Table of Contents



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

FORM 10-Q

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

For the quarterly period ended March 31, 2009

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 ý

Accelerated filer o

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, 66,789,372 shares outstanding as of May 7, 2009.



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NORTHSTAR REALTY FINANCE CORP.
QUARTERLY REPORT
For the Three Months Ended March 31, 2009

TABLE OF CONTENTS



Index



PagePart I.

Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31,
2008

3Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2009
and March 31, 2008

4Unaudited Condensed Consolidated Statements of Stockholders' Equity as of March 31, 2009 and
December 31, 2008

5Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31,
 2009 and March 31, 2008

6Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and
March 31, 2008

7Notes to the Condensed Consolidated Financial Statements (unaudited)

8Item 2.

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

40Item 3.

Quantitative and Qualitative Disclosures about Market
Risk

59Item 4.

Controls and Procedures

63Part II.

Other Information

64Item 6.

Exhibits

64Signatures

68


2

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Table of Contents

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

March 31,
2009

December 31,
2008(unaudited)ASSETS:Cash and cash equivalents

$
121,343

$
134,039Restricted cash


153,830


163,157Operating real estatenet


1,118,569


1,127,000Available for sale securities, at fair value


187,597


221,143Real estate debt investments, net


1,996,021


1,976,864Real estate debt investments, held-for-sale


39,193


70,606Investments in and advances to unconsolidated ventures


64,788


101,507Receivables, net of allowance of $840 and $0 in 2009 and 2008, respectively


21,779


24,806Unbilled rents receivable


8,463


7,993Derivative instrument, at fair value


7,086


9,318Deferred costs and intangible assets, net


73,253


79,633Other assets


27,975


27,660Total assets

$
3,819,897

$
3,943,726LIABILITIES:Mortgage notes and loans payable


908,413


910,620Exchangeable senior notes


174,513


233,273Bonds payable, at fair value


393,114


468,638Credit facilities


13,226


44,881Secured term loans


397,380


403,907Liability to subsidiary trusts issuing preferred securities, at fair value


67,721


69,617Repurchase obligations


528


176Obligations under capital leases


3,548


3,555Accounts payable and accrued expenses


19,722


27,478Escrow deposits payable


40,955


46,353Derivative liability, at fair value


77,164


87,220Other liabilities


32,787


34,248Total liabilities


2,129,071


2,329,966EQUITY: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, 2009
and December 31, 2008, 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, 2009
and December 31, 2008, respectively


183,505


183,505Common stock, $0.01 par value, 500,000,000 shares authorized, 66,787,592 and 62,906,693 shares issued and outstanding at March 31, 2009 and
December 31, 2008, respectively


673


634Additional paid-in capital


630,437


620,028Treasury stock, 475,051 shares held at March 31, 2009 and December 31, 2008, respectively


(1,384
)

(1,384
)Retained earnings


717,743


648,860Accumulated other comprehensive loss


(106,356
)

(94,343
)Total NorthStar Realty Finance Corp. Stockholders' Equity


1,482,485


1,415,167Non-controlling interest


208,341


198,593Total equity


1,690,826


1,613,760Total liabilities and stockholders' equity

$
3,819,897

$
3,943,726


See accompanying notes to condensed consolidated financial statements

3

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Table of Contents

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

Three
Months Ended
March 31,
2009

Three
Months Ended
March 31,
2008Revenues and other income:Interest income

$
36,784

$
63,705Interest incomerelated parties


4,507


3,761Rental and escalation income


27,248


28,957Advisory and management fee incomerelated parties


1,691


2,330Other revenue


168


976Total revenues


70,398


99,729Expenses:Interest expense


34,112


55,458Real estate propertiesoperating expenses


2,127


2,048Asset management feesrelated parties


853


2,106Provision for loan losses


21,462


750General and administrative:Salaries and equity based compensation(1)


11,610


11,730Auditing and professional fees


2,263


2,441Other general and administrative


3,582


3,883Total general and administrative


17,455


18,054Depreciation and amortization


14,814


9,938Total expenses


90,823


88,354Income (loss) from operations


(20,425
)

11,375Equity in (loss)/earnings of unconsolidated ventures


(4,418
)

(178
)Unrealized gain on investments and other


90,661


210,945Realized gain on investments and other


36,913


10Consolidated net income


102,731


222,152Net income attributable to the non-controlling interests


(12,864
)

(23,116
)Preferred stock dividends


(5,231
)

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

$
84,636

$
193,805Net income attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)

$
1.32

$
3.11Weighted average number of shares of common stock:Basic


64,348,264


62,243,736Diluted


72,255,413


69,589,079


---

See
accompanying notes to condensed consolidated financial statements

4

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Table of Contents

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

NorthStar Realty Finance Corp.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, 2007

$
100


61,719

$
617

$
843,433




$
(179,293
)
$
(40,879
)
$
623,978

$
20,232

$
644,210Equity component of exchangeable senior notes











2,451











2,451





2,451Proceeds from dividend reinvestment and stock purchase plan





182


2


1,139











1,141





1,141Proceeds equity distribution agreement





114


1


875











876





876Stock awards





273


3


2,411











2,414


22,266


24,680Purchase of treasury shares





(475
)







(1,384
)







(1,384
)




(1,384
)Comprehensive loss

















(6,016
)




(6,016
)

(633
)

(6,649
)Conversion of OP/LTIP units





1,094


11


10,991











11,002


(11,002
)

SFAS No. 159 beginning balance adjustment

















90,966


170,577


261,543


22,743


284,286Cash dividends on common stock




















(90,069
)

(90,069
)

(22,312
)

(112,381
)Cash dividends on preferred stock




















(20,925
)

(20,925
)




(20,925
)Issuance of shares of preferred stock


























94,822


94,822Net income




















630,156


630,156


72,477


702,633Balance at December 31, 2008

$
100


62,907

$
634

$
861,300


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

$
1,415,167

$
198,593

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











(2,385
)










(2,385
)




(2,385
)Proceeds from dividend reinvestment and stock purchase plan





5





14











14





14Amortization of equity based compensation











1











1


5,143


5,144Comprehensive loss

















(12,013
)




(12,013
)

(1,471
)

(13,484
)Conversion of OP/LTIP units





160


2


2,169











2,171


(2,171
)

Stock dividends





3,716


37


10,610








(9,608
)

1,039


(1,039
)

Cash dividends on common stock




















(6,145
)

(6,145
)




(6,145
)Cash dividends on preferred stock




















(5,231
)

(5,231
)




(5,231
)Cash distribution to non-controlling interests


























(3,578
)

(3,578
)Net income




















89,867


89,867


12,864


102,731Balance at March 31, 2009

$
100


66,788

$
673

$
871,709


(1,384
)
$
(106,356
)
$
717,743

$
1,482,485

$
208,341

$
1,690,826


See accompanying notes to condensed consolidated financial statements

5

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Table of Contents

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

Three
Months Ended
March 31,
2009

Three
Months Ended
March 31,
2008Net income

$
102,731

$
222,152Unrealized gain (loss) on available for sale securities


(15,860
)

(13,172
)Change in fair value of derivatives


979


(6,396
)Reclassification adjustment for gains included in net income


1,397


1,240Comprehensive Income


89,247


203,824Less: Comprehensive Income attributable to the non-controlling interests


11,393


20,681Comprehensive Income attributable to NorthStar Realty Finance Corp.

$
77,854

$
183,143


See
accompanying notes to condensed consolidated financial statements

6

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Table of Contents

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

Three Months
Ended
March 31, 2009

Three Months
Ended
March 31, 2008Net cash provided by operating activities

$
8,863

$
23,937Cash flows from investing activities:Acquisition of operating real estate, net





(6,476
)Improvement of Operating real estate


(1,299
)

Acquisition of available for sale securities


(17,114
)

Proceeds from disposition of securities available for sale


16,501


Available for sale securities repayments


216


1,543Originations/acquisitions of real estate debt investments


(121,677
)

(58,931
)Real estate debt investment repayments


6,622


98,694Proceeds from the sale of real estate debt investments


101,513


Real estate debt investment acquisition costs


(116
)

Corporate debt investment acquisitions





(16,148
)Corporate debt investment repayments





15,567Proceeds from disposition of corporate debt investment





27,420Other loans receivable


(1,070
)

Other loans receivable repayment





10,000Restricted cash used for investment activities


(443
)

22,836Acquisition deposits





(3,574
)Distributions from unconsolidated ventures


6,952


462Net cash (used in) investing activities


(9,915
)

91,393Cash flows from financing activities:Collateral held by broker





(830
)Collateral held by swap counter party


3,709


(8,867
)Mortgage principal repayments


(2,207
)

(1,158
)Borrowing under credit facilities


1,912


18,369Repayments credit facilities


(33,568
)

(57,756
)Repurchase obligation borrowings


528


Repurchase obligation repayments


(175
)

(1,863
)Proceeds from bonds


60,000


33,000Bond repayments





(78,300
)Borrowing under secured term loan


1,373


9,748Secured term loan repayment


(1,365
)

(11,875
)Bond repurchases


(25,830
)

Payment of deferred financing costs





(3
)Restricted cash from financing activities


(1,081
)

Proceeds from dividend reinvestment and stock purchase plan


14


280Dividends (common and preferred)


(11,376
)

(30,419
)Distributions to non-controlling interest


(3,578
)

Net cash provided by financing activities


(11,644
)

(129,674
)Net (decrease) increase in cash & cash equivalents


(12,696
)

(14,344
)Cash and cash equivalentsbeginning of period


134,039


153,829Cash and cash equivalentsend of period

$
121,343

$
139,485


See
accompanying notes to condensed consolidated financial statements

7

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization

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

The
combination of the Initial Investments contributed to the Operating Partnership represents the predecessor of the Company (the "Predecessor"). The Company succeeded to the business
of the Predecessor upon the consummation of the IPO and the contribution of the initial investments on October 29, 2004. The ultimate owners of the entities which comprise the Predecessor were
NCIC and certain other persons who held non-controlling ownership interests in such entities.

Joint Ventures



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

On
July 9, 2008, Wakefield sold a $100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. ("Inland American"). The Company
received approximately $87.7 million of net proceeds from the transaction. Prior to conversion, the convertible preferred investment is entitled to a 10.5% dividend per annum. The convertible
preferred membership interest may be converted or redeemed, at Inland American's option, upon the sale or recapitalization of the Wakefield venture. Wakefield may, at its option, redeem the
convertible preferred interests at any time following the first anniversary of the closing, subject to payment of a call premium that declines over time. In addition, at any time after the second
anniversary of the closing, Inland American may convert its preferred membership interests into common equity in Wakefield. Based on the initial investment amount and capital accounts of the Wakefield
members, the convertible preferred membership interests represent, upon conversion, approximately a 42% common equity ownership interest in Wakefield.

8

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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)

1. Formation and Organization(Continued)

Inland
American will have the option of contributing additional preferred membership interest and participating in new Wakefield investment opportunities in proportion to its percentage ownership
interest, assuming it were to convert its interests to common equity.

The
Company controls substantially all major decisions of the joint venture. Accordingly, the joint venture's financial statements are consolidated into the Company's consolidated
financial statements and Inland American's and Chain Bridge's capital are treated as non-controlling interests.



In March 2007, the Company entered into a joint venture with Monroe Capital Holdco, LLC ("Monroe"), which served as a platform
for originating middle-market loans. The joint venture ("Monroe Capital") originated, structured and syndicated middle-market corporate loans, including middle-market loans to highly leveraged
borrowers.

On
May 7, 2008, the Company completed a recapitalization of this middle-market corporate lending venture. As part of the recapitalization, an institutional money-manager invested
approximately $87.2 million of cash equity into the business and the Company contributed $6.8 million of new equity capital and its CLO equity interests. The lender under two
consolidated revolving credit facilities totaling $800.0 million of capacity and having $378.0 million outstanding at May 7, 2008, which we refer to as the MC Facility and the MC
VFCC Facility, extinguished a portion of the outstanding debt balance and refinanced the remaining indebtedness in the form of a private CLO which match funded the underlying assets. The venture was
also permitted to sell a portion of the loan collateral and to use the cash to make new corporate loan investments. The new investor became the controlling manager of the entity and the Company
deconsolidated the venture. Additionally, as part of this recapitalization, the Company terminated its joint venture with Monroe Management.

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, 2008, 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, 2008 consolidated financial statements included in its annual report on Form 10-K.

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)

2. Summary of Significant Accounting Policies(Continued)

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 in accordance with the provision of FASB Staff Position No. FIN 46(R)-6,
"Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)," ("FSP FIN 46(R)-6"). All significant intercompany balances have been eliminated in
consolidation.

