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

FORM 10-Q

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

For the quarterly period ended June 30, 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, 68,382,300 shares outstanding as of August 4, 2009.



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NORTHSTAR REALTY FINANCE CORP.  QUARTERLY REPORT  For the Three Months and Six Months Ended June 30, 2009

TABLE OF CONTENTS



Index



PagePart I.

Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008


3Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and
June 30, 2008


4Condensed Consolidated Statements of Stockholders' Equity as of June 30, 2009 (unaudited) and December 31,
2008


5Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2009
and June 30, 2008


6Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and June 30,
2008


7Notes to the Condensed Consolidated Financial Statements (unaudited)


8Item 2.

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


46Item 3.

Quantitative and Qualitative Disclosures about Market Risk


71Item 4.

Controls and Procedures


75Part II.

Other Information


76Item 4.

Submission of Matters to a Vote of Security Holders


76Item 6.

Exhibits


76Signatures


80


2

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

June 30,
2009

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

$
105,548

$
134,039Restricted cash


156,296


163,157Operating real estatenet


1,112,434


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


221,996


221,143Real estate debt investments, net


2,008,856


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





70,606Investments in and advances to unconsolidated ventures


55,536


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


19,749


24,806Unbilled rents receivable


9,160


7,993Derivative instrument, at fair value


4,410


9,318Deferred costs and intangible assets, net


62,772


79,633Other assets


56,424


27,660Total assets

$
3,813,181

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


906,697


910,620Exchangeable senior notes


153,859


233,273Bonds payable, at fair value


397,756


468,638Credit facilities


12,182


44,881Secured term loans


402,989


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


95,747


69,617Obligations under capital leases


3,541


3,555Accounts payable and accrued expenses


19,117


27,478Escrow deposits payable


41,928


46,353Derivative liability, at fair value


58,310


87,220Other liabilities


30,235


34,424Total liabilities


2,122,361


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 June 30, 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 June 30, 2009 and
December 31, 2008, respectively


183,505


183,505Common stock, $0.01 par value, 500,000,000 shares authorized, 68,371,213 and 62,906,693 shares issued and outstanding at June 30, 2009 and
December 31, 2008, respectively


684


634Additional paid-in capital


636,054


620,028Treasury stock, 0 and 475,051 shares held at June 30, 2009 and December 31, 2008, respectively





(1,384
)Retained earnings


706,812


648,860Accumulated other comprehensive loss


(102,361
)

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


1,482,561


1,415,167Non-controlling interest


208,259


198,593Total equity


1,690,820


1,613,760Total liabilities and stockholders' equity

$
3,813,181

$
3,943,726


See accompanying notes to condensed consolidated financial statements

3

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

Three Months
Ended June 30,
2009

Three Months
Ended June 30,
2008

Six Months
Ended June 30,
2009

Six Months
Ended June 30,
2008Revenues and other income:Interest income

$
35,749

$
49,885

$
72,533

$
113,590Interest incomerelated parties


4,443


3,582


8,950


7,343Rental and escalation income


24,401


29,020


51,649


57,977Advisory and management fee incomerelated parties


1,808


6,546


3,499


8,876Other revenue


178


3,983


346


4,959Total revenues


66,579


93,016


136,977


192,745Expenses:Interest expense


31,921


46,522


66,033


101,980Real estate propertiesoperating expenses


2,806


2,037


4,933


4,085Asset management feesrelated parties


854


933


1,707


3,039Provision for loan losses


17,000


2,500


38,462


3,250General and administrative:Salaries and equity-based compensation(1)


11,235


9,925


22,845


21,655Auditing and professional fees


2,274


1,234


4,537


3,675Other general and administrative


3,464


3,532


7,046


7,415Total general and administrative


16,973


14,691


34,428


32,745Depreciation and amortization


17,382


9,977


32,196


19,915Total expenses


86,936


76,660


177,759


165,014Income (loss) from operations


(20,357
)

16,356


(40,782
)

27,731Equity in (loss)/earnings of unconsolidated ventures


159


(5,440
)

(4,259
)

(5,618
)Unrealized gain (loss) on investments and other


(616
)

(41,257
)

90,045


169,688Realized gain on investments and other


23,283


7,074


60,196


7,084Consolidated net income (loss)


2,469


(23,267
)

105,200


198,885Net income (loss) attributable to the non-controlling interests


(1,490
)

3,439


(14,355
)

(19,677
)Preferred stock dividends


(5,231
)

(5,231
)

(10,463
)

(10,462
)Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders

$
(4,252
)
$
(25,059
)
$
80,382

$
168,746Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)

$
(0.06
)
$
(0.40
)
$
1.22

$
2.69Weighted average number of shares of common stock:Basic


67,353,541


62,708,688


65,964,065


62,662,208Diluted


75,049,690


70,192,538


73,660,271


69,799,329


---

See
accompanying notes to condensed consolidated financial statements

4

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

Preferred
Stock
at Par

Shares of
Common
Stock

Common
Stock
at Par

Additional
Paid-in
Capital

Treasury
Stock

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total
NorthStar
Stockholders
Equity

Non-controlling
Interests

Total
Stockholders
EquityBalance at December 31, 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 from 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











(3,230
)










(3,230
)




(3,230
)Proceeds from dividend reinvestment and stock purchase plan





32





102











102





102Proceeds from equity distribution agreement





1,251


8


2,437


1,384








3,829





3,829Stock awards





94


1


300











301


10,163


10,464Amortization of equity based compensation





























Comprehensive loss

















(8,018
)




(8,018
)

(1,009
)

(9,027
)Conversion of OP/LTIP units





371


4


5,807











5,811


(5,811
)

Stock dividends





3,716


37


10,610








(9,608
)

1,039


(1,039
)

Cash dividends on common stock




















(12,823
)

(12,823
)




(12,823
)Cash dividends on preferred stock




















(10,462
)

(10,462
)




(10,462
)Cash distribution to non-controlling interests


























(6,993
)

(6,993
)Net income




















90,845


90,845


14,355


105,200Balance at June 30, 2009

$
100


68,371

$
684

$
877,326$

$


$
(102,361
)
$
706,812

$
1,482,561

$
208,259

$
1,690,820


See accompanying notes to condensed consolidated financial statements

5

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

Three Months
Ended June 30,
2009

Three Months
Ended June 30,
2008

Six Months
Ended June 30,
2009

Six Months
Ended June 30,
2008Consolidated net income (loss)

$
2,469

$
(23,267
)
$
105,200

$
198,885Unrealized gain (loss) on available for sale securities


(1,212
)

(2,211
)

(17,072
)

(13,755
)Change in fair value of derivatives


4,272


3,970


5,251


(2,426
)Reclassification adjustment for gains included in net income


1,398


22,508


2,795


23,763Comprehensive income


6,927


1,000


96,174


206,467Less: Comprehensive income attributable to the non-controlling interests


1,952


(611
)

13,345


20,600Comprehensive income attributable to NorthStar Realty Finance Corp

$
4,975

$
1,611

$
82,829

$
185,867


See
accompanying notes to condensed consolidated financial statements

6

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

Six Months
Ended June 30,
2009

Six Months
Ended June 30,
2008Net cash provided by operating activities

$
22,403

$
50,576Cash flows from investing activities:Acquisition of operating real estate, net





(10,604
)Improvement of operating real estate


(2,514
)

Acquisition of available for sale securities


(62,249
)

(46,757
)Proceeds from disposition of securities available for sale


63,652


6,115Available for sale securities repayments


380


2,924Originations/acquisitions of real estate debt investments


(189,293
)

(203,909
)Real estate debt investment repayments


15,165


152,799Proceeds from the sale of real estate debt investments


140,753


30,400Real estate debt investment acquisition costs


(97
)

(90
)Corporate debt investment acquisitions





(16,362
)Corporate debt investment repayments





24,985Proceeds from disposition of corporate debt investment





102,574Other loans receivable


(1,070
)

Other loans receivable repayment


3,000


10,000Restricted cash used for investment activities


(704
)

(103,988
)Acquisition deposits





(6,000
)Investment in and advances to unconsolidated ventures


(397
)

(28,733
)Distributions from unconsolidated ventures


8,857


4,000Net cash (used in) investing activities


(24,517
)

(82,646
)Cash flows from financing activities:Collateral held by broker





12,746Settlement of short sales





(12,778
)Collateral held by swap counter party


3,707


(8,880
)Mortgage principal repayments


(3,923
)

(2,337
)Borrowing under credit facilities


1,912


36,546Repayments credit facilities


(34,612
)

(112,900
)Repurchase obligation borrowings


528


2,024Repurchase obligation repayments


(703
)

(1,863
)Proceeds from bonds


71,000


65,000Bond repayments





(78,300
)Borrowing under secured term loan


1,373


62,603Secured term loan repayment


(1,884
)

(30,433
)Bond repurchases


(35,247
)

(20,628
)Payment of deferred financing costs


(153
)

(5,169
)Restricted cash from financing activities


(2,030
)

89,083Proceeds from exchangeable senior notes





80,000Proceeds from dividend reinvestment and stock purchase plan


4,061


1,599Dividends (common and preferred) and distributions


(23,287
)

(60,928
)Offering costs


(126
)

(178
)Distributions to non-controlling interest


(6,993
)

(122
)Net cash (used in) provided by financing activities


(26,377
)

15,085Net (decrease) in cash & cash equivalents


(28,491
)

(16,985
)Cash and cash equivalentsbeginning of period


134,039


153,829Cash and cash equivalentsend of period

$
105,548

$
136,844


See accompanying notes to condensed consolidated financial statements

7

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

1. Formation and Organization

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

Joint Ventures



In May 2006, the Company entered into 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. 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 was to convert its
interests to common equity.

