our Denver, Colorado office for
our broker-dealer subsidiary and our Bethesda, Maryland office for our healthcare subsidiary.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended March 31, 2011 totaled $8.1 million, representing an
increase of $0.3 million, or 4%, compared to $7.8 million for the three months ended March 31, 2010. The increase was primarily related to an increase of $0.2 million
related to an office park in Indiana as a result of its March, 2011 foreclosure and $0.1 million related to 2010 operating real estate improvements and various capital expenditures.

Equity in (Loss)/Earnings of Unconsolidated Ventures

Equity in loss/earnings for the three months ended March 31, 2011 were net losses of $2.2 million, representing a
decrease of $3.5 million, compared to earnings of $1.3 million for the three months ended March 31, 2010. For the three months ended March 31, 2011, we recognized equity in
losses of $2.0 million from our equity investment in the NJ Property and $0.3 million from the LandCap joint venture. The equity in loss was partially offset by equity in earnings of
$0.1 million in connection with a net lease joint venture. 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.

Unrealized Loss on Investments and Other

Unrealized loss on investments and other increased by approximately $151.8 million for the three months ended March 31,
2011 to a loss of $152.2 million, compared to a loss of $0.4 million for the three months ended March 31, 2010. The unrealized loss on investments and other for 2011 consisted
primarily of unrealized mark-to-market losses of $302.1 million on various issued CDO bonds payable resulting from decreasing market credit spreads increasing the values
of these liabilities, and $8.7 million of unrealized losses on interest rate swap derivatives. The $8.7 million of swap losses is comprised of approximately $27.7 million of net
cash payments under the swaps, and $19.0 million of mark-to-market gains. The 2011 losses also include $28.8 million of mark-to-market
adjustments relating to the liability to subsidiary trusts issuing preferred securities. The unrealized losses in 2011 were partially offset by $187.4 million of unrealized gains related to
positive mark-to-market adjustments on available for sale securities assets, also caused primarily by decreasing credit spreads. 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

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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 securities.

Realized Gain on Investments and Other

The realized gain of $21.0 million for the three months ended March 31, 2011 consisted primarily of net realized gains of
approximately $20.7 million on the sale of certain available for sale securities, a $10.1 million income tax refund for CSE RE 2006-A's 2009 tax filing, a gain of
approximately $1.6 million on the sale of certain real estate debt investments and a net foreign currency translation gain of $3.7 million related to our Euro-denominated
investment. The realized gains were partially offset by a net realized loss of approximately $8.4 million on various debt repurchases and a realized loss of approximately $6.4 million
related to other-than-temporary impairments on certain available for sale securities and a realized loss of approximately $0.5 million on the sale of our membership
interest in Midwest. 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.

Income from Discontinued Operations

Income from discontinued operations represents the operations of properties sold or held for sale during the period. In March 2011, we
completed the sale of a leasehold interest containing approximately 17,655 square feet of retail space located in New York City to a private investor group for approximately $7.4 million and
the sale of an REO office building containing 142,988 square feet located in Philadelphia, PA to a private investor group for approximately $8.3 million. As of March 31, 2011, we
recorded as held for sale, two REO parcels of land located in Arizona, and an REO multifamily property located in Georgia, both of which were acquired in connection with the acquisition of CSE RE
2006-A and a portfolio of 18 healthcare net lease assisted living facilities located in Wisconsin. Accordingly, income of $0.4 million and income of $0.3 million,
respectively, related to the operations of these properties was reclassified to income from discontinued operations for the three months ended March 31, 2011 and 2010, respectively.

Gain on Sale from Discontinued Operations

In March 2011, we completed the sale of a leasehold interest containing approximately 17,655 square feet of retail space located in New
York City to a private investor group
for approximately $7.4 million, representing a gain of approximately $5.0 million and the sale of an REO office building containing 142,988 square feet located in Philadelphia, PA to a
private investor group for approximately $8.3 million, representing an immaterial gain. We had no such gain on sale from discontinued operations for the three months ended March 31,
2010.

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, senior notes exchangeable into common stock, trust preferred securities and perpetual preferred and common stock.
As we discussed in "Outlook and Recent Trends", such capital is becoming more available, but remains somewhat constrained for legacy commercial mortgage REITs.