Estimates

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

Reclassifications

On January 1, 2009, the Company adopted FASB Staff Position APB 14-1, "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt
instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement of the conversion option. FSP APB 14-1 requires
bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial
proceeds from issuance of the instrument is recorded as a component
of equity. The liability component of the debt instrument is accreted to par using the effective yield method; accretion is reported as a component of interest expense. The equity component is not
subsequently re-valued as long as it continues to qualify for equity treatment. Additionally, FSP APB 14-1 precludes the use of the fair value option pursuant to SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." The adoption of FSP APB 14-1 resulted in the Company recognizing additional
non-cash interest expense of approximately $0.7 million and $0.5 million in the statements of operations for the three months ended March 31, 2009 and 2008,
respectively. The financial statements for 2008 have been restated for the effects of the retroactive application of FSP APB 14-1.

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)

2. Summary of Significant Accounting Policies(Continued)

The
following tables present the cumulative effects of the change in accounting principle as of January 1, 2008 and for the three months ended March 31, 2008:

December 31, 2008As originally
reported

As adjusted

Effect of change
in accounting
principleDeferred costs and intangible assets, net

$
71,933

$
79,633

$
7,700Exchangeable senior notes


112,576


233,273


120,697Non-controlling interests


210,281


198,593


(11,688
)Total NorthStar Realty Finance Corp. Stockholders' Equity

$
1,516,475

$
1,415,167

$
(101,308
)




Three Months Ended March 31. 2008As originally
reported

As adjusted

Effect of change
in accounting
principleInterest expense

$
54,947

$
55,458

$
511Unrealized gain (loss) on investments and other


212,075


210,945


(1,130
)Non-controlling interests


(23,289
)

(23,116
)

173Net income attributable to NorthStar Realty Finance Corp. common stockholders


195,273


193,805


(1,468
)Earnings per share

$
3.14

$
3.11

$
(0.03
)


As
of March 31, 2009 and December 31, 2008, the total carrying amount of the equity components of the exchangeable senior notes was $6.8 million and $9.2 million
respectively. The principal amount of the exchangeable senior notes liabilities was $179.8 million and $240.8 million as of March 31, 2009 and December 31, 2008, respectively. The
unamortized discount of the liability components was $5.3 million and $7.5 million at March 31, 2009 and December 31, 2008, respectively. The net carrying amount of the
liability components was $174.5 million and $233.3 million at March 31, 2009 and December 31, 2008, respectively. Interest expense for the three months ended March 31, 2009
and 2008 related to the exchangeable senior notes was $5.2 million and $3.6 million, respectively, of which $4.5 million and $3.1 million was related to contractual interest,
respectively, and $0.7 million and $0.5 million was attributable to amortization of the debt discount and deferred financing costs, respectively.

On
January 1, 2009, the Company adopted SFAS 160, "Non-controlling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160
clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.
SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the
parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the
parent and to the non-controlling interest. The adoption of SFAS 160 does not affect prior periods reported

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)

2. Summary of Significant Accounting Policies(Continued)

net
income or retained earnings, however, the presentation and disclosure requirements have been applied retrospectively for all periods presented.

Recent Accounting Pronouncements

In January 2009, the FASB issued FSP EITF 99-20-1, which amends the impairment guidance in EITF Issue
No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized
Financial Assets" ("FSP EITF 99-20-1") to achieve more consistent determination of whether an other-than-temporary impairment has occurred. FSP
EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements
in SFAS 115 and other related guidance. FSP EITF 99-20-1 is effective and should be applied prospectively for financial statements issued for fiscal years and
interim periods ending after December 15, 2008. The Company's adoption of FSP EITF 99-20-1, did not have a material effect on its financial condition, results of
operations, or cash flows.

In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 ("FSP FAS 115-2 and FAS 124-2") which is intended
to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary event and to more effectively communicate when an
other-than-temporary event has occurred. FSP FAS 115-2 and FAS 124-2 applies to debt securities and requires that the total
other-than-temporary impairment be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which is
the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor can assess that (a) it does not have the intent to sell or (b) it is
not more likely than not that it will have to sell the security prior to its anticipated recovery. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 115-2 and FAS 124-2 will be
applied prospectively with a cumulative effect transition adjustment as of the beginning of the period in which it is adopted. An entity early adopting this FSP must also early adopt FSP
FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly".
The Company is currently evaluating the potential impact that the adoption of FSP FAS 115-2 and FAS 124-2 could have on its financial statements.

In
April 2009, FASB issued FSP FAS 157-4 "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly" ("FSP FAS 157-4"), which provides additional guidance on determining whether a market for a financial asset is not active and a
transaction is not distressed for fair value measurements under FASB Statement No. 157, "Fair Value Measurements" (SFAS 157"). FSP FAS 157-4 will be applied
prospectively and retrospective application will not be permitted. FSP FAS 157-4 will be effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. An
entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2. The Company is currently evaluating the potential impact
that the adoption of FSP FAS 157-4 could have on its financial statements.

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)

2. Summary of Significant Accounting Policies(Continued)

In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 ("FSP FAS 107-1 and APB 28-1 ") which will amend
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"). FSP FAS 107-1 and APB 28-1 will require an entity to
provide disclosures about the fair value of financial instruments in interim financial information. FSP FAS 107-1 and APB 28-1 would apply to all financial
instruments within the scope of SFAS 107 and will require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both
interim financial statements as well as annual financial statements. FSP FAS 107-1 and APB 28-1 will be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP
FAS 157-4 and FSP FAS 115-2 and FAS 124-2. The Company is currently evaluating the potential impact that the adoption of FSP
FAS 107-1 and APB 28-1will have on its financial statement disclosures.

3. Fair Value of Financial Instruments

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



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

Fair Value Measurements

SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the
quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. In addition, SFAS 157 requires an issuer to incorporate changes in its own credit
spreads when determining the fair value of its liabilities.



In accordance with SFAS 157, 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)

3. Fair Value of Financial Instruments(Continued)

Financial
assets and liabilities recorded on the condensed 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).


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)

3. Fair Value of Financial Instruments(Continued)

As
required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2009 by level within the fair value
hierarchy:

Assets and Liabilities at Fair ValueLevel 1

Level 2

Level 3

TotalAssets:Available for sale securities:CMBS

$


$
82,793

$
28,626

$
111,419Real estate term debtN-Star(1)








7,475


7,475Real estate term debtThird party








987


987REIT debt





40,499





40,499Term debt equityN-Star








24,319


24,319Trust preferred securities








2,898


2,898Derivative asset





7,086





7,086Corporate lending investment








19,938


19,938Total assets

$


$
130,378

$
84,243

$
214,621Liabilities:N-Star IV, VI, VII and VIII bonds payable(1)

$


$


$
393,114

$
393,114Liability to subsidiary trusts issuing preferred securities








67,721


67,721Derivative liability





77,164





77,164Total liabilities

$


$
77,164

$
460,835

$
537,999


---

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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. Fair Value of Financial Instruments(Continued)

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

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

Available
for sale
securities

Corporate
lending
investment

N-Star
Bonds
Payable

Liability to
subsidiary
trusts issuing
preferred
securitiesBeginning balance:

$
100,907

$
47,999

$
468,638

$
69,617Total transfers into Level 3Purchases, sales, issuance and settlements, net


(4,250
)

(2,827
)

60,000Total losses (realized or unrealized):Included in earnings


22,193


25,234Included in other comprehensive loss


14,956Total gains (realized or unrealized):Included in earnings


4,797





135,524


1,896Included in other comprehensive loss











Ending balance

$
64,305

$
19,938

$
393,114

$
67,721The 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

$
17,396

$
25,234

$
135,524

$
1,896


Fair Value Option

SFAS 159 provides a fair value option election that allows companies to irrevocably elect fair value as the initial and
subsequent measurement attributable to certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they
occur. SFAS 159 permits the fair value option election 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

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)

3. Fair Value of Financial Instruments(Continued)

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

Financial Instruments, at Fair Value

March 31,
2009

December 31,
2008Assets:Available for sale securities:CMBS

$
111,419

$
124,595Real estate term debtN-Star


6,182


5,236Real estate term debtThird party


987


1,322REIT debt


40,499


44,936Trust preferred securities


2,898


4,488Corporate lending investment


19,938


47,999Total assets

$
181,923

$
228,576Liabilities:(1)N-Star IV, VI, VII and VIII bonds payable


393,114


468,638Liability to subsidiary trusts issuing preferred securities


67,721


69,617Total liabilities

$
460,835

$
538,255


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,
2009

Amount
Due Upon
Maturity

DifferenceAssets:Available for sale securities:CMBS

$
111,419

$
568,758

$
(457,339
)Real estate term debtN-Star


6,182


38,439


(32,257
)Real estate term debtThird party


987


16,664


(15,677
)REIT debt


40,499


62,183


(21,684
)Trust preferred securities


2,898


15,000


(12,102
)Total assets

$
161,985

$
701,044

$
(539,059
)Liabilities:N-Star IV, VI, VII and VIII bonds payable


393,114


1,668,445


(1,275,331
)Liability to subsidiary trusts issuing preferred securities


67,721


280,133


(212,412
)Total Liabilities

$
460,835

$
1,948,578

$
(1,487,743
)


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)

3. Fair Value of Financial Instruments(Continued)

At March 31, 2009, the basis in our corporate lending investment was $75.2 million. We have elected the fair market value option pursuant to SFAS 159 for this
investment which is accounted for under the equity method of accounting. The fair market value of our investment at March 31, 2009 was $19.9 million.

For
the three months ended March 31, 2009 and 2008, the Company recognized a net gain of $89.1 million and a net gain of $244.3 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
condensed consolidated statement of operations.

The
impact of changes in instrument-specific credit spreads on N-Star bonds payable, liability to subsidiary trusts issuing preferred securities and derivatives for which the fair value
option was elected was a net gain of $136.7 million for the three months ended March 31, 2009. The Company attributes changes in the fair value of floating rate liabilities to changes in
instrument-specific credit spreads. For fixed rate liabilities, the firm allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in
interest rates.

4. Operating Real Estate

Chatsworth Property

One of the Company's net lease investments is 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. The tenant vacated the building as of March 23, 2009, and the FDIC lessee terminated its lease. The assets are financed with a
non-recourse $43.0 million first mortgage loan. The assets are also refinanced with a $9.2 million mezzanine loan which is collateral for one of the Company's securities term
financings. In the fourth quarter of 2008, the Company took an impairment charge relating to these properties and is in the process of transferring title to the first mortgage special servicer. The
net book value in the assets currently is approximately equal to the mortgage debt, and the Company therefore does expect the transfer to materially impact our income statement.

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)

5. Available for Sale Securities

The following is a summary of the Company's available for sale securities at March 31, 2009 and December 31, 2008:

March 31, 2009

Carrying
Value

SFAS 159
Transition
Adjustment

Losses in
Accumulated
OCI

Cumulative Unrealized
Loss on
Investments

Estimated
Fair
Value(1)CMBS

$
468,093

$
(64,442
)
$


$
(292,232
)
$
111,419Real estate term debtN-Star


50,752


(17,616
)

(13,183
)

(12,478
)

7,475Real estate term debtThird party


16,253


(3,896
)




(11,370
)

987REIT debt


61,117


(2,276
)




(18,342
)

40,499Term debt equityN-Star


71,483





(47,164
)




24,319Trust preferred securities


15,000


(2,736
)




(9,366
)

2,898Total

$
682,698

$
(90,966
)
$
(60,347
)
$
(343,788
)
$
187,597


---

At
March 31, 2009, the maturities of the available for sale securities ranged from two to 44 years.

During
the three months ended March 31, 2009, proceeds from the sale and redemption of available for sale securities was $16.5 million. The realized gain on sale was
$2.5 million.

December 31, 2008

Carrying
Value

SFAS 159
Transition
Adjustment

Losses in
Accumulated
OCI

Unrealized
Loss on
Investments

Estimated
Fair
Value(1)CMBS

$
444,790

$
(64,442
)
$


$
(255,754
)
$
124,594Real estate term debtN-Star


50,680


(17,616
)

(12,633
)

(13,391
)

7,040Real estate term debtThird party


16,156


(3,896
)




(10,938
)

1,322REIT debt


82,753


(2,276
)




(35,542
)

44,935Term debt equityN-Star


70,532





(31,768
)




38,764Trust preferred securities


15,000


(2,736
)




(7,776
)

4,488Total

$
679,911

$
(90,966
)
$
(44,401
)
$
(323,401
)
$
221,143


---

At
December 31, 2008, the maturities of the available for sale securities ranged from two to 44 years.