In
June 2009, the Company restructured its net lease relationship with one of its healthcare operators to take advantage of new REIT legislation which now allows a taxable REIT
subsidiary affiliate to become the lessee of healthcare-related properties. The restructuring resulted in one of the

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)

Company's
unconsolidated affiliate Midwest Care Holdco TRS I LLC ("Midwest") becoming the lessee of the properties and Midwest simultaneously entering into a management contract with a third
party operator. The management agreement is terminable by Midwest upon 60 days notice. This new structure allows the Company to participate in operating improvements of the underlying
properties not previously available under the prior structure. The Company owns a 49% interest in Midwest and does not control the major decisions and as a result, the Company does not consolidate the
operations of Midwest. The Company's investment in Midwest will be accounted for using the equity method.

The
Company terminated two additional leases for certain other net leased senior housing assets in its Wakefield joint venture and assumed the operations of these facilities, which are
managed by an experienced third-party operator.

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 the Company refers 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

9

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

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.

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 interest 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 $0.6 million and $0.6 million and $1.3 million
and $1.2 million in the statements of operations for the three and six months ended June 30, 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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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 December 31, 2008 and for the three and six months ended June 30, 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 June 30. 2008As Originally
Reported

As Adjusted

Effect of Change in
Accounting PrincipleInterest expense

$
45,875

$
46,522

$
647Unrealized gain (loss) on investments and other


(29,661
)

(41,257
)

(11,596
)Fundraising fees, debt issuance costs and other


4,948





(4,948
)Non-controlling interests


2660


3,439


779Net income attributable to NorthStar Realty Finance Corp. common stockholders


(18,539
)

(25,059
)

(6,520
)Earnings per share

$
(0.30
)
$
(0.40
)
$
(0.10
)




Six Months Ended June 30. 2008As Originally Reported

As Adjusted

Effect of Change in Accounting PrincipleInterest expense

$
100,822

$
101,980

$
1,158Unrealized gain (loss) on investments and other


182,414


169,688


(12,726
)Fundraising fees, debt issuance costs and other


4,948





(4,948
)Non-controlling interests


(20,629
)

(19,677
)

952Net income attributable to NorthStar Realty Finance Corp. common stockholders


176,734


168,746


(7,988
)Earnings per share

$
2.82

$
2.69

$
(0.13
)


As
of June 30, 2009 and December 31, 2008, the total carrying amount of the equity components of the exchangeable senior notes was $6.0 million and
$9.2 million, respectively. The principal amount of the exchangeable senior notes liabilities was $158.2 million and $240.8 million as of June 30, 2009 and
December 31, 2008, respectively. The unamortized discount of the liability components was $4.3 million and $7.5 million at June 30, 2009 and December 31, 2008,
respectively. The net carrying amount of the liability components was $153.9 million and $233.3 million at June 30, 2009 and December 31, 2008, respectively. Interest
expense for the three and six months ended June 30, 2009 and 2008 related to the exchangeable senior notes was $5.1 million and $9.7 million and $4.6 million and
$8.3 million, respectively, of which $4.5 million and $8.4 million and $4.0 million and $7.1 million

11

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

was
related to contractual interest, respectively, and $0.6 million and $1.3 million and $0.6 million and $1.2 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 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 are effective for interim and
annual periods ending after June 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. The Company's adoption of FSP FAS 115-2 and FAS 124-2 did not have a material effect on its financial
condition, results of operations, or cash flows.

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

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
is not permitted. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The Company's adoption of FSP FAS 157-4 did not
have a material effect on its financial condition, results of operations, or cash flows.

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 is effective for interim and annual periods ending after
June 15, 2009. The Company's adoption of FSP FAS 107-1 and APB 28-1 did not have a material effect on its financial condition, results of operations, or
cash flows.

In
May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"), which establishes general standards of accounting for, and requires disclosure of, events that
occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the provisions of SFAS 165 for the quarter ended June 30,
2009. The Company's adoption of these provisions did not have a material effect on its financial condition, results of operations, or cash flows.

In
June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140" ("SFAS 166"), which
requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred
financial assets. SFAS 166 eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures.
SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of SFAS 166 will have on its financial
condition, results of operations, and disclosures.

In
June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"), which modifies how a company determines when an entity that
is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's
economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional
disclosures about a company's involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for

13

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

fiscal
years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of SFAS 167 will have on its financial condition, results of operations,
and disclosures.

In
June 2009, the FASB approved the "FASB Accounting Standards Codification" ("Codification") as the single source of authoritative nongovernmental U.S. GAAP to be launched on
July 1, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be
considered nonauthoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification will not have an impact on the Company's financial
condition or results of operations.

3. Fair Value of Financial Instruments

The Company has elected to apply the fair value option in accordance with SFAS No. 159 "The Fair Value Option" ("SFAS 159") 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 "Fair Value Measurement" ("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.

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)

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).


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

15

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

Company's
financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 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

$


$
121,827

$
37,695

$
159,522Real estate term debtN-Star








4,752


4,752Real estate term debtThird party








937


937REIT debt





26,783





26,783Term debt equityN-Star








24,441


24,441Trust preferred securities








5,561


5,561Derivative asset





4,410





4,410Corporate lending investment








14,063


14,063Total assets

$


$
153,020

$
87,449

$
240,469Liabilities:N-Star IV,VI, VII and VIII bonds payable








397,756

$
397,756Liability to subsidiary trusts issuing preferred securities








95,747


95,747Derivative liability





58,310





58,310Total liabilities

$


$
58,310

$
493,503

$
551,813


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

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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)

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


(1,624
)

(4,078
)

71,192Less: total losses (realized or unrealized):Included in earnings


24,905


29,858Included in other comprehensive loss


15,275Plus: total gains (realized or unrealized):Included in earnings


14,283





142,074


(26,130
)Included in other comprehensive loss


285








Ending balance

$
73,671

$
14,063

$
397,756

$
95,747The 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

$
10,622

$
29,858

$
142,074

$
(26,130
)


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

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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:

June 30, 2009

December 31, 2008Financial Instruments, at Fair ValueAssets:Available for sale securities:CMBS

$
159,522

$
124,595Real estate term debtN-Star


3,615


5,236Real estate term debtThird party


937


1,322REIT debt


26,783


44,936Trust preferred securities


5,561


4,488Corporate lending investment


14,063


47,999Total assets

$
210,481

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


397,756


468,638Liability to subsidiary trusts issuing preferred securities


95,747


69,617Total liabilities

$
493,503

$
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
June 30,
2009

Amount
Due Upon
Maturity

DifferenceAssets:Available for sale securities:CMBS

$
159,522

$
684,938

$
(525,416
)Real estate term debtN-Star


3,615


42,541


(38,926
)Real estate term debtThird party


937


16,747


(15,810
)REIT debt


26,783


34,183


(7,400
)Trust preferred securities


5,561


15,000


(9,439
)Total assets

$
196,418

$
793,409

$
(596,991
)Liabilities:N-Star IV,VI, VII and VIII bonds payable


397,756


1,679,445


(1,281,689
)Liability to subsidiary trusts issuing preferred securities


95,747


280,133


(184,386
)Total Liabilities

$
493,503

$
1,959,578

$
(1,466,075
)


At
June 30, 2009, the basis in the Company's corporate lending investment was $73.9 million. The Company has elected the fair market value option pursuant to
SFAS 159 for this investment which is

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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)

accounted
for under the equity method of accounting. The fair market value of the Company's investment at June 30, 2009 was $14.1 million.

For
the three and six months ended June 30, 2009 and 2008, the Company recognized a net loss of $6.7 million and $73.9 million and a net gain of $82.5 million
and $169.2 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 $115.9 million for the six months ended June 30, 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 ("WaMu"). The tenant vacated the building as of March 23, 2009, and the lease was terminated. The assets are financed with a
non-recourse $42.9 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 not expect the transfer to materially impact its income statement.

19

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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)

5. Available for Sale Securities

The following is a summary of the Company's available for sale securities at June 30, 2009 and December 31, 2008:

June 30, 2009

Carrying
Value

SFAS 159
Transition
Adjustment

Losses in
Accumulated
OCI

Cumulative
Unrealized Loss
on Investments

Estimated
Fair
Value(1)CMBS

$
471,088

$
(64,963
)
$


$
(246,603
)
$
159,522Real estate term debtN-Star


51,217


(17,616
)

(13,662
)

(15,187
)

4,752Real estate term debtThird party


16,348


(3,896
)




(11,515
)

937REIT debt


33,829


(2,276
)




(4,770
)

26,783Term debt equityN-Star


72,253





(47,812
)




24,441Trust preferred securities


15,000


(2,736
)




(6,703
)

5,561Total

$
659,735

$
(91,487
)
$
(61,474
)
$
(284,778
)
$
221,996


---

At
June 30, 2009, the maturities of the available for sale securities ranged from one to 44 years.

During
the three and six months ended June 30, 2009, proceeds from the sale and redemption of available for sale securities was $47.2 million and $63.7 million,
respectively and the realized gain on sale was $15.2 million and $17.7 million, respectively.