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Our total available liquidity at March 31, 2011 was approximately $284.6 million, including $192.9 million of unrestricted cash and cash
equivalents and $91.7 million of uninvested and available funds in our CDO financings, which is available only for reinvestment and future funding commitments within the CDO structures. During
the first quarter 2011, we repurchased $138 million face amount of our CDO bonds with a carrying amount of $39 million for $40 million of unrestricted cash, including
$63 million of our CDO bonds with a carrying amount of $18 million for $19 million in unrestricted cash, which were previously financed in our N-Star CDOs. During
April 2011, we repurchased $68 million of our CDO bonds for $29 million of unrestricted cash, including, $9 million of our CDO bonds for $3 million of unrestricted cash,
which were previously financed in our CDOs.

As
set forth in our periodic reports filed with the SEC, one of our net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA
and was 100% leased to WaMu. NNN, which is a subsidiary of ours, is a defendant in the Lawsuit, filed by the Lender, in the Superior Court of the State of California, County of Los Angeles, relating
to a loan the properties previously owned by one of our subsidiaries, NRFC Sub IV, that were 100% leased to WaMu. The Lawsuit alleges, among other things, that the loan provided by Lender to NRFC Sub
IV became a recourse obligation of NNN due to an alleged termination of the Lease. The judge presiding over the Lawsuit granted the Lender's motion for summary judgment and, accordingly, entered a
judgment against NNN in the amount of approximately $45 million. NNN intends to vigorously pursue an appeal of the decision. In connection with such appeal, pursuant to California law NNN is
required to post a bond in an amount equal to one and a half times the amount of the Judgment (the "Bond"). Accordingly, we have entered into a standard General Agreement of Indemnity with an issuer
of surety bonds (the "Surety Agreement"). On January 7, 2011, as part of the Surety Agreement, in connection
with the issuance of the Bond, we posted cash collateral equal to thirty-eight percent of the amount of the Bond, or approximately $26.1 million.

On
July 10, 2010, we were notified by Inland American that it desires to have NRF Healthcare, LLC engage in a sale process for a portfolio of 34 senior housing properties,
or the Target Portfolio, or otherwise redeem $50 million of Inland American's convertible preferred membership interest in NRF Healthcare, LLC by January 9, 2011. NRF Healthcare
LLC has commenced a sale process for the Target Portfolio. If NRF Healthcare, LLC has not redeemed $50 million of the Inland American investment or sold the Target Portfolio by
October 9, 2011, then Inland American may undertake a sale process for the Target Portfolio. Inland American may also undertake a sale process for all of the assets of NRF
Healthcare, LLC beginning August 8, 2011, unless at least $25 million of Inland American's preferred interest has been redeemed by June 10, 2011 and, in any event,
beginning August 8, 2011, all future operating cash flow in excess of debt service will be used to redeem the preferred membership interest. On July 8, 2012, if the preferred membership
interest has not been redeemed in full, Inland American may sell the assets of NRF Healthcare, LLC. We are currently exploring alternatives with respect to our healthcare portfolio, including
discussing with Inland a potential modification and extension to the terms of the preferred membership interest.

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

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conditions
and economic conditions that more specifically impact our business or prospects. Although we significantly reduced the cash portion of quarterly dividends paid in 2009 and 2010 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
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, III, IV and V have expired, and, for our N-Star CDO
VI, N-Star CDO VII, N-Star CDO VIII and N-Star CDO IX will expire in 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, 2011, N-Star
CDO I and N-Star CDO II were not in compliance with their OC tests. We expect that complying with OC and IC tests will continue to be difficult.

The
following is a summary of our CDO cash distribution and coverage tests as of March 31, 2011:

Cash
Distributions(1)

Quarterly
Interest
Coverage
Cushion(2)

Overcollateralization
CushionPrimary
Collateral
Type

Quarter Ended
March 31, 2011

March 31,
2011

March 31,
2011

At
OfferingN-Star I


CMBS

$
447

$
(406
)
$
(9,800
)
$
8,687N-Star II


CMBS


0


(122
)

(14,350
)

10,944N-Star III


CMBS


1,776


2,714


15,067


13,610N-Star IV


Loans


2,189


1,936


57,438


19,808N-Star V


CMBS


803


1,167


1,680
(3)

12,940N-Star VI


Loans


650


923


31,639


17,412N-Star VII


CMBS


2,416


2,880


11,858


13,966N-Star VIII


Loans


3,479


3,199


118,005


42,193N-Star IX


CMBS


1,640


2,530


27,019


24,516CSE RE 2006-A


Loans


0
(4)

4,759


13,510


(151,595)
(5)


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 cushions from remittance report issued on date nearest to March 31, 2011.(3)As
of April 2011, N-Star V's overcollateralization cushion is negative.