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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. Real Estate Debt Investments

At March 31, 2009 and December 31, 2008, the Company held the following real estate debt investments:

March 31, 2009

Carrying
Value(1)

Allocation by
Investment
Type

Average
Fixed
Rate

Average
Spread
Over
LIBOR

Number of
InvestmentsWhole loans, floating rate

$
972,198


47.8
%


%

2.92
%

52Whole loans, fixed rate


175,458


8.6


5.88





10Subordinate mortgage interests, floating rate


186,471


9.2





6.77


11Subordinate mortgage interests, fixed rate


24,436


1.2


7.51





2Mezzanine loans, floating rate


471,654


23.2





4.44


16Mezzanine loan, fixed rate


183,654


8.9


10.94





15Other loansfloating


15,359


0.8





1.61


2Other loansfixed


5,984


0.3


5.53





1Total/Weighted average

$
2,035,214


100.0
%

8.36
%

3.78
%

109


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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. Real Estate Debt Investments(Continued)

December 31, 2008

Carrying
Value(1)

Allocation by
Investment
Type

Average
Fixed
Rate

Average
Spread
Over
LIBOR

Number of
InvestmentsWhole loans, floating rate

$
1,048,310


51.2
%


%

2.89
%

52Whole loans, fixed rate


96,252


4.7


7.58





8Subordinate mortgage interests, floating rate


200,556


9.8





6.42


13Subordinate mortgage interests, fixed rate


24,349


1.2


7.51





2Mezzanine loans, floating rate


463,765


22.6





4.43


15Mezzanine loan, fixed rate


191,438


9.4


11.65





15Other loansfloating


16,609


0.8





1.60


2Other loansfixed


6,191


0.3


5.53





1Total/Weighted average

$
2,047,470


100.0
%

9.99
%

3.70
%

108


---

Contractual
maturities of real estate debt investments at March 31, 2009 are as follows:

Years Ending December 31:

Initial
Maturity(1)

Maturity
Including
Extensions2009 (remainder)

$
710,397

$
128,5922010


679,456


318,0872011


205,139


503,7342012


208,395


663,6312013





107,342Thereafter


277,311


359,312Total

$
2,080,698

$
2,080,698






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)

6. Real Estate Debt Investments(Continued)



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

Non-Performing Loans and Provision for Loan Losses



As of March 31, 2009, the Company had two non-performing loans which consisted of a whole loan having a principal
balance of $21.3 million and a maturity date of October 1, 2008, and a junior participation in a first mortgage having a principal balance of $28.5 million and a maturity date of
March 1, 2009, representing approximately 2.5% of the Company's total commercial real estate debt investments. The Company's maximum exposure to loss related to these loans would be equal to
the outstanding principal balance.



During the quarter, the Company recorded a $21.5 million credit loss provision relating to 10 loans. As of March 31,
2009, the loan loss reserves totaled $32.7 million.

8. Investment in and Advances to Unconsolidated Ventures

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

CS/Federal Venture

In February 2006, the Company, through a joint venture with an institutional investor, acquired a portfolio of three adjacent
class A office/flex buildings located in Colorado Springs, Colorado for $54.3 million. The joint venture financed the transaction with two non-recourse, first mortgage loans
totaling $38.0 million and the balance in cash. The loans mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%. The Company contributed $8.4 million for a
50% interest in the 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, 2009 and December 31, 2008, the Company had an
investment in CS/Federal of approximately $7.2 million and $7.3 million, respectively. The Company recognized equity in earnings of $0.1 million for each of the three months ended
March 31, 2009 and March 31, 2008.

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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)

Monroe Capital Management Advisors, LLC

In March 2007, the Company entered into a joint venture with Monroe Management, a Chicago-based firm, and acquired a 49.9%
non-controlling interest in Monroe Management. Monroe Management originated, structured and syndicated middle-market corporate loans for Monroe Capital and provided asset management
services. On May 7, 2008, the Company terminated its joint venture with Monroe Management upon the completion of the recapitalization of Monroe Capital. See Note 1 for additional
information.

G-NRF, LTD

On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market corporate lending platform. Upon
completion of the recapitalization transaction, the new investor became the controlling manager of the assets and the Company deconsolidated the joint venture. The Company currently uses the equity
method of accounting to account for the recapitalized joint venture and has elected the fair value option under SFAS 159 for its equity investment. As of March 31, 2009, the fair market
value of the Company's investment in the corporate lending venture was $19.9 million. For the three months ended March 31, 2009, the Company recognized an unrealized loss of
$25.2 million related to the fair value adjustment on its equity investment. The company conducted its quarterly comprehensive credit review of this investment and as a result, concluded that
due to the uncertainty of the underlying cash flows, the Company will utilize the cost recovery method of accounting for income recognition on this investment.

NorthStar Real Estate Securities Opportunity Fund

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

The
Company is the manager and general partner of the Securities Fund. The Company receives base management fees ranging from 1.0% to 2.0% per annum on third-party capital and is
entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary
depending on the investor capital lockup periods.

At
March 31, 2009 and December 31, 2008, the Company's investment in the Securities Fund was $23.0 million and $29.3 million, respectively, representing a
49.4% and 53.1% interest in the Securities Fund.

For
the three months ended March 31, 2009 and 2008, the Company recognized equity in losses of $2.3 million and $0.6 million, respectively. The Company also earned
$0.1 million in management fees from the Securities Fund for each of the three months ended March 31, 2009 and 2008.

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)

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

LandCap Investment

On October 5, 2007, the Company entered into a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007
"Whitehall", to form LandCap Partners, which is referred to as LandCap. LandCap was established to opportunistically invest in single family residential land through land loans, lot option agreements
and select land purchases. The venture is managed by professionals who have extensive experience in the single family housing sector. During the first quarter 2009, the Company and Whitehall agreed to
provide no additional new investment capital in the LandCap joint venture. The joint venture was subsequently restructured, all employees were terminated and the joint venture entered into an asset
management agreement with Solus Management Company ("Solus"). Solus was formed by the former Chief Executive Officer and several other key employees of LandCap, and will manage the existing
investments of the venture. At March 31, 2009 and December 31, 2008 the Company's investment in LandCap is carried at $10.5 million and $12.9 million, respectively. For the
three months ended March 31, 2009 and 2008, the Company recognized equity in loss of $2.4 million and $0.5 million, respectively, which consisted primarily of general and
administrative expenses. At March 31, 2009 and December 31, 2008, LandCap has made investments totaling $39.1 million. In addition, the Company advanced approximately
$4.9 million under a loan agreement to LandCap, which bears interest at a fixed rate of 12% and was included in other assets in the condensed consolidated balance sheets.

9. Variable Interest Entities

The Company has created and manages portfolios of primarily investment grade commercial real estate securities and real estate debt investments, which were financed in term debt
transactions. The collateral securities include CMBS, fixed income securities issued by REITs and term debt transactions backed primarily by real estate securities. These securities are primarily
investment grade and generally are not insured by the Federal Housing Administration or guaranteed by the Veterans Administration or otherwise guaranteed or insured. 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 term debt transactions, the
Company expects to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities.

FASB
Interpretation No. 46 (revised December 2003),"Consolidation of Variable Interest Entities," ("Fin 46(R)") requires a variable interest entity ("VIE") to be consolidated by
its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIEs anticipated losses and or a majority of the expected returns. The Company has evaluated its real
estate debt investments, liability to subsidiary trusts issuing preferred securities and its investments in each of its eight term debt transaction issuers to determine whether they are VIEs. 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 direct or indirect ability through voting rights to make decisions about the entity's significant activities; (b) the obligation to absorb the
expected losses of the entity and their obligations are not protected directly or indirectly; and (c) the right to receive the expected residual return of the entity and their rights are not
capped; (3) whether the voting rights of these investors are proportional to their obligations to absorb

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)

9. Variable Interest Entities(Continued)

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.

FSP
FIN 46(R)-6 addresses how a reporting enterprise should determine the variability to be considered and provides guidance in applying Fin 46(R).

As
of March 31, 2009 and December 31, 2008, the Company identified interests in 17 entities which were determined to be VIEs under FSP FIN 46(R)-6.

Based
on management's analysis, the Company is not the primary beneficiary of 13 of the identified VIEs since it does not absorb a majority of the expected residual losses, or is
entitled to a majority of the expected residual returns. Accordingly, these VIEs are not consolidated into the Company's financial statements as of March 31, 2009 or December 31, 2008.

Real Estate Debt Investments

The Company has identified one real estate debt investment as a variable interest in a VIE in accordance with the provisions of Fin
46(R) 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. The Company's
maximum exposure to loss would not exceed the carrying amount of its investment of $23.9 million. For all other 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. Under the provisions of FIN 46(R)-6, 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.

Term Debt Transactions

The Company has interests in eight term debt transactions, whose term notes are primarily collateralized by investment grade real
estate securities or real estate debt investments. The Company generally purchases the preferred equity or the income notes of each term debt transaction, which are the equity securities of the term
debt issuances, and, with the exception of N-Star I, all of the below investment grade term debt notes of each term debt transaction. In addition, the Company earns a fee of 0.35% of the
outstanding principal balance of the assets backing each of these term debt issuances as an annual collateral management fee. The Company's interests in each of the term debt transactions accounted
for as a single debt security available for sale pursuant to EITF 99-20. During the quarter, two of the Company's term debt transactions experienced a credit loss on a security
whose issuer filed

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)

9. Variable Interest Entities(Continued)

for
bankruptcy. The Company reviewed the term notes for impairment and determined base upon its analysis that no impairment existed at March 31, 2009. The Company will use the cost recovery
method of income recognition for the term notes because of the uncertainty of the income streams of these two term debt transactions. Any potential losses in our off balance sheet term debt
transactions is limited to the amortized cost of our investment of $122.2 million at March 31, 2009.



N-Star IV, VI, VII and VIII are consolidated term debt transactions in accordance with the guidance provided in FSP
FIN 46(R)-6.

The
following tables describe certain terms of the collateral for, and the notes issued by, N-Star IV, N-Star VI, N-Star VII and N-Star
VIII at March 31, 2009 and December 31, 2008:

CollateralMarch 31, 2009

Term NotesMarch 31, 2009Issuance

Date
Closed

Par Value
of Collateral

Weighted
Average
Interest
Rate at
12/31/08

Weighted
Average
Expected
Life (years)

Outstanding
Term
Notes(1)

Weighted
Average
Interest
Rate at
12/31/08

Stated
MaturityN-Star IV


6/14/2005

$
363,428


5.00
%

1.56

$
292,500


1.69
%

7/1/2040N-Star VI


3/17/2006


376,585


5.65


1.70


303,700


1.84


6/1/2041N-Star VII


6/22/2006


597,030


4.93


7.50


499,200


0.82


6/22/2051N-Star VIII


12/6/2006


770,239


5.32


1.78


573,045


1.00


2/1/2041Total




$
2,107,282


5.21
%

3.36

$
1,668,445


1.22
%


---

CollateralDecember 31, 2008

Term NotesDecember 31, 2008Issuance

Date
Closed

Par Value
of Collateral

Weighted
Average
Interest
Rate at
12/31/08

Weighted
Average
Expected
Life (years)

Outstanding
Term
Notes(1)

Weighted
Average
Interest
Rate at
12/31/08

Stated
MaturityN-Star IV


6/14/2005

$
346,996


6.93
%

1.71

$
292,500


1.08
%

7/1/2040N-Star VI


3/17/2006


385,251


7.26


2.11


292,700


2.45


6/1/2041N-Star VII


6/22/2006


563,771


5.05


7.38


499,200


1.74


6/22/2051N-Star VIII


12/6/2006


717,705


7.42


2.05


524,045


2.41


2/1/2041Total




$
2,013,723


6.64
%

3.49

$
1,608,445


1.97
%


---

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)

9. Variable Interest Entities(Continued)



N-Star I, II, III and V are unconsolidated term debt transactions in accordance with the provisions of FIN 46(R).