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 June 30, 2009 and December 31, 2008, the Company held the following real estate debt investments:

June 30, 2009

Carrying
Value(1)

Allocation By
Investment Type

Average
Fixed Rate

Average Spread
Over LIBOR

Number of
InvestmentsWhole loans, floating rate

$
1,023,370


50.9
%


%

2.82
%

53Whole loans, fixed rate


93,336


4.6


7.54





8Subordinate mortgage interests, floating rate


188,101


9.4





6.73


11Subordinate mortgage interests, fixed rate


24,528


1.2


7.50





2Mezzanine loans, floating rate


502,078


25.0





4.39


18Mezzanine loan, fixed rate


156,307


7.8


9.60





13Other loansfloating


15,358


0.8





1.61


2Other loansfixed


5,778


0.3


5.53





1Total/Weighted average

$
2,008,856


100.0
%

8.64
%

3.69
%

108


---

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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 June 30, 2009 are as follows:

Years Ending December 31:

Initial
Maturity(1)

Maturity
Including
Extensions2009 (remainder)

$
553,642

$
107,3922010


724,895


313,8762011


164,402


551,3192012


349,965


635,8722013





184,445Thereafter


277,634


277,634Total

$
2,070,538

$
2,070,538






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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)

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.

On
June 30, 2009, the Company received $23.6 million of cash proceeds relating to the repayment of a $27.4 million first mortgage loan backed by a data center
property bearing interest at LIBOR + 4.5% and having a February 2012 final maturity date. The Company agreed to the discounted payoff of its loan on this niche asset for the economic and
credit risk benefits. Accordingly, for the second quarter 2009, the Company recorded a $3.8 million credit loss relating to this discounted payoff.

Non-Performing Loans and Provision for Loan Losses



As of June 30, 2009, the Company had four non-performing loans totaling $73.0 million which consisted of a
first mortgage having a principal balance of $21.3 million and a maturity date of October 1, 2008, a junior participation in a first mortgage having a principal balance of
$28.5 million and a maturity date of March 1, 2009, a first mortgage having a principal balance of $13.8 million and a maturity date of April 1, 2009 and a mezzanine loan
having a principal balance of $9.4 million and a maturity date of August 1, 2009, representing approximately 3.5% 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 less reserves taken.

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)

6. Real Estate Debt Investments (Continued)



For the three and six months ending June 30, 2009, the Company recorded a $17.0 million and $38.5 million credit
loss provision relating to eight and 13 loans, respectively. As of June 30, 2009, the loan loss reserves totaled $49.7 million.

7. 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 June 30, 2009 and December 31, 2008, the Company had an
investment in CS/Federal of approximately $7.0 million and $7.3 million, respectively. The Company recognized equity in earnings of $0.1 million and $0.2 million for each
of the three and six months ended June 30, 2009 and June 30, 2008, respectively.

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 June 30, 2009,

24

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

the
fair market value of the Company's investment in the corporate lending venture was $14.1 million. For the three and six months ended June 30, 2009, the Company recognized an
unrealized loss of $4.6 million and $29.9 million related to the fair value adjustment on its equity investment, respectively. 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
June 30, 2009 and December 31, 2008, the Company's investment in the Securities Fund was $19.4 million and $29.3 million, respectively, representing a
49.2% and 53.1% interest in the Securities Fund, respectively.

For
the three and six months ended June 30, 2009 and 2008, the Company recognized equity in losses of $3.1 million and $5.0 million and $5.4 million and
$5.6 million, respectively. The Company also earned
$0.1 million and $0.2 million and $0.1 million and $0.3 million in management fees from the Securities Fund for the three and six months ended June 30, 2009 and
2008, respectively.

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 June 30, 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 and six months ended June 30, 2009 and 2008, the Company recognized equity in loss of $0.4 million and $1.1 million and $2.8 million and
$1.6 million, respectively, which consisted primarily of general and administrative expenses. At June 30, 2009 and December 31, 2008, LandCap has made investments totaling
$39.1 million. In addition, the Company advanced approximately $4.9 million

25

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

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.

Midwest Care Holdco TRS I LLC

In June 2009, the Company restructured its net lease relationship with one of its healthcare operators to take advantage of new REIT
legislation which now allows a taxable REIT subsidiary affiliate to become the lessee of healthcare-related properties. The restructuring resulted Midwest becoming the lessee of the properties and
Midwest simultaneously entering into a management contract with a third party operator. This new structure allows the Company to participate in operating improvements of the underlying properties not
previously available under the prior structure. The Company owns a 49% interest in Midwest and does not control the major decisions and as a result, the Company does not consolidate the operations of
Midwest. The Company recognized equity in earnings of $3.3 million for the three and six months ended June 30, 2009.

8. 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 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.

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)

8. Variable Interest Entities (Continued)

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 June 30, 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 June 30, 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 collateralized debt obligations, also referred to as 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 is accounted for as a single debt security available for sale pursuant to EITF 99-20. During the first quarter, two of the
Company's term debt transactions experienced a credit loss on a security whose issuer filed for bankruptcy. The Company reviewed the equity notes for impairment and determined base upon its analysis
that no impairment existed at June 30, 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

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)

8. Variable Interest Entities (Continued)

potential
losses in the Company's off balance sheet term debt transactions is limited to the amortized cost of its investment of $108.9 million at June 30, 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 June 30, 2009 and December 31, 2008:

CollateralJune 30, 2009

Term NotesJune 30, 2009Issuance

Date
Closed

Par Value
of Collateral

Weighted
Average
Interest Rate

Weighted
Average Expected
Life (years)(1)

Outstanding
Term Notes(2)

Weighted
Average
Interest Rate

Stated
MaturityN-Star IV

6/14/2005

$
339,214


4.75
%

1.82

$
292,500


0.92
%
7/1/2040N-Star VI

3/17/2006


374,481


5.69


2.08


303,700


1.15

6/1/2041N-Star VII

6/22/2006


672,877


4.97


7.27


499,200


0.66

6/22/2051N-Star VIII

12/6/2006


788,348


5.32


1.84


584,045


0.81

2/1/2041Total



$
2,174,920


5.14
%

3.56

$
1,679,445


0.84
%


---

CollateralDecember 31, 2008

Term NotesDecember 31, 2008Issuance

Date
Closed

Par Value
of Collateral

Weighted
Average
Interest Rate

Weighted
Average Expected
Life (years)

Outstanding
Term
Notes(2)

Weighted
Average
Interest Rate

Stated
MaturityN-Star IV(1)

6/14/2005

$
346,996


6.93
%

1.71

$
292,500


1.08
%
7/1/2040N-Star VI(1)

3/17/2006


385,251


7.26


2.11


292,700


2.45

6/1/2041N-Star VII(1)

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
%


---



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

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)

8. Variable Interest Entities (Continued)

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 June 30, 2009 and December 31, 2008:

CollateralJune 30, 2009

Term NotesJune 30, 2009Issuance

Date
Closed

Par Value
of Collateral

Weighted
Average
Interest Rate

Weighted
Average Expected
Life (years)

Outstanding
Term
Notes(1)

Weighted
Average
Interest Rate

Stated
MaturityN-Star I(2)


8/21/2003

$
284,449


6.60
%

4.24

$
267,056


6.21
%

8/01/2038N-Star II


7/01/2004


299,151


6.22


5.00


268,241


5.50


6/01/2039N-Star III


3/10/2005


421,309


3.60


5.36


358,446


4.19


6/01/2040N-Star V


9/22/2005


569,671


4.98


5.84


456,319


4.42


9/05/2045Total




$
1,574,580


5.14
%

5.26

$
1,350,062


4.93
%


---

CollateralDecember 31, 2008

Term NotesDecember 31, 2008Issuance

Date
Closed

Par Value
of Collateral

Weighted
Average
Interest Rate

Weighted
Average Expected
Life (years)

Outstanding
Term
Notes(1)

Weighted
Average
Interest Rate

Stated
MaturityN-Star I(2)


8/21/2003

$
299,316


6.60
%

4.16

$
278,000


6.37
%

8/01/2038N-Star II


7/01/2004


331,242


6.17


4.77


295,098


5.51


6/01/2039N-Star III


3/10/2005


410,188


5.70


4.11


358,556


4.88


6/01/2040N-Star V


9/22/2005


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
%


---

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)

9. Borrowings

The following is a table of the Company's outstanding borrowings as of June 30, 2009 and December 31, 2008:

Initial
Stated
Maturity

Maximum
Maturity
Including
Extensions

Interest
Rate

Maximum
Amount
Available

Contractual
Balance at
June 30,
2009

Contractual
Balance at
December 31,
2008Credit FacilitiesJP Facility

8/8/2009

8/8/2009

LIBOR + .80% to 1.80%

$
150,000

$
12,182

$
44,881Total Credit Facilities








150,000


12,182


44,881Term LoansWA Term Loan(1)

11/6/2009

11/6/2010

LIBOR + 2.00%


467,207


277,087


276,143Euronote

11/6/2009

11/6/2010

3 month Euribor + 2.0%


102,567


102,567


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


415,171


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

5/1/2015



5.65%





42,878


42,923Salt Lake City

9/1/2012



5.16%





15,668


15,862EDS

10/8/2015



5.37%





47,339


47,698Executive Center(2)