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(4)As
of March 31, 2011, $7 million is held in escrow pending resolution of certain assets.(5)Based
on trustee report as of June 24, 2010 which was closest to the date of acquisition.


We
have committed to purchase up to $10 million of shares of NSREIT's common stock during the two-year period following commencement of its continuous, public offering in the
event that its distributions to stockholders exceeds its AFFO.

We
will seek to meet our long term liquidity requirements, including the repayment of debt and our investment funding needs, through existing cash resources, opportunistic issuances of
debt or equity capital, including exchangeable notes, 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.

Exchangeable Senior Notes

In March 2011, we issued $172.5 million of 7.50% exchangeable senior notes (the "7.50% Notes") due in 2031. The 7.50% Notes were
offered in a private offering exempt from registration in reliance on Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). The 7.50% Notes pay interest
semi-annually in arrears on March 15 and September 15, at a rate of 7.50% per annum, and mature on March 15, 2031. The 7.50% Notes have an initial exchange rate
representing an exchange price of $6.44 per share of our common stock, subject to adjustment under certain circumstances. The 7.50% Notes are senior unsecured obligations of ours and may be
exchangeable at any time prior to the close of business on the second business day immediately preceding the maturity date for cash or common stock of ours, or a combination of cash and common stock
of ours, at the our option. The 7.50% Notes are redeemable, at our option, on and after March 15, 2016. We may be required to repurchase the 7.50% Notes upon the occurrence of certain events.
The net proceeds from the offering were approximately $164.0 million.

Debt Repurchases

During the three months ended March 31, 2011, we repurchased approximately $36.3 million face amount, having a carrying
amount of $35.9 million, of our 7.25% exchangeable senior notes for a total of $37.7 million and $96.3 million face amount, having a carrying amount of $26.4 million, of
our N-Star CDO bonds payable for a total of $34.2 million. We recorded a total net realized loss of $8.4 million in connection with the repurchase of our notes and bonds for
three months ended March 31, 2011.

To
qualify as a REIT, we are required to distribute annually at least 90% of our taxable income, subject to certain adjustments, to our stockholders. Certain "excess
non-cash" income is not subject to the 90% distribution requirement. To the extent that we satisfy the distribution requirement, but we distribute less than 100% of our taxable income, we
will be subject to federal corporate income tax on our undistributed taxable income. Discounted purchases of our N-Star CDO bonds will cause us to recognize cancellation of indebtedness,
or COD, income, which is "phantom" or "non-cash" income. Any COD income we recognize will generally be subject to the 90% distribution requirement, except to the extent our COD income,
when combined with certain other types of non-cash income, exceeds 5% of our gross income. The excess above the 5% threshold will be treated as "excess non-cash" income. COD
income recognized as a result of repurchases of our N-Star CDO bonds that are treated as "taxable REIT subsidiaries," which are N-Star CDOs I, II, V, VII and IX, will not be
eligible to be

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treated
as "excess non-cash" income. Even if we satisfy the 90% distribution requirement, we will be subject to corporate tax on any "excess non-cash" income and any other
income that we do not distribute to our stockholders. As a result of the 90% distribution requirement, we may decide to forego purchases of our N-Star CDO bonds at a discount.
Alternatively, we may make additional distributions to our stockholders in order to comply with the 90% distribution requirement,

Mortgage Note Refinancing

On March 31, 2011, we closed on a $20.9 million loan with General Electric Capital Corporation. The proceeds were
primarily used to refinance $19.9 million of loans maturing in 2015 on four of our healthcare-related net leased assets. 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.

Modification of Mortgage Loan

We own a partially vacant net lease property located in Cincinnati, Ohio. In November 2010, the mortgage lender declared a payment
default and, in December 2010, began foreclosure proceedings on the property. At March 31, we were in discussions with the lender to transfer the property to the lender via a deed in lieu of
foreclosure. At March 31, 2011, we had a reserve of $5.2 million and had no additional exposure related to this property.

Dividend Reinvestment and Stock Purchase Plan

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 ended March 31, 2011, we issued a total of 15,028 common shares pursuant to the Plan for a gross sales price of approximately $0.1 million. During
the three months ended March 31, 2010, we issued a total of 23,975common shares pursuant to the Plan for a gross sales price of approximately $0.1 million.

Cash Flows

Three months ended March 31, 2011 compared to three months ended March 31, 2010

The net cash used in operating activities was $0.7 million for the three months ended March 31, 2011 compared to the net
cash flow used in operating activities of $3.9 million for the three months ended March 31, 2010. The decrease in net cash used was primarily due to separation and consulting payments to
our former chief operating officer in the first quarter of 2010, partially offset by increased overhead related to our recently formed broker-dealer subsidiary.