The
following tables describe certain terms of the collateral for, and the notes issued by, N-Star I, N-Star II, N-Star III and N-Star V
at March 31, 2009 and December 31, 2008:

CollateralMarch 31, 2009

Term NotesMarch 31, 2009Issuance

Date
Closed

Par Value
of Collateral

Weighted
Average
Interest
Rate at
12/31/08

Weighted
Average
Expected
Life (years)

Outstanding
Term
Notes(1)

Weighted
Average
Interest
Rate at
12/31/08

Stated
MaturityN-Star I(2)


8/21/03

$
293,177


6.59
%

4.17

$
274,981


6.37
%

8/01/2038N-Star II


7/01/04


320,487


6.13


4.81


290,407


5.51


6/01/2039N-Star III


3/10/05


414,281


5.70


2.46


358,477


4.88


6/01/2040N-Star V


9/22/05


524,572


5.52


5.74


456,319


4.58


9/05/2045Total




$
1,552,517


5.89
%

4.38

$
1,380,184


5.21
%


---

CollateralDecember 31, 2008

Term NotesDecember 31, 2008Issuance

Date
Closed

Par Value
of Collateral

Weighted
Average
Interest
Rate at
12/31/08

Weighted
Average
Expected
Life (years)

Outstanding
Term
Notes(1)

Weighted
Average
Interest
Rate at
12/31/08

Stated
MaturityN-Star I(2)


8/21/03

$
299,316


6.60
%

4.16

$
278,000


6.37
%

8/01/2038N-Star II


7/01/04


331,242


6.17


4.77


295,098


5.51


6/01/2039N-Star III


3/10/05


410,188


5.70


4.11


358,556


4.88


6/01/2040N-Star V


9/22/05


499,745


5.52


6.23


456,319


4.58


9/05/2045Total




$
1,540,491


5.92
%

4.95

$
1,387,973


5.23
%


---

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)

10. Borrowings

The following is a table of the Company's outstanding borrowings as of March 31, 2009 and December 31, 2008:

Initial
Stated
Maturity

Maximum
Maturity
Including
Extensions

Interest
Rate

Maximum
Amount
Available

Contractual
Balance at
March 31,
2009

Contractual
Balance at
December 31,
2008Credit FacilitiesJP Facility


8/8/2009


8/8/2010

LIBOR + .80% to 1.80%

$
150,000

$
13,226

$
44,881Total Credit Facilities










150,000


13,226


44,881Term LoansWA Term Loan(1)


11/6/2009


11/6/2010

LIBOR + 2.00%


473,044


277,315


276,143Euronote


11/6/2009


11/6/2010

3 month Euribor + 2.0%


96,730


96,730


103,526LB Term Loan


2/9/2010


2/9/2012

LIBOR + 1.50%


23,335


23,335


24,238Total Credit Facilities & Term Loans









$
743,109


410,606


448,788Mortgage notes payable (non-recourse)Chatsworth


5/1/2015




5.65%





42,878


42,923Salt Lake City


9/1/2012




5.16%





15,763


15,862EDS


10/8/2015




5.37%





47,512


47,698Executive Center


1/1/2016




5.85%





51,480


51,480Green Pond


4/11/2016




5.68%





17,283


17,341Indianapolis


2/1/2017




6.06%





28,385


28,472Wakefield GE


8/30/2010




6.93%





67,009


67,269WakefieldPark National


1/11/2014




5.94%





33,227


33,300WakefieldGEWLK


1/11/2017




6.49%





159,349


160,000WakefieldGETusc & Harmony


1/11/2017




6.59%





7,861


7,875WakefieldHarmony FNMA


2/1/2017




6.39%





75,000


75,000WakefieldGrove City


2/1/2038




5.45%





1,854


1,862WakefieldLancaster


6/1/2037




6.40%





2,595


2,605WakefieldMarysville


6/1/2037




6.40%





1,666


1,673WakefieldWashington


10/1/2038




6.65%





1,969


1,975WakefieldGEMiller


6/30/2012




7.07%





119,329


116,000WakefieldARL Mob Wachovia


5/11/2017




5.89%





3,412


3,412WakefieldAscend Colonial


5/31/2012




7.52%





6,500


6,500WakefieldColonial Dova


8/31/2012




7.32%





6,500


6,500WakefieldColonial 6 Alfs


10/31/2012




6.98%





20,000


23,329WakefieldSt Francis


9/10/2010




LIBOR + 2.00%





11,400


11,400Aurora


7/11/2016




6.22%





33,258


33,329DSG


10/11/2016




6.17%





34,119


34,237Keene


2/1/2016




5.85%





6,765


6,790Fort Wayne


1/1/2015




6.41%





3,460


3,480Portland


6/17/2014




7.34%





4,782


4,825Milpitas


3/6/2017




5.95%





22,436


22,548Fort Mill


4/6/2017




5.63%





27,700


27,700Reading


1/1/2015




5.58%





14,092


14,153Reading


1/1/2015




6.00%





5,000


5,000Alliance


12/6/2017




6.48%





23,717


23,787Mezzanine loan payable (non-recourse)Chatsworth


5/1/2014




6.64%





9,191


9,310Fort Mill


4/6/2017




6.21%





2,921


2,985Exchangeable Senior Notes(2)


6/15/2027




7.25%





99,800


160,800Exchangeable Senior Notes ("NNN Notes")(2)


6/15/2013




11.50%





80,000


80,000Repurchase obligations


Varies




LIBOR varies





528


176Bonds payable(3)N-Star IV


7/1/2040




LIBOR + 0.62% (average spread)





292,500


292,500N-Star VI


6/1/2041




3 month LIBOR + 0.56% (average spread)





303,700


292,700N-Star VII


6/22/2051




LIBOR + 0.36% (average spread)





499,200


499,200N-Star VIII


2/1/2041




LIBOR + 0.57% (average spread)





573,045


524,045Liability to subsidiary trusts issuing preferred securities(3)(4)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





30,100


30,1002.70%Trust VI


12/30/2036




3 month LIBOR





25,100


25,1002.90%Trust VII


4/30/2037




3 month LIBOR





31,475


31,4752.50%Trust VIII


7/30/2037




3 month LIBOR





35,100


35,1002.70%$
3,447,925

$
3,488,962


---

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)

10. Borrowings(Continued)

Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of March 31, 2009:

Total

Mortgage and
Mezzanine
Loans

Credit
Facilities

Secured Term
Loan(1)

Liability to
Subsidiary
Trusts Issuing
Preferred
Securities(2)

Exchangeable
Senior Notes(2)

Repurchase
Obligations

Bonds
Payable(1)2009

$
419,597

$
8,463

$
13,226

$
397,380

$


$


$
528

$
2010


96,768


96,768

















2011


14,368


14,368

















2012


267,471


167,671











99,800





2013


92,613


12,613











80,000





Thereafter


2,557,108


608,530








280,133








1,668,445Total

$
3,447,925

$
908,413

$
13,226

$
397,380

$
280,133

$
179,800

$
528

$
1,668,445


---

At March 31, 2009, the Company was in compliance with all covenants under its borrowings.



During the three months ended March 31, 2009, the Company repurchased approximately $61.0 million of its 7.25%
exchangeable senior notes for a total of $25.8 million. The Company recorded a net realized gain of $34.4 million in connection with the repurchase of its notes. The repurchases also
represented a $35.2 million discount to the par value of the debt.

11. Related Party Transactions

Advisory Fees

The Company has agreements with each of N-Star I, N-Star II, N-Star III, N-Star V and
N-Star IX to perform certain advisory services. The Company earned total fees on these agreements of
approximately $1.6 million and $2.2 million for the three months ended March 31, 2009 and 2008, respectively.

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)

11. Related Party Transactions(Continued)

The
Company has an agreement with the Securities Fund to receive base management fees ranging from 1.0% to 2.0% per year on third-party capital. For each of the there months ended
March 31, 2009 and 2008, the Company earned $0.1 million in management fees.

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc. to perform certain
management services. Wakefield Capital Management Inc. is owned by the partners who own Chain Bridge. The Company incurred $0.9 million in management fees for each of the three months
ended March 31, 2009 and 2008, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations.

The
Company entered into a management agreement in March 2007 with Monroe Management to perform certain management services. On May 7, 2008, the Company terminated its management
agreement with Monroe Management. The Company incurred $1.2 million in management fees for the three months ended March 31, 2008, which is recorded in asset management
fees-related parties in the condensed consolidated statement of operations.

12. 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, 2008, the Company has issued an aggregate of 8,283,510 LTIP Units, net of
forfeitures of 60,198 LTIP Units. An aggregate of 813,558 LTIP Units were converted to commons stock and 374,020 shares of common stock were issued pursuant to the Stock Incentive Plan. Of the
8,283,510 LTIP Units, so long as the recipient continues to be an eligible recipient, 5,016,112 will vest to the individual recipient at a rate of one-twelfth of the total amount granted
as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29, July 29, or October 29 for the
three-year vesting period, 2,252,437 will vest over 16 consecutive quarters with the first quarter being January 29, 2008, 701,058 will cliff vest on December 31, 2010, and
170,801 are subject to no vesting requirements. The Company accelerated the vesting of 143,102 LTIP Units as part of the termination benefits provided to employees. In addition, the LTIP Unit holders
are entitled to dividends on the entire grant beginning on the date of the grant.

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)

12. Equity Based Compensation(Continued)

The
Company has recognized compensation expense of $5.0 million and $4.9 million for the three months ended March 31, 2009 and 2008, respectively. As of
March 31, 2009, there were approximately 4,700,499 unvested LTIP Units and no LTIP Units were forfeited during the period. The related compensation expense to be recognized over the remaining
vesting period of the Omnibus Incentive Plan LTIP grants is $34.8 million, provided there are no forfeitures.

2006 Outperformance Plan

In January 2006, the Compensation Committee of the Board of Directors approved the NorthStar Realty Finance Corp. 2006 Outperformance
Plan (the "2006 Outperformance Plan"), a long-term compensation program to further align the interests of the Company's stockholders and management. The Company did not meet the
performance hurdles under the 2006 Outperformance Plan as of the conclusion of the 2006 Outperformance Plan on December 31, 2008. The Company recorded the compensation expense for the 2006
Outperformance Plan in accordance with SFAS 123 (R) "Stock Based Compensation." of $0.1 million for the three months ended March 31, 2009 and $0.3 million for the
three months ended March 31, 2008. The remaining compensation expense to be recognized over the next seven quarters is $0.5 million.

The
status of all of the LTIP grants as March 31, 2009 and December 31, 2008 is as follows:

March 31, 2009

December 31, 2008LTIP
Grants

Weighted Average
Grant Price

LTIP
Grants

Weighted Average
Grant PriceBalance at beginning of year(1)


8,067


9.86


5,484

$
11.47Granted








3,533


7.26Converted to common stock


(160
)

9.85


(895
)

9.51Forfeited








(55
)

9.42Ending balance(2)


7,907


9.86


8,067

$
9.86


---

13. Stockholders' Equity

Common Stock

In April 2007, the Company implemented a Dividend Reinvestment and Stock Purchase Plan, or the Plan, pursuant to which it registered
with the Securities and Exchange Commission 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%.

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)

13. Stockholders' Equity(Continued)

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. For the three months ended March 31, 2009, the Company issued a total of approximately 4,968 common shares.

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

Stock Repurchase Program

On October 8, 2008, the Company's Board of Directors authorized a stock repurchase program of up to 10,000,000 shares of our
outstanding common stock, or approximately 16% of its outstanding common stock. Stock repurchases under this program will be made from time to time through the open market or in privately negotiated
transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate
liquidity requirements and priorities. For the three months ended March 31, 2009, the Company did not repurchase any common shares pursuant to its stock repurchase program.

Dividends

On January 20, 2009, the Company declared a dividend of $0.25 per share of common stock. The dividends were paid on
February 27, 2009 to the stockholders of record as of January 28, 2009. The common stock dividends were paid in a combination of 40% cash and 60% common stock which totaled approximately
3,715,869 shares of common stock.

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)

13. Stockholders' Equity(Continued)

Earnings Per Share

Earnings per share for the three months ended March 31, 2009 and 2008 is computed as follows:

Three Months
Ended March 31,
2009

Three Months
Ended March 31,
2008Numerator (Income)Basic EarningsNet income available to common stockholders

$
84,636

$
193,805Effect of dilutive securities:Income allocated to non-controlling interest


10,400


22,871Dilutive net income available to stockholders

$
95,036

$
216,676Denominator (Weighted Average Shares)Basic Earnings:Shares available to common stockholders


64,348


62,244Effect of dilutive securities:OP/LTIP units


7,907


7,345Dilutive Shares


72,255


69,589


14. 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 condensed consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of March 31, 2009 and
December 31, 2008, non-controlling interest related to the aggregate limited partnership units of 7,907,149 and 8,067,211, represented an 10.59% and 11.37% interest in the Operating
Partnership, respectively. Income allocated to the operating partnership non-controlling interest for the three months ended March 31, 2009 and 2008 was $10.4 million and
$22.9 million, 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. Non-controlling Interest(Continued)

Joint Ventures

In May 2006, the Company formed the Wakefield joint venture with Chain Bridge. On July 9, 2008, Wakefield sold a
$100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. The joint venture is consolidated in the condensed consolidated financial statements and
Inland American's and Chain Bridge's capital are treated as non-controlling interests. Income allocated to the joint venture's non-controlling interest for the three months
ended March 31, 2009 and March 31, 2008 was $2.5 million and $0.2 million, respectively.

15. Risk Management and Derivative Activities

Derivatives

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

The
effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is
subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2009, such derivatives were used to hedge the variable cash flows associated with
certain variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2009
and 2008, the Company recorded immaterial amounts of hedge ineffectiveness in earnings.

Amounts
reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's
variable-rate debt. During 2009, the Company estimates that an additional $11.0 million will be reclassified as an increase to interest expense.