1/1/2016



5.85%





51,480


51,480Green Pond

4/11/2016



5.68%





17,230


17,341Indianapolis

2/1/2017



6.06%





28,307


28,472Wakefield GE

8/30/2010



6.93%





66,751


67,269WakefieldPark National

1/11/2014



5.94%





33,137


33,300WakefieldGEWLK

1/11/2017



6.49%





159,136


160,000WakefieldGETusc & Harmony

1/11/2017



6.59%





7,840


7,875WakefieldHarmony FNMA

2/1/2017



6.39%





75,000


75,000WakefieldGrove City

2/1/2038



5.45%





1,848


1,862WakefieldLancaster

6/1/2037



6.40%





2,588


2,605WakefieldMarysville

6/1/2037



6.40%





1,662


1,673WakefieldWashington

10/1/2038



6.65%





1,964


1,975WakefieldMiller Merril

6/30/2012



7.07%





119,188


116,000WakefieldARL Mob Wachovia

5/11/2017



5.89%





3,409


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%





33,169


33,329DSG

10/11/2016



6.17%





34,017


34,237Keene

2/1/2016



5.85%





6,741


6,790Fort Wayne

1/1/2015



6.41%





3,440


3,480Portland

6/17/2014



7.34%





4,740


4,825Milpitas

3/6/2017



5.95%





22,329


22,548Fort Mill

4/6/2017



5.63%





27,700


27,700Reading

1/1/2015



5.58%





14,031


14,153Reading

1/1/2015



6.00%





5,000


5,000Alliance

12/6/2017



6.48%





23,650


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

5/1/2014



6.64%





9,191


9,310Fort Mill

4/6/2017



6.21%





2,864


2,985Exchangeable Senior Notes(3)

6/15/2027



7.25%





78,165


160,800Exchangeable Senior Notes ("NNN Notes")(3)

6/15/2013



11.50%





80,000


80,000Repurchase obligations

Varies



LIBOR varies








176


30

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

Initial
Stated
Maturity

Maximum
Maturity
Including
Extensions

Interest
Rate

Maximum
Amount
Available

Contractual
Balance at
June 30,
2009

Contractual
Balance at
December 31,
2008Bonds payable(4)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)





584,045


524,045Liability to subsidiary trusts issuing preferred securities(4)(5)Trust I

3/30/2035



8.15%





41,240


41,240Trust II

6/30/2035



7.74%





25,780


25,780Trust III

1/30/2036



7.81%





41,238


41,238Trust IV

6/30/2036



7.95%





50,100


50,100Trust V

9/30/2036



3 month LIBOR
2.70%





30,100


30,100Trust VI

12/30/2036



3 month LIBOR
2.90%





25,100


25,100Trust VII

4/30/2037



3 month LIBOR
2.50%





31,475


31,475Trust VIII

7/30/2037



3 month LIBOR
2.70%





35,100


35,100$
3,439,611

$
3,488,962


---

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of June 30, 2009:

Total

Mortgage and
Mezzanine
Loans

Credit
Facilities

Secured Term
Loans(1)

Liability to
Subsidiary
Trusts Issuing
Preferred
Securities(2)

Exchangeable
Senior
Notes(2)

Repurchase
Obligations

Bonds
Payable(1)2009

$
396,870

$
5,034

$
12,182

$
379,654

$


$


$


$
2010


117,304


93,969





23,335











2011


12,890


12,890

















2012


245,144


166,979











78,165





2013


91,891


11,891











80,000





Thereafter


2,575,512


615,934








280,133








1,679,445Total

$
3,439,611

$
906,697

$
12,182

$
402,989

$
280,133

$
158,165

$


$
1,679,445


---

At June 30, 2009, the Company was in compliance with all covenants under its borrowings.



During the three and six months ended June 30, 2009, the Company repurchased approximately $21.6 million and
$82.6 million of its 7.25% exchangeable senior notes for a total of $9.4 million and $35.2 million, respectively, The Company recorded a net realized gain of $11.9 million
and $46.2 million in connection with the repurchase of its notes for the three and six months ended June 30, 2009, respectively. The repurchases for the three and six months ended
June 30, 2009 represented a $12.2 million and $47.4 million discount to the par value of the debt, respectively.

10. 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 $1.8 million and $6.4 million and $3.4 million and $8.6 million
for the three and six months ended June 30, 2009 and 2008, respectively.

The
Company has an agreement with the Securities Fund to receive base management fees ranging from 1.0% to 2.0% per year on third-party capital. For the three months ended
June 30, 2008, the Company earned $0.1 million in management fees. For the six months ended June 30, 2009 and 2008, the Company earned $0.1 million and $0.3 million,
respectively, in management fees.

32

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

10. Related Party Transactions (Continued)

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc., an affiliate of Chain
Bridge, to perform certain management services. The Company incurred $0.9 million and $1.7 million in management fees for each of the three and six months ended June 30, 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 $1.3 million in management fees for the six months ended June 30, 2008, which are recorded in asset management
fees-related parties in the condensed consolidated statement of operations.

11. Equity-Based Compensation

Omnibus Stock Incentive Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock
Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock
options, and stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests
("LTIP Units") or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company and, prior to October 29,
2005, employees pursuant to the shared facilities and services agreement. An aggregate of 8,933,038 shares of common stock of the Company are currently reserved and authorized for issuance under the
Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. As of June 30, 2008, the Company has issued an aggregate of 8,283,340 LTIP Units, net of
forfeitures of 60,368 LTIP Units. An aggregate of 898,343 LTIP Units were converted to commons stock and 468,064 shares of common stock were issued pursuant to the Stock Incentive Plan. Of the
8,283,340 LTIP Units, so long as the recipient continues to be an eligible recipient, 5,015,942 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 agreements provided to employees. In addition, the LTIP Unit
holders are entitled to dividends on the entire grant beginning on the date of the grant.

The
Company has recognized compensation expense of $4.9 million and $5.2 million and $9.9 million and $10.1 million for the three and six months ended
June 30, 2009 and 2008, respectively. As of June 30, 2009, there were approximately 4,221,723 unvested LTIP Units and 170 LTIP Units were forfeited during the period. The related
compensation expense to be recognized over the remaining

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity-Based Compensation (Continued)

vesting
period of the Omnibus Incentive Plan LTIP grants is $29.9 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 and $0.3 million for the three months ended June 30, 2009 and 2008,
respectively, and $0.2 million and $0.6 million for the three and six months ended June 30, 2009 and 2008, respectively. The remaining compensation expense to be recognized over
the next six quarters is $0.4 million.

The
status of all of the LTIP grants as June 30, 2009 and December 31, 2008 is as follows:

June 30, 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


(371
)

9.92


(895
)

9.51Forfeited








(55
)

9.42Ending balance(2)


7,696

$
9.86


8,067

$
9.86


---

12. Stockholders' Equity

Common Stock

In May 2009, the Company issued 94,045 shares of common stock with a fair value at the date of grant of $0.3 million to its
Board of Directors as part of their annual grants.

In
April 2007, the Company implemented a Dividend Reinvestment and Stock Purchase Plan (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%.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

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 and six months ended June 30, 2009, the Company issued a total of approximately 27,062 and 32,030 common shares,
respectively, pursuant to the Plan.

Equity Distribution Agreements

In May 2009, the Company entered into an equity distribution agreement with JMP Securities LLC ("JMP"). In accordance with the
terms of the agreement, the Company may offer and sell up to 10,000,000 shares of its common stock from time to time through JMP. JMP will receive a commission from the Company of up to 2.5% of the
gross sales price of all shares sold through it under the equity distribution agreement. As of June 30, 2009, the Company sold 1,251,628 common shares and received $4.0 million of cash
proceeds pursuant to its equity distribution agreement with JMP.

For
the six months ending June 30, 2009, the Company did not sell any common shares pursuant to its May 2008 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 its
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 six months ended June 30, 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.

On
January 20, 2009, the Company declared a cash dividend of $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The
dividends were paid on February 16, 2009 to the stockholders of record as of the close of business on February 6, 2009.

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 were paid on May 15, 2009 to the stockholders of record as of the close of business on May 5, 2009.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

Earnings Per Share

Earnings per share for the three and six months ended June 30, 2009 and 2008 is computed as follows:

Three Months
Ended June 30,
2009

Three Months
Ended June 30,
2008

Six Months
Ended June 30,
2009

Six Months
Ended June 30,
2008Numerator (Income)Basic EarningsNet income (loss) available to common stockholders

$
(4,252
)
$
(25,059
)
$
80,382

$
168,746Effect of dilutive securities:Income (loss) allocated to non-controlling interest


(486
)

(2,991
)

9,915


19,880Dilutive net income available to stockholders

$
(4,738
)
$
(28,050
)
$
90,297

$
188,626Denominator (Weighted Average Shares)Basic Earnings:Shares available to common stockholders


67,354


62,709


65,964


62,662Effect of dilutive securities:OP/LTIP units


7,696


7,484


7,696


7,137Dilutive Shares


75,050


70,193


73,660


69,799


The
earnings per share calculation takes into account the conversion of LTIP units into common shares. The LTIPS convert on a one-for-one basis into commons
shares and share equally in the Company's earnings. Depending on the timing of LTIP conversions and the amount of LTIPS converted, relative to the timing of the Company's earnings allocated to the
LTIP non-controlling interest, and the weighting of the common shares, the LTIP conversions may result in an anti-dilutive effect on earnings per share. For the six months
ended June 30, 2009 the LTIP conversion were anti-dilutive..

13. Non-controlling Interest

Operating Partnership

Non-controlling interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership
held by limited partners (the "Unit Holders"). Income allocated to the non-controlling interest is based on the Unit Holders ownership percentage of the Operating Partnership. The
ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total number of dilutive shares. The issuance of additional shares of beneficial interest (the
"Common Shares" or "Share") or OP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option of the Company,
it is deemed to be equivalent to a Share. Therefore, such transactions are treated as

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

13. Non-controlling Interest (Continued)

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
June 30, 2009 and December 31, 2008, non-controlling interest related to the aggregate limited partnership units of 7,696,093 and 8,067,211, represented a 10.12% and 11.37%
interest in the Operating Partnership, respectively. Income/(loss) allocated to the operating partnership non-controlling interest for the three and six months ended June 30, 2009
and 2008 was a loss of $0.5 million and a loss of $3.0 million and $9.9 million and $19.9 million, respectively.