The
net cash flow provided by investing activities was $41.1 million for the three months ended March 31, 2011 compared to the net cash used in investing activities of
$28.4 million for the three months ended March 31, 2010. The primary sources of cash flow provided by investing activities in 2011 were the sale of real estate debt investments, real
estate debt repayments and available for sale securities repayments, partially offset by originations and acquisitions of real estate debt investments.

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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
net cash flow provided by financing activities was $27.1 million for the three months ended March 31, 2011 compared to cash provided by financing activities of
$10.2 million for the three months ended March 31, 2010. The primary sources of cash flow by financing activities were the issuance of $172.5 million of the 7.5% Notes, partially
offset by debt repurchases and repayments of $138.5 million and the issuance of the $26.1 surety bond. The primary sources of cash flow by financing activities in 2010 were mortgage notes and
loan borrowings.

Contractual Obligations and Commitments

As of March 31, 2011, we had the following contractual commitments and commercial obligations (dollars in thousands):

Payments Due by PeriodContractual Obligations

Total

1 year or less

2 - 3 years

4 - 5 years

After 5 YearsMortgage notes

$
836,429

$
43,502

$
152,386

$
220,606

$
419,935Mezzanine loan payable


2,399


237


698


801


663Exchangeable senior notes(1)


265,165





92,665





172,500Bonds payable


4,312,748











4,312,748Secured term loan


14,682








14,682


Liability to subsidiary trusts issuing preferred securities


280,117











280,117Operating leases


64,567


4,331


11,331


11,221


37,684Outstanding unfunded commitments(2)


60,081


55,081


5,000





Estimated interest payments(3)


521,887


95,193


232,684


140,836


53,174Total contractual obligations

$
6,358,075

$
198,344

$
494,764

$
388,146

$
5,276,821


(1)$31.9 million
of our 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table assumes the holders exercise
their repurchase rights which would require us to repurchase the notes on June 15, 2012.(2)Our
future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaled $60.1 million,
of which a minimum of $57.7 million will be funded within our existing CDO financings. Fundings are categorized by estimated funding period. Assuming that all loans that have future fundings
meet the terms to qualify for such funding, our equity requirement on the remaining future funding requirements would be approximately $2.4 million over the next two years.(3)Estimated
interest payments are based on the weighted-average life of the debt. One-month LIBOR plus the respective spread as of
March 31, 2011 was used to estimate payments for our floating rate debt.


As
of March 31, 2011, we were in compliance with all covenants in our debt agreements.

Off Balance Sheet Arrangements

None

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Recent Developments

Dividends

On May 4, 2011, 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 25, 2011, to the stockholders of record as of the close of business on May 18, 2011.

Debt Repurchases

During April, 2011, we repurchased approximately $8.5 million face amount of our 7.25% exchangeable senior notes for a total of
$8.8 million, $4.0 million face amount of our 11.50% exchangeable senior notes for a total of $4.3 million and $82.3 million face amount of our N-Star CDO bonds
payable for a total of $34.7 million.

B-Piece Transaction

During April 2011, we were selected as the winning bidder of the "B-piece" in a new approximately $2 billion CMBS
securitization. We expect the transaction to close in the second quarter of 2011 and, subject to obtaining certain ratings on the bonds, expect to utilize approximately $7 million of
unrestricted cash and $20 million of restricted cash in our CDO financings as part of the transaction. NorthStar intends to appoint itself as special servicer in the securitization.

Healthcare Net Lease Sale

In April 2011, we completed the sale of a portfolio of healthcare net lease assisted living facilities for $101.5 million. The
purchaser assumed $73.5 million of mortgage debt secured by the assets in the portfolio.

Inflation

Our leases for tenants of operating real estate are 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, as amended, for additional information on our
exposure to market risk.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

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

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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.

We
calculate AFFO by subtracting from (or adding) 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.