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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. Risk Management and Derivative Activities(Continued)

The
following tables summarize the Company's derivative financial instruments that were designated as cash flow hedges of interest rate risk as of March 31, 2009 and
December 31, 2008:

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swaps and basis swapsAs of March 31, 2009


10


90,749


(12,940
)
4.18% - 5.08%

March 2010 - August 2018As of December 31, 2008


10


90,749


(13,923
)
4.18% - 5.08%

March 2010 - August 2018


In
January 2008, the Company adopted SFAS 159 and elected the fair value option for its bonds payable and its liability to subsidiary trusts issuing preferred securities. Under
SFAS 159, the changes in fair value of these financial instruments are now recorded in earnings. As a result of this election, the interest rate swap agreements associated with these debt
instruments no longer qualify for hedge accounting, in accordance with SFAS 133 "Derivatives and Hedging Activity", since the underlying debt is remeasured with changes in the fair value
recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the
life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings.

Derivatives
not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict
hedge accounting requirements of SFAS 133. For the three months ended March 31, 2009, the Company recorded, in earnings, a mark-to-market unrealized loss of
$2.9 million and a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps.

The
following tables summarize the Company's derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of March 31, 2009 and
December 31, 2008:

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swaps and basis swapsAs of March 31, 2009


24


1,396,648


(57,138
)
0.61% - 5.63%

October 2009 - June 2018As of December 31, 2008


24


1,404,463


(63,979
)
0.54% - 5.63%

October 2009 - June 2018


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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. 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, 2009 and
December 31, 2008.

Tabular Disclosure of Fair Values of Derivative Instruments

Asset Derivatives

Liability DerivativesAs of March 31,
2009

As of December 31,
2008

As of March 31,
2009

As of December 31,
2008Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
ValueDerivatives designated as hedging instruments under SFAS 133Interest Rate Products

Derivative instrument, at fair value

$


Derivative instrument, at fair value

$


Derivative liability, at fair value

$
(12,940
)
Derivative liability, at fair value

$
(13,923
)Total derivatives designated as hedging instruments under SFAS 133



$




$




$
(12,940
)


$
(13,923
)Derivatives not designated as hedging instruments under SFAS 133Interest Rate Products

Derivative instrument, at fair value

$
7,086

Derivative instrument, at fair value

$
9,318

Derivative liability, at fair value

$
(64,224
)
Derivative liability, at fair value

$
(73,297
)Total derivativesnotdesignated as hedging instruments under SFAS 133



$
7,086



$
9,318



$
(64,224
)


$
(73,297
)


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, 2009 and 2008:

Amount of Gain
or (Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)
For the Three
Months Ended
March 31,Amount of Gain
or (Loss)
Recognized in
OCI on Derivative
(Effective Portion)
For the Three
Months Ended
March 31,Location of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)Derivatives in SFAS 133 Cash
Flow Hedging Relationships

2009

2008

2009

2008Interest Rate Products

$
2

$
(6,848
)
Interest income / (expense)

$
(1,397
)
$
(1,255
)Total

$
2

$
(6,848
)


$
(1,397
)
$
(1,255
)


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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. Risk Management and Derivative Activities(Continued)



Amount of Gain
or (Loss)
Recognized in
Income on Derivative
For the Three
Months Ended
March 31,Location of Gain or
(Loss) Recognized in
Income on DerivativeDerivatives Not Designated as Hedging
Instruments Under SFAS 133

2009

2008Interest Rate Products

Interest income / (expense)

$
2,940

$
(30,304
)Total



$
2,940

$
(30,304
)


At
March 31, 2009, the Company's counterparties hold approximately $26.5 million of cash margin as collateral against its swap contracts.

Credit Risk Concentrations

Concentrations of credit risk arise when a number of borrowers, tenants or issuers related to the Company's investments are engaged in
similar business activities or located in the same geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential
concentrations of credit risks. The Company has no one borrower or one tenant that generates 10% or more of its total revenue. However, approximately 29.0% of the Company's rental and escalation
revenue for the three months ended March 31, 2009 is generated from two tenants in the Company's healthcare net lease portfolio. The Company believes the remainder of its net lease portfolio is
reasonably well diversified and does not contain any unusual concentration of credit risks.

16. Segment Reporting

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

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

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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. Segment Reporting(Continued)

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 commercial mortgage-backed securities ("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.

On
May 7, 2008, the Company completed a recapitalization of its middle-market corporate lending venture. Upon completion of the recapitalization transaction, the Company
deconsolidated the venture and now uses the equity method of accounting for the investment. As a result, and as of May 7, 2008, the corporate loan segment is no longer a reportable segment of
the Company. Its current investment is included in corporate.

The
following table summarizes segment reporting for the three ended March 31, 2009 and 2008:

Real Estate
Debt

Operating
Real Estate

Real Estate
Securities

Healthcare
Real Estate
Joint Venture

Corporate
Investments
and Other(1)

Consolidated
TotalTotal revenues for the three months endedMarch 31, 2009

$
28,225

$
11,158

$
15,331

$
16,115

$
(431
)

70,398March 31, 2008


44,628


13,064


14,849


16,047


11,141


99,729Consolidated net income for the three
months endedMarch 31, 2009


89,504


(7,621
)

23,421


(605
)

(1,968
)

102,731March 31, 2008


234,366


(1,262
)

(27,252
)

(624
)

16,924


222,152Consolidated net income (loss) before preferred dividend for the three months endedMarch 31, 2009


79,709


(6,787
)

20,858


(3,069
)

(844
)

89,867March 31, 2008


209,628


(1,015
)

(24,375
)

(672
)

15,470


199,036Total assets as ofMarch 31, 2009


2,219,953


505,455


231,098


729,140


134,251


3,819,897December 31, 2008

$
2,266,115

$
515,577

$
259,326

$
732,513

$
170,195

$
3,943,726


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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. 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, 2009 and 2008 is presented below:

2009

2008Real estate debt investment pay-down due from servicer

$


$
(1,525
)Write-off of deferred financing cost in connection with FAS 159 implementation





29,728Initial mark-to-market adjustment in connection with FAS 159 implementation





(223,045
)Stock Dividend


10,646





18. Subsequent Events

Dividends

On April 21, 2009, the Company declared a cash 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 are payable on May 15, 2009 to the stockholders of record as of the close of business on
May 5, 2009.

Debt Repurchases

During April 2009, the Company repurchased approximately $11.0 million of its 7.25% exchangeable senior notes for a total of
$4.5 million. The Company recorded a realized gain of approximately $6.5 million in connection with the repurchase of its notes.

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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

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

Factors that could have a material adverse effect on our operations and future prospects are set forth in "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2008, 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 also generate interest revenues from our ownership interest in
non-consolidated securities term debt transaction issuances and advisory fee income and income from our unconsolidated ventures. Other income comprises a much smaller and more variable
source of revenues and is generated principally from fees associated with early loan repayments and gains/losses from sales of securities.

We
primarily derive income 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 term
debt transaction 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.

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 a 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. For 2008, a much higher percentage of our performance compensation was awarded in cash rather than
stock equivalents compared to prior years, resulting in an unfavorable efficiency ratio compared to prior years.

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

In early 2007, the subprime residential lending and single family housing markets began to experience significant default rates,
declining real estate values and increasing backlog of housing supply. Other lending markets also experienced higher volatility and decreased liquidity resulting from the poor credit performance in
the residential lending markets. The residential sector capital markets issues quickly spread more broadly into the asset-backed commercial real estate, corporate and other credit and equity markets.

During
2008, financial institutions curtailed their lending to peer institutions, even on a very short-term basis, as lack of transparency regarding asset quality reduced
confidence in counterparty creditworthiness. Despite liquidity infusions from government-sponsored central banks worldwide, the cost of capital increased dramatically, and even the most liquid markets
such as the commercial paper market experienced enormous outflows of capital. Those institutions deemed by the market to be most at risk for credit issues, principally those with large real estate and
mortgage portfolios, experienced massive withdrawals from customer brokerage and deposit accounts. These institutions also became unable to transact in the capital markets because few participants
were willing to take their counterparty risk, thereby resulting in their insolvency (most notably Bear, Stearns & Co. and Lehman Brothers Holdings, Inc.). The U.S. Government
reacted to the rapid deterioration in the financial system by passing the Emergency Economic Stabilization Act of 2008, or the EESA, in early October. The EESA authorized and provided funds to the
U.S. Treasury Department to acquire financial assets from institutions as a buyer of last resort in order to enable these institutions to reduce their exposure to troubled assets and to regain market
confidence. During the fourth quarter of 2008, the U.S. abandoned the direct asset purchase strategy, committed to make up to $250 billion of direct equity investments into banking institutions
and purchased commercial paper from corporations.

In
February 2009, the U.S. Government ratified a $787 billion economic stimulus package and in March announced the Public-Private Investment Program (PPIP) to introduce up to $1
trillion of

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leverage
into the financial system to purchase and finance high quality securities, including CMBS, and to acquire "legacy" loans from banks. The goal of the PPIP is to draw private capital into the
market by providing government equity co-investment and attractive public financing. Many details of the program must be clarified, but the CMBS market has responded positively to the
announcement with credit spreads for the highest quality securities decreasing by several hundred basis points after the program's announcement. We partnered with MacFarlane Partners Investment
Management and filed an application with the U.S. Government to be one of its approved fund managers in order to access government-sponsored co-investment equity and debt capital.

As
a result of the enormous credit market disruptions and worldwide economic recession, most financial industry participants, including commercial real estate lenders and investors,
continue to find it difficult to obtain cost-effective debt and equity capital to fund new investment activity or to refinance maturing debt. Weakening macroeconomic conditions combined
with the continued lack of liquidity in the U.S. commercial real estate market continue to pressure underlying real estate values and cash flows.



Property types most directly and immediately impacted by these weaker conditions include residential condominium projects in markets
which experienced a high level of development during the residential market boom, such as in South Florida, Las Vegas and areas of California. Multi-family properties located in nearby areas have
generally been impacted by the oversupply of condominiums because many of these projects are being converted into competing rental properties. Also, hotels are generally most immediately impacted by
changing economic conditions because revenues are generated on a nightly basis, based on room rates and occupancy. Business and leisure travel is declining as macroeconomic conditions worsen. The next
most sensitive real estate class to changing economic conditions is retail, followed by office and industrial properties. Office, industrial and retail property types have longer-term,
multi-year leases and therefore reset to market on a lagging basis. Business and retailer failures have become more frequent and are expected to negatively impact occupancy rates in the
future. The degree to which commercial real estate values are impacted by weaker economic conditions and the level of credit losses in our asset base will be determined primarily by the length that
such conditions persist and the severity of the economic contraction.

Most
of our real estate loans bear interest rates based on a spread to one-month LIBOR, a floating rate index based on rates that banks charge each other to borrow.
One-month LIBOR as of April 30, 2009, is 0.41%, well below its 3.5% average over the past five years. Lower LIBOR means lower debt service costs for our borrowers which should
partially offset decreasing cash flows caused by the economic recession, and extend 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. Currently, a lack of readily available financing, economic uncertainty and higher returning alternative investment opportunities have increased investor
return expectations resulting in much higher risk premiums and, despite the lower interest rate, lower valuations for commercial real estate properties. The conditions are adversely impacting the
performance of our real estate loans and the related collateral properties. The deep economic recession combined with a crippled banking sector has resulted in weakening cash flows from collateral
properties and extreme difficulties in obtaining repayments at maturity.

For
existing loans, when credit spreads widen, the fair value of these existing loans decreases. If a lender were to originate a similar loan today, such loan would carry a greater
credit spread than the existing loan. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed, the fair 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

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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. The rating agencies have changed their ratings methodologies
for all securitized asset classes, including commercial real estate, in light of questionable ratings previously assigned to residential mortgage portfolios. Their reviews have resulted in, and are
continuing to result in, large amounts of ratings downgrade actions for CMBS, negatively impacting market values of CMBS and in some cases negatively impacting the term debt transaction financing
structures used by us and others to leverage these investments.

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



We responded to these difficult conditions by decreasing investment activity when we observed deteriorating market conditions. We
expect credit to continue to be challenging throughout the remainder of 2009 and into 2010 and have focused our company resources on portfolio management activities to preserve our invested capital
and liquidity. We anticipate that most of our investment activity and uses of available unrestricted cash liquidity for the foreseeable future will be focused on discounted repurchases of our
previously issued debt securities which generally have been available in the market at very attractive prices, and also allows us to reduce future debt maturities. Our business plan assumes that the
gains from repurchasing this debt at discounts to par more than offsets credit losses during the same period.

Approximately
$4.0 billion of our term debt transaction liabilities (including the off-balance sheet and on-balance sheet term debt transaction financings)
currently permit reinvestment of capital proceeds which means when the underlying assets repay we are able to reinvest the proceeds in new assets without having to repay the liabilities. We also have
assets financed on a bank term loan with an outstanding balance of $277.3 million at March 31, 2009, which has a final maturity in October 2010. Rather than making new investments with
loan repayment proceeds in our term debt transactions, in certain instances we have been amortizing the bank term loan by transferring performing assets financed by the term loan into our term debt
transactions, providing match funded financing for these assets. Approximately $689.4 million of our funded loan commitments have their initial maturity date in 2009; however, most of the loans
contain extension options of at least nine months (many subject to performance criteria). It is therefore difficult to estimate how much capital, if any, from initial maturities or prepayments will be
generated in our term debt transactions from loan repayments during 2009 to create availability to further amortize the bank loan. For the first quarter of 2009, we had just $5 million of
repayments and no full payoffs, compared to $25.4 million of scheduled final maturities.