Joint Ventures

On July 9, 2008, Wakefield sold a $100 million convertible preferred membership interest to Inland American Real Estate
Trust, Inc. The Wakefield joint venture is consolidated in the condensed consolidated financial statements with Inland American's and Chain Bridge's equity treated as
non-controlling interests. Income allocated to the joint venture's non-controlling interest for the three months and six ended June 30, 2009 and 2008 was
$2.0 million and a loss of $0.4 million and $4.4 million and a loss of $0.2 million, respectively.

14. Risk Management and Derivative Activities

Derivatives

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

The
effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is
subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 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 and six months ended June 30,
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 the remainder of 2009, the Company estimates that an additional $5.6 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)

14. 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 June 30, 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 June 30, 2009


10


90,749


(8,672
)
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 June 30, 2009 and 2008, the Company recorded, in earnings, a mark-to-market unrealized gain
of $7.4 million and $33.4 million and a $1.4 million and $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying
interest rate swaps, respectively. For the six months ended June 30, 2009 and 2008, the Company recorded, in earnings, a mark-to-market unrealized gain of
$10.4 million and $3.1 million and a $2.8 million and $2.6 million reclassification from accumulated other comprehensive income for the non-qualifying interest
rate swaps, respectively.

The
following tables summarize the Company's derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of June 30, 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 June 30, 2009


24


1,396,879


(45,229
)
0.54% - 5.63%

October 2009 - June 2018As of December 31, 2008


24


1,396,879


(63,979
)
0.54% - 5.63%

October 2009 - June 2018


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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)

14. Risk Management and Derivative Activities (Continued)

The following table presents the fair value of the Company's derivative financial instruments as well as their classification on its balance sheet
as of June 30, 2009 and December 31, 2008.

Tabular Disclosure of Fair Values of Derivative Instruments

Asset Derivatives

Liability DerivativesAs of June 30,
2009

As of December 31,
2008

As of June 30,
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

$
(8,672
)
Derivative liability, at fair value

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



$




$




$
(8,672
)


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

Derivative instrument, at fair value

$
4,410

Derivative instrument, at fair value

$
9,318

Derivative liability, at fair value

$
(49,639
)
Derivative liability, at fair value

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



$
4,410



$
9,318



$
(49,639
)


$
(73,297
)


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

The following tables present the effect of the Company's derivative financial instruments on its statement of operations for the three and six
months ended June 30, 2009 and 2008:

Derivatives is SFAS 133 Cash Flow Hedging Relationships

Location of Gain/(loss)
recognized in income

Three Months
Ended
June 30,
2009

Three Months
Ended
June 30,
2008

Six Months
Ended
June 30,
2009

Six Months
Ended
June 30,
2009Interest rate productsAmount of Gain or (loss) in OCI on Derivative on OCI (Effective Portion)

n/a

$
3,252

$
3,468

$
3,253

$
(3,381
)Amount of Gain or (loss) reclassified from accumulated OCI into Income (Effective Portion)

Interest Expense

$
7

$
7

$
14

$
14


Derivatives Not Designated as Hedging Instruments Under SFAS 133

Location of Gain/(loss)
recognized in income

Three Months
Ended
June 30,
2009

Three Months
Ended
June 30,
2008

Six Months
Ended
June 30,
2009

Six Months
Ended
June 30,
2009Interest rate productsAmount of Gain or (loss) recognized in income

Unrealized gain (loss) on investment and other

$
7,445

$
33,437

$
10,385

$
3,133Amount of Gain or (loss) reclassified from accumulated OCI into Income

Unrealized gain (loss) on investment and other

$
(1,405
)
$
(1,404
)
$
(2,809
)
$
(2,651
)


At June 30, 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 51.2% and 51.4%, respectively of the Company's
rental and escalation revenue for the three and six months ended June 30, 2009 is generated from two tenants in the Company's healthcare net lease portfolio. The

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

Company
believes the remainder of its net lease portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

15. Segment Reporting

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

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

The
Company's real estate securities segment is focused on investing in a wide range of commercial real estate debt securities, including 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

15. Segment Reporting (Continued)

The
following table summarizes segment reporting for the three and six months ended June 30, 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 endedJune 30, 2009

$
25,853

$
10,026

$
16,356

$
17,486

$
(3,142
)
$
66,579June 30, 2008


43,573


13,013


19,164


16,081


1,185


93,016Consolidated net income for the three months endedJune 30, 2009


944


(1,856
)

47,157


(7,846
)

(35,930
)

2,469June 30, 2008


(7,992
)

(2,621
)

29,221


2,137


(44,012
)

(23,267
)Consolidated net income (loss) after non-controlling interests and before preferred dividend for the three months endedJune 30, 2009


847


(1,666
)

42,321


(9,820
)

(30,703
)

979June 30, 2008


(7,390
)

(2,514
)

26,134


2,084


(38,143
)

(19,828
)Total revenues for the six months endedJune 30, 2009


54,078


21,184


31,687


33,601


(3,573
)

136,977June 30, 2008


88,201


26,077


34,013


32,128


12,326


192,745Consolidated net income for the six months endedJune 30, 2009


90,448


(9,477
)

70,578


(8,451
)

(37,898
)

105,200June 30, 2008


226,374


(3,883
)

1,969


1,513


(27,088
)

198,885Consolidated net income (loss) after non-controlling interests and before preferred dividend for the six months endedJune 30, 2009


80,556


(8,453
)

63,179


(12,890
)

(31,547
)

90,845June 30, 2008


202,238


(3,529
)

1,759


1,412


(22,672
)

179,208Total assets as ofJune 30, 2009


2,223,811


499,668


263,677


718,447


107,578


3,813,181December 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)

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

A summary of non-cash investing and financing activities for the six months ended June 30, 2009 and 2008 is presented below:

2009

2008Real estate debt investment pay-down due from servicer


32,701


1,646Write-off of deferred financing cost in connection with FAS 159 implementation





29,725Initial mark-to-market adjustment in connection with FAS 159 implementation





(314,011
)Minority Interest buy-out





(1,566
)Contribution of book value of assets to unconsolidated joint venture





112,097Allocate proceeds from exchangeable notes to equity in connection with APB14-1 retroactive adjustment





(3,100
)Allocate payment of deferred financing costs to cost of capital in connection with APB 14-1 retroactive adjustment





191Stock dividend


10,646





17. Fair Value of Financial Instruments

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

As
of June 30, 2009 cash equivalents, accounts receivable, accounts payable, repurchase agreements with major banks and securities firms and the master repurchase agreement
balances reasonably approximate their fair values due to the short-term maturities of these items. The available for sale securities and securities sold, not yet purchased are carried on
the balance sheet at their estimated fair value.

For
the real estate debt investments the fair value of the fixed and floating rate investments was approximated comparing yields at which the investments are held to estimated yields at
which loans originated with similar credit risks or market yields at which a third party might require to purchase the investment by discounting future cash flows at such market yields. Prices were
calculated to the "worst" assuming fully extended maturities regardless of if structural or economic tests required to achieve such extended maturities. At June 30, 2009 the fair market value
was $1.7 billion with a gross carrying amount of $2.1 billion.

For
the exchangeable senior notes the Company uses available market information, which includes quoted market prices or recent transactions, if available to estimate their fair value. At
June 30, 2009 the fair market value of the 7.25% exchangeable senior notes was $36.3 million with a carrying amount

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

17. Fair Value of Financial Instruments (Continued)

of
$76.4 million and the fair market value of the 11.50% exchangeable senior notes was $39.2 million with a carrying amount of $77.4 million.

For
fixed rate mortgage loans payable the Company uses rates currently available to them with similar terms and remaining maturities to estimate their fair value. At June 30, 2009
the fair market value was $919.2 million with a carrying amount of $906.7 million.

Disclosure
about fair value of financial instruments is based on pertinent information available to management as of June 30, 2009. Although management is not aware of any factors
that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair
value may differ significantly from the amounts presented herein.

18. Subsequent Events

The Company has evaluated subsequent events through August 4, 2009, which is the date these financial statements were issued.

Dividends

On July 21, 2009, the Company declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A
preferred stock and $0.51563 per share of Series B preferred stock. The dividends will be paid on August 14, 2009 to the stockholders of record as of the close of business on
August 4, 2009.

Debt Repurchases

During July 2009, the Company repurchased $10.0 million of its 7.25% exchangeable senior notes and $18.3 million of its
11.50% exchangeable senior notes for a total purchase price of $14.4 million. The Company recorded a realized gain of approximately $12.9 million in connection with the repurchase of its
notes.

Incentive Compensation Plan

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

The
incentive pool will be divided into the following three separate incentive compensation components: (1) an annual cash bonus, tied to annual performance of the Company and
paid after year end at or around completion of the year end audit; (2) a deferred cash bonus, determined based on the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

18. Subsequent Events (Continued)

same
year's performance, but paid 50% following the close of each of the first and second years after such incentive pool is determined, subject to the participant's continued employment through each
payment date; and (3) a long-term incentive, paid at the end of a three-year period based on the Company's achievement of cumulative performance goals for the
three-year period, subject to the participant's continued employment through the payment date. Performance goals for each component will be set by the Committee initially upon the adoption
of the Plan and at the beginning of each subsequent calendar year for each new cycle. The goals will generally be divided into five distinct ranges of performance, each of which will correspond to a
pay-out level equal to a percentage (0%, 25%, 50%, 75% or 100%) of a participant's pool allocation for such component.