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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, 2011
and 2010 (in thousands):

Three Months Ended
March 31,
2011

Three Months Ended
March 31,
2010Funds from Operations:Loss from continuing operations

$
(106,457
)
$
(20,392
)Non-controlling interest


(128
)

(1,962
)Consolidated net loss before non-controlling interest in operating partnership


(106,585
)

(22,354
)Adjustments:Preferred stock dividends


(5,231
)

(5,231
)Depreciation and amortization


8,082


7,785Funds from discontinued operations


1,074


987Real estate depreciation and amortizationunconsolidated ventures


232


237Funds from Operations

$
(102,428
)
$
(18,576
)Adjusted Funds from Operations:Funds from Operations

$
(102,428
)
$
(18,576
)Straight-line rental income, net


(223
)

(546
)Straight-line rental income, discontinued operations





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


(21
)

(26
)Amortization of equity-based compensation


2,034


5,058Amortization of above/below market leases


(214
)

(264
)Unrealized (gains)/losses from mark-to-market adjustments


122,288


(20,158
)Unrealized losses from mark-to-market adjustments, unconsolidated ventures





625Gain from acquisitions





Adjusted Funds from Operations

$
21,436

$
(33,887
)


Item 3.    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 maintain a net floating rate asset or liability position. To the extent we have net floating rate assets,
our earnings will 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 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 $28.1 million offset by an increase in our interest expense of
approximately $20.5 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 ($7.6 million).

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Real Estate Debt

We invest in real estate debt which is 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 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 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 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 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 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 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, as amended. 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

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borrower-related
factors which we believe are critical to evaluating the credit risk inherent in a transaction.

We
expect our investments to be denominated in U.S. dollars or, if they are denominated in another currency, to be converted back to U.S. dollars through the use of currency swaps. It
may not be possible to eliminate all of the currency risk as the payment characteristics of the currency swap may not exactly match the payment characteristics of the investments.

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 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 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 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.

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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.

Core Net Lease and Healthcare 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 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.

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.

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Government.
At March 31, 2011, our counterparties hold approximately $23.7 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 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, 2011 and 2010, we recorded, in earnings, a mark-to-market unrealized gain of $19.0 million and an unrealized loss of
$33.7 million, respectively, for the non-qualifying interest rate swaps. For the three months ended March 31, 2011 and 2010, we recorded a $1.9 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 not designated as hedges in qualifying hedging relationships as of March 31, 2011 and
December 31, 2010 (in thousands):

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of March 31, 2011


63

$
2,678,745

$
(201,673
)
0.37% - 7.00%

December 2011 - October 2019As of December 31, 2010


64

$
2,812,409

$
(220,630
)
0.37% - 7.00%

February 2011 - October 2019


We had no derivative financial instruments that were designated as hedges in qualifying hedging relationships as of March 31, 2011 and
December 31, 2010, respectively.

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 Acting Principal 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 Acting Principal
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.

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PART II. OTHER INFORMATION

Item 6.    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)4.1

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))4.2

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)4.3

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))4.4

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)


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Exhibit
Number

Description of Exhibit4.5

Indenture, dated as of March 9, 2011, among NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp. and NRFC Sub-REIT Corp., as Guarantors, and Wilmington Trust FSB, as Trustee
(incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed March 9, 2011)4.6

Form of Note of NorthStar Realty Finance Limited Partnership (incorporated by reference to Exhibit 4.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed March 9, 2011)4.7

Form of Guarantee of NorthStar Realty Finance Corp. and NRFC Sub-REIT Corp. (incorporated by reference to Exhibit 4.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed March 9,
2011)4.8

Registration Rights Agreement, dated as of March 9, 2011, among NorthStar Realty Finance Corp. and Citigroup Global Markets Inc. and JMP Securities LLC, as representatives of the initial purchasers
(incorporated by reference to Exhibit 4.4 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed March 9, 2011)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)10.6

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)


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Exhibit
Number

Description of Exhibit10.9

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

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)10.14

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)10.15

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)10.16

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)10.17

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)10.18

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)10.19

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)10.20

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)10.21

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)


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Exhibit
Number

Description of Exhibit10.22

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)10.23

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)10.24

Letter Agreement, dated June 30, 2010, by Wells Fargo Bank, National Association and Wells Fargo Bank, N.A., London Branch (as successor-by-merger to Wachovia Bank, N.A. (London Branch)), as acknowledged and
agreed by NorthStar Realty Finance Corp. and certain of its Affiliates and Subsidiaries (incorporated by reference to Exhibit 10.29 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
2010)10.25

Common Stock Purchase Warrant, Certificate No. W-4, dated June 30, 2010, issued to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.30 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2010)10.26
*
Amendment to the NorthStar Realty Finance Corp. Executive Incentive Bonus Plan.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.


*Filed
herewith


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SIGNATURES

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

NORTHSTAR REALTY FINANCE CORP.Date: May 6, 2011

By:

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

/s/ LISA MEYER Lisa Meyer Acting Principal Financial Officer


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