Our
term debt structures do not have corporate financial covenants but require that the underlying loans and securities meet debt service 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

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reinvest
can be adversely impacted if these tests are not in compliance. Ratings downgrades 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 term debt structures. As economic conditions continue to weaken and
capital for commercial real estate remains scarce, we expect credit quality in our assets and across the commercial real estate sector to weaken. While we have devoted a majority of our resources to
managing our existing asset base, a continued weak environment will make maintaining compliance with the term debt structures more difficult, jeopardizing regular cash flow distributions to our
company.

We
believe that in the longer term, liquidity could eventually return to the commercial real estate finance markets but that in the near term, new financing sources must be developed in
order to attractively finance new investment activity. We believe these sources could include financing from U.S. Government-sponsored programs such as PPIP and TARP, term loans from financial
institutions and life insurance companies, more restrictive commercial real estate finance structures, which may not permit reinvestment from asset repayments, and financing provided by motivated
sellers of assets.

Risk Management

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

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

We
conduct a quarterly comprehensive credit review which is designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a
portfolio-wide basis as an "early warning system." Nevertheless, we cannot be certain that our review will identify all issues within our portfolio due to, among other things, adverse
economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from assets that are not identified by our credit reviews. Based on the quarterly
reviews, loans and net lease assets are put on an internal "Watch List" if we believe there is greater near-term risk that we could lose invested capital and/or there is a situation at the
underlying collateral which requires intensive risk management and portfolio management resources. Securities investments are generally added to the watch list if there is a default, although
management may use its discretion to include or exclude any

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asset
from the watch list based on qualitative factors such as likelihood of actual loss realization, level of resources required to work out the issue, and probability of default if there has not yet
been an actual default. A Watch List asset does not necessarily mean it is non-performing or that there is an impaired loan basis, but indicates our view that the risk of the asset
becoming non-performing or impaired is much greater than in the overall portfolio. We believe the Watch List is a useful internal tool for prioritizing management resources but
delinquencies, realized losses, non-performing loans and actual credit loss reserves are the appropriate basis in which our investors should compare our credit performance to other
financial services companies. These metrics are much more objective and comparable than management's assessment of Watch List criteria which are more subjective and difficult to define in the current
environment.

As
of March 31, 2009 our loan portfolio had the following credit statistics:

#

$

% of total loan portfolioNon-performing loans(1)


2

$
49,834


2.45
%Loan loss reserves


11


32,662


1.60
%






As
of March 31, 2009 our loan portfolio principal and interest aging is as follows:

1 - 30 Days

31 - 60 Days

61 - 90 Days

90 + Days$
25,589

$
74

$
6,416

$
21,373


During
the first quarter of 2009, we recorded $21.5 million of credit loss provisions relating to 10 loans and had no foreclosures or reversals of prior period reserves. As of
March 31, 2009, loan loss reserves totaled $32.7 million. At March 31, 2009, we had two loans totaling $49.8 million on non-performing status due to maturity
defaults. A $21.3 million first mortgage loan secured by a condo/hotel development site in Manhattan was on the non-performing
loan list at December 31, 2008 and the maturity default is not yet resolved. At March 31, 2009, we have a $3.0 million loan loss reserve for this loan, and are negotiating a
potential assumption of our loan by new sponsors, who have significant hotel development and operating track records and intend to develop a full service hotel on the site, as well as pursuing legal
remedies against the borrower. The second non-performing loan is a $28.5 million B-note secured by a large mixed use development located near Orlando, FL. Our note is
subordinate to a $127 million A-note and senior to a $28.0 million C-note. The borrower did not meet the requirements for a March 2008 extension, and the special
servicer, an affiliate of the C-note lender, is negotiating the terms of a potential extension of the loan in return for amortization. The borrower also has existing recourse obligations
to make scheduled amortization payments. There can be no assurance that acceptable assumption and modification agreements can be reached with the respective borrowers under our
non-performing loans, and if agreements cannot be reached we may determine that more reserves are required for these loans. Subsequent to March 31, 2009, two additional loans
totaling $23.2 million became non-performing loans. We fully reserved for one of the loans, a $9.4 million mezzanine loan backed by a multi-family development site in
Washington D.C., by taking an additional $4.9 million in the first quarter 2009. We also took a $1.0 million provision against a $13.8 million first mortgage loan secured by a
condo development site in Manhattan which has the same sponsor as the $21.3 non-performing loan previously discussed.

Overall,
the prolonged financial sector crisis and economic recession is resulting in increasing stress levels for commercial real estate credit. A shrinking economy generally results in
decreasing real estate cash flows as corporations and consumers reduce their real estate needs, travel and spending. Because the commercial real estate asset-backed markets remain closed, and banks
and life companies have

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drastically
curtailed new lending activity, real estate owners are having difficulty refinancing their assets at maturity. Many owners are also having trouble achieving their business plans to the
extent they acquired a property to reposition it or otherwise invest capital to increase the property's cash flows. Property values have also generally decreased over the past year because of scarcity
of financing, which when it is available the terms generally are at much lower leverage and higher cost than available in prior years, uncertainty regarding future economic conditions and higher
returning investment opportunities available in other asset classes. Decreasing values make it difficult for real estate investors to sell their properties and to recoup their capital. As a result of
the weak commercial real estate market, many lenders, including us, are concluding that extending loans at original maturity, rather than foreclosure and sale, may be the most attractive path for
maximizing value.

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

Our
net leased assets are generally leased to a single tenant and we typically financed these assets with non-recourse first mortgage loans. In the event a tenant goes out of
business, we must decide whether to continue to pay debt service and property operating costs until we find a new tenant, or we may give the property to the mortgage lender and lose our invested
equity capital. One of our net lease investments is 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. The assets are financed with a non-recourse $43.0 million first mortgage loan. The assets are also financed with a $9.2 million mezzanine loan which is collateral for
one of our securities term financings. The tenant vacated the building as of March 23, 2009, and the FDIC lessee terminated its lease. In the fourth quarter of 2008 we took an impairment charge
relating to these properties and are in the process of transferring title to the first mortgage special servicer. Our net book value in the assets currently is approximately equal to the mortgage
debt, and we therefore do not expect the transfer to materially impact our income statement.

Critical Accounting Policies

Refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2008 entitled
"Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting policies" for a full discussion of our critical accounting policies.

Recent Accounting Pronouncements

In January 2009, the FASB issued FSP EITF 99-20-1, which amends the impairment guidance in EITF Issue
No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized
Financial Assets" ("FSP EITF 99-20-1") to achieve more consistent determination of whether an other-than-temporary impairment has occurred. FSP
EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements
in SFAS 115 and other related guidance. FSP EITF 99-20-1 is effective and should be applied

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prospectively
for financial statements issued for fiscal years and interim periods ending after December 15, 2008. The adoption of FSP EITF 99-20-1, did not have
a material effect on our financial condition, results of operations, or cash flows.

In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 ("FSP FAS 115-2 and FAS 124-2") which is intended
to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary event and to more effectively communicate when an
other-than-temporary event has occurred. FSP FAS 115-2 and FAS 124-2 applies to debt securities and requires that the total
other-than-temporary impairment be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which is
the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor entity can assess that (a) it does not have the intent to sell or
(b) it is not more likely than not that it will have to sell the security prior to its anticipated recovery. FSP FAS 115-2 and FAS 124-2 is effective for
interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 115-2 and
FAS 124-2 will be applied prospectively with a cumulative effect transition adjustment as of the beginning of the period in which it is adopted. An entity early adopting this FSP
must also early adopt FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly". We are currently evaluating the potential impact that the adoption of FSP FAS 115-2 and FAS 124-2 could have on our financial
statements.

In
April 2009, FASB issued FSP FAS 157-4 "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly" ("FSP FAS 157-4"), which provides additional guidance on determining whether a market for a financial asset is not active and a
transaction is not
distressed for fair value measurements under FASB Statement No. 157,"Fair Value Measurements"(SFAS 157). FSP
FAS 157-4 will be applied prospectively and retrospective application will not be permitted. FSP FAS 157-4 will be effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP
FAS 115-2 and FAS 124-2. We are currently evaluating the potential impact that the adoption of FSP FAS 157-4 could have on our financial
statements.

In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 ("FSP FAS 107-1 and APB 28-1 ") which will amend
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"). FSP FAS 107-1 and APB 28-1 will require an entity to
provide disclosures about the fair value of financial instruments in interim financial information. FSP FAS 107-1 and APB 28-1 would apply to all financial
instruments within the scope of SFAS 107 and will require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both
interim financial statements as well as annual financial statements. FSP FAS 107-1 and APB 28-1 will be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP
FAS 157-4 and FSP FAS 115-2 and FAS 124-2. We are currently evaluating the potential impact that the adoption of FSP
FAS 107-1 and APB 28-1will have on our financial statement disclosures.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2009 to the Three Months Ended March 31, 2008

Revenues



Interest income for the three months ended March 31, 2009 totaled $36.8 million, representing a decrease of
$26.9 million, or 42%, compared to $63.7 million for the three months ended March 31, 2008. The decrease consisted of a $18.2 million decrease attributable to an
approximately 306 basis points lower average one-month LIBOR rate and lower asset balances during the first quarter 2009 compared to first quarter 2008, and a $10.6 million decrease
in interest income attributable to the recapitalization and deconsolidation of Monroe Capital in 2008. The decrease was partially offset by a net increase to interest income of approximately
$1.9 million resulting from the origination and acquisition of commercial real estate debt and commercial real estate securities with a net book value of $468.3 million subsequent to
March 31, 2008 offset by approximately $354.6 million of investment dispositions and repayments during 2008.



Interest income from related parties for the three months ended March 31, 2009 totaled $4.5 million, representing an
increase of $0.7 million, or 18%, compared to $3.8 million for the three months ended March 31, 2008. The increase is attributable to securities purchases within our
non-consolidated term debt financings in which we own the non-investment grade note classes. All of our real estate securities term debt transactions completed since 2006, in
which we retain the equity notes, have been accounted for as on-balance sheet financings.



Rental and escalation income for the three months ended March 31, 2009 totaled $27.2 million, representing a decrease of
$1.8 million, or 6%, compared to $29.0 million for the three months ended March 31, 2008. The decrease was primarily attributable to the Reading, PA and Chatsworth, CA property
lease terminations which decreased rental and escalation income by approximately $1.9 million, partially offset by net lease property acquisitions by our Wakefield joint venture which increased
rental and escalation income by approximately $0.1 million.



Advisory fees from related parties for the three months ended March 31, 2009 totaled $1.7 million, representing a
decrease of approximately $0.6 million, or 26%, compared to $2.3 million for the three months ended March 31, 2008. The decrease was primarily attributable to the sale of 67% of
the advisory fee income stream from one of our term debt transactions to the Securities Fund during the second quarter 2008. The sale resulted in $0.5 million of lower advisory fees and a
decrease of $0.1 million as a result of the decline in net asset value of our term debt transactions which generate the advisory fees.



Other revenue for the three months ended March 31, 2009 totaled $0.2 million, representing a decrease of
$0.8 million, or 80%, compared to $1.0 million the three months ended March 31, 2008. Other revenue for three months ended March 31, 2009 consisted primarily of
$0.1 million in exit fees and $0.1 million in unused credit line fees. Other revenue for the three months ended March 31, 2008 consisted primarily of $0.3 million in
prepayment penalties, $0.3 million of exit fees, $0.2 million in unused credit line fees, $0.1 million in draw fees and $0.1 million miscellaneous other revenue.

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Expenses



Interest expense for the three months ended March 31, 2009 totaled $34.1 million, representing a decrease of
$21.4 million, or 39%, compared to $55.5 million for the three months ended March 31, 2008. The decrease in interest was primarily the result of: (i) $15.0 million
lower interest on N-Star IV, VI, VII and VIII bonds payable and trust preferred debt due to lower average LIBOR rates, debt repurchases and repayments; (ii) $4.9 million
lower interest as a result of the recapitalization, termination and de-consolidation of our corporate lending venture in 2008; (iii) $2.2 million relating to lower average
balances and lower LIBOR rates on our WA Term Loan; (iv) $0.8 million lower interest relating to lower interest rates on our Euro-note; (v) $0.7 million related
to the termination of our unsecured revolving credit line in May 2008; and (vi) $0.1 million lower average balances on repurchase obligations. The decrease in interest expense was
partially offset by: (i) $2.6 million in additional expense from our $80.0 million 11.50% exchangeable senior notes issued in May 2008 and (ii) $0.1 million in
additional expense from our LB term loan which closed in June 2008.