The
annual bonus component for 2009 will be calculated based on AFFO and liquidity targets (weighted 50% and 25%, respectively) with the remaining 25% of the 2009 annual bonus determined
in the Committee's discretion. The deferred bonus component will be calculated based on the same performance measures as the annual bonus, but paid as described above. For the long-term
incentive component, each participant will initially be granted a number of restricted stock units determined by dividing the value of the participant's pool allocation for this component by the
20-day average closing price of the Company's common stock at the end of the first year of the grant cycle (such amount, the "Initial Long-Term Allocation"). Upon the
conclusion of the three-year performance period, the participant will receive a payout equal to the value of one share of common stock at the time of such payout, with respect to a share
of common stock during the three-year performance period, for each unit actually earned based on the Company's achievement of cumulative AFFO and/or a stock price goal during the
performance period (the "Long-Term Payout"). The Long-Term Payout will be made in the form of shares of common stock to the extent available under the Company's equity
compensation plans or, if all or a portion of such shares are not
available, in cash; provided, that the amount of cash paid to any participant with respect to the 2009 long-term incentive component shall not exceed such participant's Initial
Long-Term Allocation. For the three-year performance period ending December 31, 2011, the stock price goal is $8.21 per share.

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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 through the Troubled
Asset Relief Program, or TARP, into banking institutions and purchased commercial paper from corporations.

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In
February 2009, the U.S. Government ratified a nearly $800 billion economic stimulus package and in March announced the Public-Private Investment Program, or PPIP, to introduce
up to $1 trillion of 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, and the CMBS market initially 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, as well as a reported nearly 100 other potential PPIP managers filed
an application with the U.S. Government to be one of its approved fund managers, but NorthStar was not one of the initial handful selected.

In
June 2009, the Term Asset Lending Facility ("TALF"), a financing facility for asset-backed securities established by the U.S. Federal Reserve in late 2008, began accepting commercial
real estate securities as assets eligible for financing. The Federal Reserve indicated that securities issued in 2009 and having a AAA rating would be considered eligible for financing, subject to the
Fed's final approval of individual assets. To-date, it appears that several banks may be working on new loans whose AAA rated securities would be eligible for TALF financing, but none have
yet been completed.

During
the second quarter 2009, several banks were permitted by the U.S. Government to repay their TARP equity investments, but other very large institutions (e.g., Bank of
America and Citigroup, among others) were not deemed healthy enough to repay their TARP capital. Although repayment of the government investment was considered a sign of financial strength, those who
repaid their TARP funds remain cautious in committing new capital to real estate in an uncertain economic environment. Despite the TARP repayments, the overall U.S. banking sector remains under
stress, with 69 banks seized by the FDIC in 2009 to date. In addition, neither the legacy loans nor securities programs formed under the PPIP have resulted in any material investment activity and the
legacy loans program has been put on hold. As a result, capital for commercial real estate remains extremely scarce and continued declines in macroeconomic conditions and employment are resulting in
worsening credit performance across commercial real estate and many other sectors.



Virtually all commercial real estate property types have been adversely impacted by this prolonged economic recession and liquidity
crisis. Property types that were 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 were immediately impacted by changing economic conditions because revenues are generated on a nightly basis, based on room rates and
occupancy. Business and leisure travel continues to decline 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. Our credit loss provisioning levels are higher than in the past due to the impact of
these conditions on the cash flow performance of the collateral properties underlying our loans. 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 June 30, 2009 is 0.3%, 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

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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 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 for amortization of bank debt. Our business plan assumes that the gains from
repurchasing our debt securities at discounts to par more than offsets credit losses during the same period.

Approximately
$4.0 billion of our collateralized debt obligations, also referred to as 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

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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 $379.7 million
at June 30, 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 bank loan into our term debt transactions,
providing match funded financing for these assets. Approximately $553.6 million of our funded loan commitments have their initial maturity date in the remainder of 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.

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 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 and additional credit ratings downgrades 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.

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

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

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

As
of June 30, 2009, our loan portfolio had the following credit statistics:

Number of
Loans

Dollar
Value

Percent of Total Loan
PortfolioNon-performing loans(1)


4

$
73,046


3.53
%Loan loss reserves


13

$
49,662


2.40
%


---

As
of June 30, 2009, our loan portfolio principal and interest aging is as follows (inclusive of our non-performing loans):

1 - 30 Days

31 - 60 Days

61 - 90 Days

90 + Days$
921

$
663

$
430

$
64,730


During
the three and six month period ending June 30, 2009, we recorded $17.0 million and $38.5 million of credit loss provisions relating to eight and 13 loans,
respectively, and had no foreclosures or (reversals of prior period reserves). As of June 30, 2009, loan loss reserves totaled $49.7 million. At June 30, 2009, we had three loans
totaling $63.6 million on non-performing status due to maturity defaults and one loan totaling $9.4 million on non-performing status due to a payment

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delinquency
of greater than 90 days. 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 June 30, 2009, we have a $5.0 million loan loss reserve for this loan, and continue to negotiate 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 2009 extension, and the A-Note
holder is leading restructuring discussions with the borrower. The borrower also has existing recourse obligations to make scheduled amortization payment. At June 30, 2009, we have a
$8.0 million loan loss reserve for this loan. The third non-performing loan which we fully reserved against, is a $9.4 million mezzanine loan backed by a multi-family
development site in Washington D.C. The fourth non-performing loan is a $13.8 million first mortgage loan secured by a condo development site in Manhattan which has the same sponsor
as the $21.3 million non-performing loan previously discussed. There is a $2.0 million reserve for this loan at June 30, 2009. 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.

On
June 30, 2009, we received $23.8 million of cash proceeds relating to the repayment of a $27.4 million first mortgage loan backed by a data center property
bearing interest at LIBOR + 4.5% and having a February 2012 final maturity date. We agreed to the discounted payoff of our loan on this niche asset for the economic and credit risk
benefits discussed herein. Accordingly, for the second quarter 2009 we recorded a $3.6 million credit loss relating to this discounted payoff.

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 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.

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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 terminated its lease. In the fourth quarter of 2008, we took an impairment charge relating to
these properties and we are currently 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 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. 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. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material effect 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 is not permitted. FSP FAS 157-4 is effective for interim and

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annual
periods ending after June 15, 2009. The adoption of FSP FAS 157-4 did not have a material effect 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 is effective for interim and annual periods ending after
June 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1did not have a material effect our financial statement disclosures.

In
May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"), which establishes general standards of accounting for, and requires disclosure of, events that
occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted the provisions of SFAS 165 for the quarter ended June 30, 2009.
Our adoption of these provisions did not have a material effect on our financial condition, results of operations, or cash flows.

In
June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140" ("SFAS 166"), which
requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred
financial assets. SFAS 166 eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures.
SFAS 166 is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the impact that the adoption of SFAS 166 will have on our financial
condition, results of operations, and disclosures.

In
June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"), which modifies how a company determines when an entity that
is insufficiently capitalized or is not controlled through voting (or similar) rights, should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other
things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. SFAS 167 requires an
ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company's involvement in variable
interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009. We are currently
evaluating the impact that the adoption of SFAS 167 will have on our financial condition, results of operations, and disclosures.

In
June 2009, the FASB approved the "FASB Accounting Standards Codification" ("Codification") as the single source of authoritative nongovernmental U.S. GAAP to be launched on
July 1, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be
considered nonauthoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification will not have an impact on our financial condition or
results of operations.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2009 to the Three Months Ended June 30, 2008

Revenues



Interest income for the three months ended June 30, 2009 totaled $35.7 million, representing a decrease of
$14.2 million, or 28%, compared to $49.9 million for the three months ended June 30, 2008. The decrease consisted of a $14.1 million decrease attributable to an
approximately 225 basis points lower average one-month LIBOR rate during the second quarter 2009 compared to second quarter 2008, and a $1.1 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 $389.3 million subsequent to June 30, 2008
offset by approximately $357.7 million of investment dispositions and repayments during 2008.



Interest income from related parties for the three months ended June 30, 2009 totaled $4.4 million, representing an
increase of $0.8 million, or 22%, compared to $3.6 million for the three months ended June 30, 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. We are generally earning higher yields on securities purchased during the past
12 months due to credit spread widening. 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 June 30, 2009 totaled $24.4 million, representing a decrease of
$4.6 million, or 16%, compared to $29.0 million for the three months ended June 30, 2008. The decrease of $4.6 million was primarily attributable to the following;
i) Reading, PA and Chatsworth, CA property lease terminations, ii) the Cincinnati, OH lease renewal and iii) during the second quarter 2009, we restructured our net lease
relationship with one of our healthcare operators to take advantage of new REIT legislation which now allows a taxable REIT subsidiary affiliate to become the lessee of healthcare-related properties.
The restructuring resulted in one of our unconsolidated affiliates becoming the lessee of the properties and our unconsolidated affiliate simultaneously entering into a management contract with a
third party operator. This new structure allows us to participate in operating improvements of the underlying properties not previously available under the prior structure.



Advisory fees from related parties for the three months ended June 30, 2009 totaled $1.8 million, representing a decrease
of approximately $4.7 million, or 72%, compared to $6.5 million for the three months ended June 30, 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 which resulted in the recognition of an additional $4.8 million in advisory fee income during the second
quarter 2008. The sale resulted in $0.2 million of lower advisory fees and a decrease of $0.1 million as a result of the decline in the net asset value of our Securities Fund and our
term debt transactions which generate advisory fees, also contributed to the lower advisory fees.

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Other revenue for the three months ended June 30, 2009 totaled $0.2 million, representing a decrease of
$3.8 million, or 95%, compared to $4.0 million the three months ended June 30, 2008. Other revenue for three months ended June 30, 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 June 30, 2008 consisted primarily of the sale of our profit
participation in a real estate debt investment for $3.7 million, $0.1 million unused credit line fees and $0.1million in draw fees and $0.1 million miscellaneous other revenue.