Real estate property operating expenses for three months ended March 31, 2009 totaled $2.1 million, representing an
increase of $0.1 million, or 5%, compared to $2.0 million for three months ended March 31, 2008. The increase was primarily attributable to the Reading, PA and Chatsworth, CA
property lease terminations.



Advisory fees for related parties for the three months ended March 31, 2009 totaled $0.9 million, representing a decrease
of $1.2 million, or 57%, compared to $2.1 million for the three months ended March 31, 2008. The decrease was primarily attributable to the termination of the corporate lending
joint venture agreement. We incurred $0.9 million of advisory fees to Wakefield Capital Management and no advisory fees to the corporate lending joint venture for the three months ended
March 31, 2009, respectively. We incurred $0.9 million of advisory fees to Wakefield Capital Management and $1.2 million of advisory fees to our former corporate lending venture
for the three months ended March 31, 2008, respectively.



Provision for loan losses for the three months ended March 31, 2009 totaled $21.5 million and was specifically identified
for ten loans. The first quarter 2009 expense includes $12.0 million for mezzanine loans, $6.5 million for whole loans and $3.0 million for subordinated mortgage interests.
Provision for loan losses for the three months ended March 31, 2008 totaled $0.8 million and was allocated to a $19.5 million first mortgage asset backed by two multi-family
properties.



General and administrative expenses for the three months ended March 31, 2009 totaled $17.5 million, representing a
decrease of $0.5 million, or 3%, compared to $18.0 million for the three months ended March 31, 2008. The primary components of our general and administrative expenses were the
following:

Salaries
and equity-based compensation for the three months ended March 31, 2009 totaled $11.6 million, representing a decrease of approximately $0.1 million, or 1%,
compared to $11.7 million, for the three months ended March 31, 2008. The decrease was attributable to a $1.8 million decrease related to equity based compensation offset
partially by a $1.7 million increase related to salaries and

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accrued
cash incentive compensation costs. The $1.8 million decrease in equity-based compensation expense was attributable to the one-time 2008 grants of $0.7 million in
connection with employee compensation arrangements and $1.1 million in connection with employee separation agreements. The decrease was partially offset by an increase of approximately
$0.1 million of vesting of equity-based awards issued under our 2004 Omnibus Stock Incentive Plan relating to grants issued in the fourth quarter 2008. The increase in the 2009 cash incentive
compensation cost was a result of a higher proportion of cash versus stock than prior periods due to a higher than previously anticipated mix of cash versus equity incentive awards.

Auditing
and professional fees for the three months ended March 31, 2009 totaled $2.3 million, representing a decrease of $0.1 million, or 4%, compared to
$2.4 million for the three months ended March 31, 2008. The decrease was primarily attributable to lower legal fees for general corporate work and investment activities, lower recruiting
fees, and lower professional fees related to agreed upon procedures in connection with term debt transactions.

Other
general and administrative expenses for the three months ended March 31, 2009 totaled $3.6 million, representing a decrease of approximately $0.2 million, or
6%, compared to $3.8 million for the three months ended March 31, 2008. The decrease was primarily attributable to decreases costs related to decreased investment initiatives and a
decrease in overhead resulting from lower staffing levels during the three months ended March 31, 2009.



Depreciation and amortization expense for the three months ended March 31, 2009 totaled $14.8 million, representing an
increase of $4.8 million, or 48%, compared to $10.0 million for the three months ended March 31, 2008. This increase was primarily attributable to write-off of
$4.8 million of various costs as a result of the Chatsworth, CA property lease termination.



Equity in (loss) earnings for the three months ended March 31, 2009 was a net $4.4 million loss, representing a decrease
of $4.2 million, compared to a loss of $0.2 million for the three months ended March 31, 2008. For the three months ended March 31, 2009, we recognized equity in losses of
$2.3 million from the LandCap joint venture and equity in losses of $2.3 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and
mark-to-market adjustments). The losses were partially offset by equity in earnings of $0.1 million in connection with a net lease joint venture. For the three months
ended March 31, 2008, we recognized equity in losses of $0.6 million from the Securities Fund, of which $4.4 million was the unrealized loss related to the
mark-to-market adjustment on the securities in the Securities Fund, and equity in loss of $0.5 million on the LandCap joint venture. The losses were partially offset by
our investment in Monroe Management, which we recognized $0.9 million equity in earnings.



Unrealized gain (loss) on investments and other decreased by approximately $120.2 million for the three months ended
March 31, 2009 to a gain of $90.7 million, compared to a gain of $210.9 million for the three months ended March 31, 2008. The unrealized gain on investments for the three
months ended March 31, 2009 consisted primarily of unrealized gains related to SFAS 159 mark-to-market adjustments of $135.6 million on various
N-Star bonds payable, unrealized gains of $1.5 million on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments under SFAS 133 and
unrealized gains of $1.9 million on liability to subsidiary trusts issuing preferred securities. The increase was partially offset by unrealized losses related to SFAS 159
mark-to-market adjustments of $23.2 million on various N-Star available for sale securities and unrealized losses of

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$25.2 million
on our corporate lending joint venture (which is an equity investment that is marked to market). The unrealized gain on investment for the three months ended March 31, 2008
consisted of unrealized gains related to SFAS 159 mark-to-market adjustments of $103.5 million on N-Star VIII bonds payable, $76.5 million on
N-Star IV bonds payable, $64.9 million on N-Star VII bonds payable, $46.7 million on N-Star VI bonds payable, $32.8 million on liability to
subsidiary trusts issuing preferred securities, offset partially by unrealized losses related to SFAS 159 mark-to-market adjustments of $73.9 million on
N-Star VII available for sale securities, $7.7 million on N-Star IV available for sale securities and $31.5 million on interest rate swaps as a result of these
swaps no longer qualifying for hedge accounting under SFAS 133.



The realized gain of $36.9 million for the three months ended March 31, 2009 consisted primarily of net realized gains of
$34.4 million on the repurchase of $61.0 million of our 7.25% exchangeable senior notes and net realized gains of $2.5 million on the sale of certain debt securities available for
sale, offset partially a foreign currency translation gain of $0.1 million related to our Euro-denominated investment. The realized gain on investments and other for the three
months ended March 31, 2008, was immaterial.

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 term debt transaction financings,
long-term senior and subordinate corporate capital such as senior notes, trust preferred securities and perpetual preferred and common stock. As we discussed in "Outlook and Recent
Trends", availability of such capital from all of these sources is extremely scarce (if available at all) for financial institutions including commercial mortgage REITs, and we expect this capital to
be difficult to obtain for the foreseeable future.

Our
total available liquidity at March 31, 2009 was approximately $201.2 million, including $121.3 million of unrestricted cash and cash equivalents and
$79.9 million of uninvested and available funds in our term debt transactions, which is available only for reinvestment within the term debt transactions.

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. For calendar year 2009, we will be permitted to pay up to 90% of our distribution requirement in common stock or other company securities which give us the
flexibility to preserve cash. On January 20, 2009, we declared a $0.25 per common share dividend, of which up to 40% was paid in cash in order to preserve our capital. On April 21, 2009,
we declared a $0.10 per common share cash dividend. 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 REIT qualification requirements, the amount of
cash flows provided by operating activities, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing
sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our
business or prospects. Although we have significantly reduced the cash portion of the 2009 dividends declared to date relative to prior periods, future dividend levels are subject to further
adjustment based upon our evaluation of the factors

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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 secured term debt transaction
financing structures generally require that the underlying collateral and cash flow generated by the collateral to
be in excess of ratios stipulated in the related indentures. These ratios are called overcollateralization, or OC, and interest coverage, or IC, tests. 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 term debt transactions in order to preserve cash flow.
As of March 31, 2009 we are in compliance with all of the OC and IC tests in our secured term debt transactions. We expect that very weak economic conditions, lack of capital for commercial
real estate, decreasing real estate values and credit ratings downgrades of real estate securities will make complying with OC and IC tests more difficult in the future.

We
also have four bank loans which permit the lender to require partial repayment under certain circumstances. The WA and Euro term loans with a combined balance of $374.0 million
at March 31, 2009 allow the lender to require a partial repayment based on quarterly credit reviews of the loan assets which serve as collateral for the facilities. The amount of the repayment
is based upon lender's sole discretion regarding the decrease in value of its collateral due to credit deterioration. The JP Facility and a secured term loan with $13.2 million and
$23.3 million outstanding balances, respectively, as of March 31, 2009, provide the lenders with a similar ability to require repayment, except the lenders under both loans may require
repayment at any time due to decreases in credit quality and decrease in value of the loan collateral based upon market credit spread movements. In a weakening economic environment we would generally
expect credit quality and value of the underlying loans to decline resulting in a higher likelihood that the lenders would require partial repayment from us. Such amounts could be material to our cash
and liquidity position depending on performance of the loan collateral and market credit spreads.

These
bank loans also contain corporate financial covenants which we must comply with in order to avoid defaults under the loans. The interest and fixed charge coverage covenants are
currently the most restrictive and as of March 31, 2009 we are in compliance with all financial covenants under these facilities. The interest and fixed charge covenants include credit loss
provisions in their calculations; therefore, higher levels of credit provisions without corresponding increases in income from other sources could decrease our cushion under these covenants and result
in a default which would allow the lenders to accelerate their debt. In addition, the WA and Euro term loans have an initial maturity in October 2009 and both contain a one-year extension
at our option provided that we are in compliance with the terms of the loans. If we fail to comply with the financial and non-financial covenants in these loans we may be unable to
exercise the extension option. Furthermore, the $13.2 million JP Facility reaches a maturity date in August 2009. The facility is extendable for an additional year at the lender's option. If
the lender decides to not renew that facility, we would be required to repay amounts due at the maturity date.

We
will seek to meet our long term liquidity requirements, including the repayment of debt and our investment funding needs, through existing cash resources, our existing secured term
debt 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

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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.

Equity Distribution Agreement

In May, 2008, we entered into an equity distribution agreement with Wachovia Capital Markets, LLC, or Wachovia. In accordance
with the terms of the agreement, we may offer and sell up to 10,000,000 shares of our common stock from time to time through Wachovia. Wachovia will receive a commission from us of up to 2.5% of the
gross sales price of all shares sold through it under the equity distribution agreement.

For
the three months ended March 31, 2009, we did not issue any shares of common stock related to our equity distribution agreement with Wachovia.

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, 2009, we issued a total of 4,968 common shares pursuant to the Plan for a gross sales price of approximately $14,000.

Debt Repurchases

During the three months ended March 31, 2009, we repurchased approximately $61.0 million of our 7.25% exchangeable senior
notes for a total of $25.8 million. We recorded a realized gain of $34.4 million in connection with the repurchase of our notes. The repurchases also represented a $35.2 million
discount to the par value of the debt.

Wakefield Preferred Equity

On July 9, 2008, Wakefield sold a $100 million convertible preferred equity interest to Inland American Real Estate
Trust, Inc. ("Inland American"). We received approximately $87.7 million of net proceeds from the transaction. Prior to conversion, the convertible preferred investment will yield a
dividend of 10.5%. The convertible preferred equity may be converted or redeemed, at Inland American's option, upon the sale or recapitalization of the Wakefield venture. Wakefield may, at its option,
redeem the convertible preferred interests at any time following the first anniversary of the closing, subject to payment of a call premium that declines over time. In addition, at any time after the
second anniversary of the closing, Inland American may convert its preferred equity interests into common equity in Wakefield. Based on the current investment amount and capital accounts of the
Wakefield members, the convertible preferred equity interests would represent, upon conversion, approximately a 42% common equity ownership interest in Wakefield. Inland American will have the option
of contributing additional preferred equity and participating in new Wakefield investment opportunities in proportion to its percentage ownership interest, assuming it were to convert its interests to
common equity.

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Cash Flows

The net cash flow provided by operating activities of $8.9 million, decreased by $15.0 million for the three months ended
March 31, 2009 from $23.9 million for the three
months ended March 31, 2008. This was primarily due to the lower LIBOR rates which decreased interest income generated from our asset base.

The
net cash flow used by investing activities was $9.9 million for the three months ended March 31, 2009 compared to the net cash provided by investing activities of
$91.4 million for the three months ended March 31, 2008. This decrease from 2008 was primarily a result of increased investment activity and lower investment repayments in 2009. Net cash
flow used in investing activities in 2008 was primarily the result of the payoffs and principal paydowns of our real estate debt investments and corporate loan investments combined with decreased
investment activity.

The
net cash flow used by financing activities was $11.6 million for the three months ended March 31, 2009 compared to $129.7 million of cash provided by financing
activities for the three months ended March 31, 2008. The primary use of cash flow by financing activities was credit facilities repayments and bond repurchases. Net cash flow in provided by
financing activity in 2008 was primarily related to the paydown of our bonds, credit facilities, and secured term loan as a result of principal paydowns of our assets.

Contractual Obligations and Commitments

As of March 31, 2009, we had the following contractual commitments and commercial obligations:

Payments Due by PeriodContractual Obligations

Total

1 year

2-3 years

4-5 years

After 5 YearsMortgage notes

$
896,301

$
6,927

$
107,291

$
175,859

$
606,224Mezzanine loan payable


12,112


1,536


3,845


4,425


2,306Exchangeable senior notes(1)


179,800








179,800


Bonds payable


1,668,445











1,668,445Credit facilities


13,226


13,226








Secured term loan(2)


397,380


397,380








Liability to subsidiary trusts issuing preferred securities


280,133











280,133Repurchase agreements


528


528








Capital leases(3)


16,496


365


974


997


14,160Operating leases


75,024


4,218


11,211


10,869


48,726Placement fees


608


608








Outstanding unfunded commitments(4)


240,612


213,764


26,848





Total contractual obligations

$
3,780,665

$
638,552

$
150,169

$
371,950

$
2,619,994


---

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Off-Balance Sheet Arrangements

Term Debt Issuances

The terms of the portfolio of real estate securities held by the term debt transactions are structured to be matched with the terms of
the non-recourse term debt liabilities. These term debt liabilities are repaid with the proceeds of the principal payments on the real estate securities collateralizing the term debt
liabilities when these payments are actually received. There is no refinancing risk associated with the term debt liabilities, as principal is only due to the extent that it has been collected on the
underlying real securities and the stated maturities are noted above. Term debt transactions produce a relatively predictable income stream based on the spread between the interest earned on the
underlying securities and the interest paid on the term debt transaction liabilities. This spread may be reduced by credit losses on the underlying securities or by hedging mismatches. In two of our
term debt transactions we incurred a loss on a security whose issuer filed for bankruptcy. We reviewed the term notes for impairment and determined no impairment existed at March 31, 2009. We
continue to receive quarterly cash distributions from N-Star I and monthly cash distributions from N-Star II, N-Star III and N-Star V, each representing
our proportionate share of the residual cash flow from the term debt transactions, as well as collateral advisory fees and interest income on the unrated income notes of the term debt transactions.

The
following tables describe certain terms of the collateral for and the notes issued by term debt transactions at March 31, 2009:

CollateralMarch 31, 2009

Term NotesMarch 31, 2009Issuance

Date
Closed

Par
Value of
Collateral

Weighted
Average
Interest
Rate at
12/31/08

Weighted
Average
Expected
Life
(years)

Outstanding
Term
Notes(1)

Weighted
Average
Interest
Rate at
12/31/08

Stated
MaturityN-Star I(2)


8/21/03

$
293,177


6.59
%

4.17

$
274,981


6.37
%

8/01/2038N-Star II


7/01/04


320,487


6.13


4.81


290,407


5.51


6/01/2039N-Star III


3/10/05


414,281


5.70


2.46


358,477


4.88


6/01/2040N-Star V


9/22/05


524,572


5.52


5.74


456,319


4.58


9/05/2045Total




$
1,552,517


5.89
%

4.38

$
1,380,184


5.21
%


---

Any
potential losses in our off balance sheet term debt transactions is limited to the amortized cost of our investment of $122.2 million at March 31, 2009.

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NorthStar Real Estate Securities Opportunity Fund

In July 2007, we closed on $109.0 million of equity capital for our Securities Fund, an investment vehicle in which we conduct
most of our real estate securities investment business.

We
are the manager and general partner of the Securities Fund. We receive base management fees ranging from 1.0% to 2.0% per annum on third-party capital and are entitled to annual
incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary depending on the investor
capital lockup periods.

At
March 31, 2009, we had invested a total of $43.2 million in the Securities Fund and the carrying value of our investment was $23.0 million, representing a 49.4%
interest.

For
the three months ended March 31, 2009 and 2008, we recognized equity in losses of $2.3 million and $0.6 million, respectively. We also earned $0.1 million
in management fees from the Securities Fund for each of the three months ended March 31, 2009 and 2008.

Recent Developments

Dividends

On April 21, 2009, we declared a cash 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 are payable on May 15, 2009 to the stockholders of record as of the close of business on May 5,
2009.

Debt Repurchases

During April 2009, we repurchased approximately $11.0 million of our 7.25% exchangeable senior notes for a total of
$4.5 million. We recorded a realized gain of approximately $6.5 million in connection with the repurchase of our notes.

Inflation

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



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

We
believe that the risk associated with an increase in market interest rates on the floating rate debt used to finance our investments in our term debt transactions 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 this Annual Report on Form 10-K for additional information on our exposure to
market risk.

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Table of Contents

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 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) to FFO:



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

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

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Table of Contents

Set
forth below is a reconciliation of FFO and AFFO to net income from continuing operations before non-controlling interest for the three months ended March 31, 2009
and 2008:

Three Months
Ended March 31,
2009

Three Months
Ended March 31,
2008Funds from Operations:Consolidated net income

$
102,731

$
222,152Non-controlling interest in joint ventures


(2,464
)

(245
)Consolidated net income before non-controlling interest in operating partnership


100,267


221,907Adjustments:Preferred dividend


(5,231
)

(5,231
)Depreciation and amortization


14,814


9,938Funds from discontinued operations





Real estate depreciation and amortizationunconsolidated ventures


247


247Funds from Operations

$
110,097

$
226,861Adjusted Funds from Operations:Funds from Operations

$
110,097

$
226,861Straight-line rental income, net


(472
)

(757
)Straight-line rental income, discontinued operations





Straight-line rental income and fair value lease revenue (SFAS 141 adjustment), unconsolidated ventures


(32
)

(46
)Amortization of equity-based compensation


5,144


6,991Fair value lease revenue (SFAS 141 adjustment)


(325
)

(306
)Unrealized(gains)/losses from mark-to-market adjustments


(94,563
)

(213,428
)Unrealized losses from mark-to-market adjustments, unconsolidated ventures


2,765


4,355Adjusted Funds from Operations

$
22,614

$
23,670


Return on Average Common Book Equity

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

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Table of Contents

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

Three
Months
Ended
March 31,
2009

Annualized
March 31,
2009(2)

Year Ended
December 31,
2008Adjusted Funds from Operations (AFFO)

[A]

$
22,614

$
90,456

$
90,553Plus: Fundraising Fees, Debt Issuance Costs and Other










7,823AFFO, excluding Fundraising Fees, Debt Issuance Costs and Other




22,614





98,376Plus: General & Administrative Expenses




17,455





74,859Less: Equity-Based Compensation and straight line rent included in G&A




5,144





24,672Less: Bad Debt Expense included in G&A




479





AFFO, excluding G&A

[B]


34,446


137,784


148,563Average Common Book Equity & Operating Partnership Non-Controlling Interest(1)

[C]

$
1,366,326




$
887,515Return on Average Common Book Equity (including G&A)

[A]/[C]


6.6
%




10.2
%Return on Average Common Book Equity (excluding G&A)

[B]/[C]


10.1
%




16.7
%


---

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 do not hedge our retained equity interest in our floating rate term debt transactions. To the extent a
term debt transaction has floating rate assets, our earnings will generally increase with increases in floating interest rates, and decrease with declines in floating interest rates. Interest rates
are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Our
interest rate risk sensitive assets, liabilities and related derivative positions are generally held for non-trading purposes. As of December 31, 2008, a
hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $31.0 million offset by an increase in our
interest expense of approximately $25.2 million on our variable rate liabilities. Similarly, a hypothetical 100 basis point decrease in interest rates would decrease our annual interest income
by the same net amount.

Real Estate Debt

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

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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 generally
seek to hedge this type of risk unless the asset is leveraged as we believe the costs of such a hedging transaction over the term of such an investment would generally outweigh the benefits. If fixed
rate real estate debt is
funded with floating rate liabilities, we typically convert the floating rate to fixed through the use of interest rate swaps, caps or other hedges. Because the interest rates on our fixed rate
investments are generally fixed through maturity of the investment, changes in interest rates do not affect the income we earn from our fixed rate investments.

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

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

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

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.

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Real Estate Securities

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

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

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

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

Our
financing strategy is dependent on our ability to place the match-funded debt we use to finance our real estate securities at spreads that provide a positive funding spread. Match
funded debt is currently very difficult to obtain, and market-demanded yields on all real estate assets have increased. Our current strategy is to use our existing term debt 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.

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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 term
debt transaction, such as CMBS, decreases and as interest rates decrease, the value of these securities will increase. Conversely, we mark our term debt liabilities to market which causes a partial
offset to the income and balance sheet impact of marking the securities assets to market.

Net Lease Properties

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

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

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

Derivatives and Hedging Activities

We use derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap
agreements and the primary objective is to minimize interest rate risks associated with the our investment and financing activities. The counterparties of these arrangements are major financial
institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties and we monitor their financial
condition; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings and financial support from the U.S.
Government. At March 31, 2009, our counterparties hold approximately $26.5 million of cash margin as collateral against our swap contracts.

In
January 2008, we adopted SFAS 159 and elected the fair value option for our bonds payable and our liability to subsidiary trusts issuing preferred securities. Under
SFAS 159, the changes in fair value of these financial instruments are now recorded in earnings. As a result of this election, the interest rate swap agreements associated with these debt
instruments no longer qualify for hedge

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Table of Contents

accounting,
in accordance with SFAS 133 "Derivatives and Hedging Activity", since 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, 2009, we recorded in earnings a mark-to-market unrealized loss of $2.9 million and a $1.0 million reclassification from accumulated
other comprehensive income for the non-qualifying interest rate swaps. For the three months ended March 31, 2008, we recorded in earnings a mark-to-market
unrealized loss of $30.3 million and a $1.2 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps.

The
following table summarizes the notional amounts and fair (carrying) values of our derivative financial instruments as of March 31, 2009 (in thousands):

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swaps and basis swapsAs of March 31, 2009


10


90,749


(12,940
)
4.18% - 5.08%

March 2010 - August 2018


Item 4.    Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation (as required under
Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act), under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. Notwithstanding the foregoing, a control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be
set forth in our periodic reports.

Internal Control over Financial Reporting

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

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Table of Contents

PART II. OTHER INFORMATION

Item 6.    Exhibits

(a)    Exhibits

Exhibit
Number

Description of Exhibit3.1

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

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

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

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

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

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

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

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

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

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


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Exhibit
Number

Description of Exhibit10.5

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)10.9

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

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

Indenture dated as of February 28, 2007, between N-Star Real Estate CDO IX Ltd., as Issuer, and LaSalle Bank National Association, as trustee (incorporated by reference to Exhibit 10.25 to NorthStar
Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2008)10.12

Junior Subordinated Indenture, dated as of March 30, 2007, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference
to Exhibit 10.46 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007)10.13

Amended and Restated Trust Agreement, dated as of March 30, 2007, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as
property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.47 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2007)10.14

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)10.15

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)


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Table of Contents

Exhibit
Number

Description of Exhibit10.16

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)10.17

Junior Subordinated Indenture, dated as of June 7, 2007, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to
Exhibit 10.52 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)10.18

Amended and Restated Trust Agreement, dated as of June 7, 2007, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as
property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.53 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007)10.19

Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership, dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to the
NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-146679))10.20

Indenture dated as of June 18, 2007, between NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp., as Guarantor, and Wilmington Trust Company, as Trustee (incorporated by
reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on June 22, 2007)10.21

Master Repurchase Agreement, dated as of August 8, 2007, by and among NRFC JP Holdings, LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.56 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)10.22

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)10.23

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Andrew C. Richardson (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)10.24

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)10.25

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Richard J. McCready (incorporated by reference to Exhibit 99.4 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)10.26

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


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Exhibit
Number

Description of Exhibit10.27

Limited Guaranty Agreement, dated as of November 6, 2007, by and among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and Wachovia Bank, National Association, as Administrative Agent
(incorporated by reference to Exhibit 10.54 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)10.28

Registration Rights Agreement relating to the 11.50% Exchangeable Senior Notes due 2013 of NRFC NNN Holdings, LLC, dated May 28, 2008 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty
Finance Corp. Registration Statement on Form S-3 (File No. 333-152545))10.29

Indenture dated as of May 28, 2008, among NRFC NNN Holdings, LLC, as Issuer, NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, and NRFC Sub-REIT Corp., as Guarantors, and
Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on May 28, 2008)10.30

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)10.31

Amendment No. 1 to Master Repurchase Agreement, dated as of October 7, 2008, by and among NRFC JP Holdings, LLC, and JP Morgan Chase Bank, N.A. (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, 2008)10.32

Amended and Restated Guarantee Agreement, dated as of October 7, 2008, made by NorthStar Realty Finance Corp., in favor of JP Morgan Chase Bank, N.A. (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, 2008)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.


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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 7, 2009

By:

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

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


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