Expenses



Interest expense for the three months ended June 30, 2009 totaled $31.9 million, representing a decrease of
$14.6 million, or 31%, compared to $46.5 million for the three months ended June 30, 2008. The decrease in interest was primarily the result of: (i) $9.5 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) $2.5 million
lower interest on our 7.25% exchangeable senior notes due to repurchases; (iii) $0.9 million lower interest as a result of the recapitalization, termination and
de-consolidation of our corporate lending venture in 2008; (iv) $0.9 million lower interest relating to lower average balances and lower LIBOR rates on our WA Term Loan;
(v) $1.1 million in lower interest rates on our Euro-note; (vi) $0.8 million lower interest related to the Chatsworth, CA lease termination
(vii) $0.5 million lower interest related to the termination of our unsecured revolving credit line in May 2008; and (viii) $0.2 million lower interest related to lower
average balances on repurchase obligations. The decrease in interest expense was partially offset by: (i) $1.7 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 June 30, 2009 totaled $2.8 million, representing an
increase of $0.8 million, or 40%, compared to $2.0 million for three months ended June 30, 2008. The increase was primarily attributable to expenses of $0.3 million that
are no longer reimbursed related to the Reading, PA facility that in now vacant and $0.8 million related to the restructuring and termination of our leases with two of our operators in our
healthcare portfolio, partially offset by $0.3 million in lower expenses as a result of Chatsworth, CA lease termination.



Advisory fees for related parties for the three months ended June 30, 2009 totaled $0.9 million, which was flat, compared
to $0.9 million for the three months ended June 30, 2008. We incurred advisory fees to Wakefield Capital Management for the three months ended June 30, 2009 and 2008.



Provision for loan losses for the three months ended June 30, 2009 totaled $17.0 million and was specifically identified
for eight loans. The second quarter 2009 expense includes $7.5 million for first mortgage whole loans, $5.0 million for subordinated mortgage interests and $4.5 million for
mezzanine loans. Provision for loan losses for the three months ended June 30, 2008 totaled $2.5 million and was specifically identified for two loans. The second quarter 2008 expense
includes $0.5 million for a first mortgage whole loan and $2.0 million for a mezzanine loan.

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General and administrative expenses for the three months ended June 30, 2009 totaled $17.0 million, representing an
increase of $2.3 million, or 16%, compared to $14.7 million for the three months ended June 30, 2008. The primary components of our general and administrative expenses were the
following:

Salaries
and equity-based compensation for the three months ended June 30, 2009 totaled $11.2 million, representing an increase of approximately $1.3 million, or
13%, compared to $9.9 million, for the three months ended June 30, 2008. The increase was attributable to a $1.9 million increase related to salaries and accrued cash incentive
compensation costs offset partially by a $0.7 million decrease related to equity-based compensation. The 2008 cash incentive compensation costs were weighted towards the fourth quarter in
anticipation of a greater mix of equity than cash awards than was actually paid. The 2009 quarterly cash incentive compensation accruals assume the equity/cash mix will be consistent with actual 2008
payments. The $0.7 million decrease in equity-based compensation expense was attributable to 2008 grants of $0.1 million in connection with employee separation agreements and a decrease
of approximately $0.5 million in vesting of equity-based awards issued under our 2004 Omnibus Stock Incentive Plan and our 2006 Outperformance Plan relating to grants fully vesting and a
$0.1 million decrease in our Annual Directors grants.

Auditing
and professional fees for the three months ended June 30, 2009 totaled $2.3 million, representing an increase of $1.1 million, or 92%, compared to
$1.2 million for the three months ended June 30, 2008. The increase was primarily attributable to increased legal fees for general corporate work, investment activities and lease
restructuring expenses in our healthcare portfolio.

Other
general and administrative expenses for the three months ended June 30, 2009 totaled $3.4 million, representing a decrease of approximately $0.1 million, or
3%, compared to $3.5 million for the three months ended June 30, 2008. The decrease was primarily attributable to a decrease in overhead resulting from lower staffing levels during the
three months ended June 30, 2009.



Depreciation and amortization expense for the three months ended June 30, 2009 totaled $17.4 million, representing an
increase of $7.4 million, or 74%, compared to $10.0 million for the three months ended June 30, 2008. This increase was primarily attributable to the write-off of
$7.7 million of certain costs associated with the lease restructuring and termination of one of our operators in our healthcare portfolio, partially offset by lower depreciation and
amortization of $0.3 million as a result of the write of the Reading, PA and Chatsworth, CA properties.



Equity in (loss) earnings for the three months ended June 30, 2009 was a net $0.2 million in earnings, representing an
increase of $5.6 million, compared to a loss of $5.4 million for the three months ended June 30, 2008. For the three months ended June 30, 2009, we recognized equity in
earnings of $3.4 million on a new joint venture related to the restructured net lease relationship with one of our healthcare operators which resulted in one of our unconsolidated affiliates
becoming the lessee of the properties and the unconsolidated affiliate simultaneously entering into a management contract with a third party operator and equity in earnings of $0.1 million in
connection with another net lease joint venture. The equity in earnings were partially offset by equity in losses $3.0 million from the Securities Fund (which includes both realized and
unrealized gains from asset sales and mark-to-market adjustments) and equity in losses $0.3 million from the LandCap joint venture. For the three months ended
June 30, 2008, we recognized equity in losses of $4.9 million from the Securities Fund, of which $5.3 million was an unrealized loss related to the
mark-to-market adjustment on the securities in the Securities Fund, and equity in loss of $1.1 million on the LandCap joint venture. The

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losses
were partially offset by equity in earnings of $0.1 million in connection with our net lease joint venture and $0.5 million equity in earning from our corporate lending venture.



Unrealized gain (loss) on investments and other increased by approximately $40.7 million for the three months ended
June 30, 2009 to a loss of $0.6 million, compared to a loss of $41.3 million for the three months ended June 30, 2008. The unrealized loss on investments for the three
months ended June 30, 2009 consisted primarily of unrealized losses related to SFAS 159 mark-to-market adjustments of $28.0 million on liability to
subsidiary trusts issuing preferred securities and unrealized losses of $4.6 million on our corporate lending joint venture (which is an equity investment that is marked to market). The
unrealized losses were partially offset by unrealized gains related to SFAS 159 mark-to-market adjustments of $19.5 million on various available for sale
securities, unrealized gains of $6.5 million on various N-Star bonds payable and net gains of $6.0 million on interest rate swap derivatives no longer qualifying, or not
designated as, hedging instruments under SFAS 133. The unrealized loss on investment for the three months ended June 30, 2008 consisted of unrealized losses related to SFAS 159
mark-to-market adjustments of $13.5 million on various N-Star bonds payable, $2.8 million on liability to subsidiary trusts issuing preferred
securities, $25.1 million on various available for sale securities and unrealized losses of $32.5 million on our corporate lending joint venture offset partially by unrealized gains
$32.0 million on interest rate swaps as a result of these swaps no longer qualifying for hedge accounting under SFAS 133 and $0.6 million on securities sold, not yet purchased.



The realized gain of $23.3 million for the three months ended June 30, 2009 consisted primarily of net realized gains of
$11.9 million on the repurchase of $21.6 million of our 7.25% exchangeable senior notes and net realized gains of $15.5 million on the sale of certain debt securities available
for sale, offset partially by realized losses of $3.8 million related to the discounted payoff of a first mortgage. The realized gain on investments and other of $7.1 million for the
three months ended June 30, 2008, was attributable to the recapitalization of our corporate lending venture in which we recognized a $46.0 million realized gain upon the extinguishment
of a portion of the debt, a simultaneous $27.1 million cost basis reduction of our investment in the recapitalized venture and a realized loss of $18.9 million related to the sale of
certain corporate loans within the portfolio. In addition we recognized a $7.1 million gain on the repurchase of various N-Star bonds.

Comparison of the Six Months Ended June 30, 2009 to the Six Months Ended June 30, 2008

Revenues



Interest income for the six months ended June 30, 2009 totaled $72.5 million, representing a decrease of
$41.1 million, or 36%, compared to $113.6 million for the six months ended June 30, 2008. The decrease consisted of a $32.5 million decrease attributable to an
approximately 273 basis points lower average one-month LIBOR rate and lower asset balances during the six month period ending June 30, 2009 compared to the six month period ending
June 30 2008, and a $11.7 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 $4.0 million resulting from the origination and acquisition of commercial real estate debt and commercial real estate securities with a net book
value of $389.3 million subsequent to June 30, 2008 offset by approximately $357.7million of investment dispositions and repayments during 2008.

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Interest income from related parties for the six months ended June 30, 2009 totaled $9.0 million, representing an
increase of $1.7 million, or 23%, compared to $7.3 million for
the six months ended June 30, 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. We are generally earning higher yields on securities purchased during the past 12 months due to credit spread widening. 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 six months ended June 30, 2009 totaled $51.6 million, representing a decrease of
$6.4 million, or 11%, compared to $58.0 million for the six months ended June 30, 2008. The decrease of $6.4 million was attributable to the following; i) Reading,
PA and Chatsworth, CA property lease terminations, ii) the Cincinnati, OH lease renewal and iii) during the second quarter 2009, we restructured our net lease relationship with one of
our healthcare operators to take advantage of new REIT legislation which now allows a taxable REIT subsidiary affiliate to become the lessee of healthcare-related properties. The restructuring
resulted in one of our unconsolidated affiliates becoming the lessee of the properties and our unconsolidated affiliate simultaneously entering into a management contract with a third party operator.
This new structure allows us to participate in operating improvements of the underlying properties not previously available under the prior structure.



Advisory fees from related parties for the six months ended June 30, 2009 totaled $3.5 million, representing a decrease
of approximately $5.4 million, or 61%, compared to $8.9 million for the six months ended June 30, 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 which resulted in the recognition of an additional $4.8 million in advisory fee income during the second quarter
2008. The sale resulted in $0.4 million of lower advisory fees and a decrease of $0.2 million as a result of the decline in net asset value of our Securities Fund and our term debt
transactions which generate the advisory fees.



Other revenue for the six months ended June 30, 2009 totaled $0.3 million, representing a decrease of
$4.7 million, or 94%, compared to $5.0 million the six months ended June 30,
2008. Other revenue for six months ended June 30, 2009 consisted primarily of $0.2 million in late fees and $0.1 million in unused credit line fees. Other revenue for the six
months ended June 30, 2008 consisted primarily of $3.7 million in profit participation proceeds from the modification of a real estate debt investment, $0.3 million in prepayment
penalties, $0.3 million of exit fees, $0.3 million in unused credit line fees, $0.1 million in draw fees and $0.2 million miscellaneous other revenue.

Expenses



Interest expense for the six months ended June 30, 2009 totaled $66.0 million, representing a decrease of
$36.0 million, or 35%, compared to $102.0 million for the six months ended June 30, 2008. The decrease in interest was primarily the result of: (i) $23.6 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) $3.7 million
lower interest on our 7.25% exchangeable senior notes due to repurchases; (iii) $5.9 million lower interest as a result of the recapitalization, termination and

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de-consolidation
of our corporate lending venture in 2008; (iv) $2.7 million lower interest relating to lower average balances and lower LIBOR rates on our WA Term Loan;
(v) $1.8 million in lower interest rates on our Euro-note; (vi) $0.8 million lower interest related to the Chatsworth, CA lease termination;
(vii) $1.2 million lower interest related to the termination of our unsecured revolving credit line in May 2008; and (viii) $0.6 million lower interest related to lower
average balances on repurchase obligations. The decrease in interest expense was partially offset by: (i) $4.2 million in additional expense from our $80.0 million 11.50%
exchangeable senior notes issued in May 2008 and (ii) $0.3 million in additional expense from our LB term loan which closed in June 2008.



Real estate property operating expenses for six months ended June 30, 2009 totaled $4.9 million, representing an increase
of $0.8 million, or 20%, compared to $4.1 million for
six months ended June 30, 2008. The increase was primarily related to expenses of $0.5 million that are no longer reimbursed related to the Reading, PA facility that is now vacant and
$0.8 million related to the restructuring and termination of our leases with two of our operators in our healthcare portfolio partially offset by $0.3 million in lower expenses as a
result of Chatsworth, CA lease termination and lower expenses of $0.2 million at various properties.



Advisory fees for related parties for the six months ended June 30, 2009 totaled $1.7 million, representing a decrease of
$1.3 million, or 43%, compared to $3.0 million for the six months ended June 30, 2008. The decrease was primarily attributable to the termination of the corporate lending joint
venture agreement. We incurred $1.7 million of advisory fees to Wakefield Capital Management and no advisory fees to the corporate lending joint venture for the six months ended June 30,
2009, respectively. We incurred $1.7 million of advisory fees to Wakefield Capital Management and $1.3 million of advisory fees to our former corporate lending venture for the six months
ended June 30, 2008, respectively.



Provision for loan losses for the six months ended June 30, 2009 totaled $38.5 million and was specifically identified
for 13 loans. The provision for loan losses for the six months ended June 30, 2009 included $14.0 million for first mortgage whole loans, $8.0 million for subordinated mortgage
interests and $16.5 million for mezzanine loans. Provision for loan losses for the six months ended June 30, 2008 totaled $3.3 million and included $1.3 million for first
mortgage whole loans and $2.0 million for a mezzanine loan.



General and administrative expenses for the six months ended June 30, 2009 totaled $34.4 million, representing an
increase of $1.7 million, or 5%, compared to $32.7 million for the six months ended June 30, 2008. The primary components of our general and administrative expenses were the
following:

Salaries
and equity-based compensation for the six months ended June 30, 2009 totaled $22.9 million, representing an increase of approximately $1.2 million, or 5%,
compared to $21.7 million, for the six months ended June 30, 2008. The increase was attributable to a $3.6 million increase related to salaries and accrued cash incentive
compensation costs offset partially by a $2.5 million decrease related to equity-based compensation. The 2008 cash incentive compensation costs were weighted towards the fourth quarter in
anticipation of a greater mix of equity than cash awards than was actually paid. The 2009 quarterly cash incentive compensation accruals assume the equity/cash mix will be consistent with actual 2008
payments. The $2.5 million decrease in equity-based compensation expense

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was
attributable to the one-time 2008 grants of $0.7 million in connection with employee compensation arrangements and $1.2 million in connection with employee separation
agreements. In addition, approximately $0.5 million of the decrease was attributable to a decrease of vesting of equity-based awards issued under our 2004 Omnibus Stock Incentive Plan and our
2006 Outperformance Plan relating to awards fully vesting and a $0.1 million decrease in our Annual Directors grants.

Auditing
and professional fees for the six months ended June 30, 2009 totaled $4.5 million, representing an increase of $0.8 million, or 22%, compared to
$3.7 million for the six months ended June 30, 2008. The increase was primarily attributable to increased legal fees for general corporate work, investment activities and lease
restructuring expense in our healthcare portfolio.

Other
general and administrative expenses for the six months ended June 30, 2009 totaled $7.0 million, representing a decrease of approximately $0.4 million, or 5%,
compared to $7.4 million for the six months ended June 30, 2008. The decrease was primarily attributable to decreases costs related to decrease in overhead resulting from lower staffing
levels during the six months ended June 30, 2009.



Depreciation and amortization expense for the six months ended June 30, 2009 totaled $32.2 million, representing an
increase of $12.3 million, or 62%, compared to $19.9 million for the six months ended June 30, 2008. This increase was primarily attributable to the write-off of
$7.7 million of certain costs associated with the lease restructuring and termination of one of our operators in our healthcare portfolio and the write-off of $4.6 million of
various costs as a result of the Chatsworth, CA property lease termination.



Equity in (loss) earnings for the six months ended June 30, 2009 was a net $4.3 million loss, representing a decrease of
$1.3 million, compared to a loss of $5.6 million for the six months ended June 30, 2008. For the six months ended June 30, 2009, we recognized equity in losses of
$2.7 million from the LandCap joint venture and equity in losses of $5.2 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 $3.4 million on our new joint venture related to the restructured net lease
relationship with one of our healthcare operators which resulted in one of our unconsolidated affiliates becoming the lessee of the properties and the unconsolidated affiliate simultaneously entering
into a management contract with a third party operator and $0.2 million in connection with a net lease joint venture. For the six months ended June 30, 2008, we recognized equity in
losses of $5.6 million from the Securities Fund, of which $9.6 million was the unrealized loss related to the mark-to-market adjustment on the securities in the
Securities Fund, and equity in loss of $1.6 million on the LandCap joint venture. The losses were partially offset by our investment in Monroe Management, which we recognized
$1.4 million equity in earnings and $0.2 million equity in earnings in connection with our net lease joint venture.



Unrealized gain (loss) on investments and other decreased by approximately $79.7 million for the six months ended
June 30, 2009 to a gain of $90.0 million, compared to a gain of $169.7 million for the six months ended June 30, 2008. The unrealized gain on investments for the three
months ended June 30, 2009 consisted primarily of unrealized gains related to SFAS 159 mark-to-market adjustments of $142.1 million on various
N-Star bonds payable and unrealized net gains of $7.6 million on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments under
SFAS 133. The unrealized gains were partially offset by unrealized losses related to SFAS 159 mark-to-market adjustments of $29.9 million on our corporate
lending joint venture (which is an equity investment that

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is
marked to market), unrealized losses of $26.1 million on liability to subsidiary trusts issuing preferred securities and unrealized losses of $3.6 million on various available for
sale securities. The unrealized gain on investment for the six months ended June 30, 2008 consisted of unrealized gains related to SFAS 159 mark-to-market
adjustments of $278.0 million on various N-Star bonds payable, $29.9 million on liability to subsidiary trusts issuing preferred securities and $0.5 million on
interest rate swaps as a result of these swaps no longer qualifying for hedge accounting under SFAS 133, offset partially by unrealized losses related to SFAS 159
mark-to-market adjustments of $106.2 million on available for sale
securities and unrealized losses of $32.5 million on our corporate lending joint venture (which is an equity investment that is marked to market).



The realized gain of $60.2 million for the six months ended June 30, 2009 consisted primarily of net realized gains of
$46.2 million on the repurchase of $82.6 million of our 7.25% exchangeable senior notes and net realized gains of $17.8 million on the sale of certain debt securities available
for sale, offset partially by realized losses of $3.8 million related to the discounted payoff of a first mortgage and a foreign currency translation gain of $0.2 million related to our
Euro-denominated investment. The realized gain on investments and other of $7.1 million for the six months ended June 30, 2008, was attributable to the recapitalization of
our corporate lending venture in which we recognized a $46.0 million realized gain upon the extinguishment of a portion of the debt, a simultaneous $27.1 million cost basis reduction of
our investment in the recapitalized venture and a loss of $18.9 million related to the sale of certain corporate loans within the portfolio. In addition we recognized a $7.1 million gain
repurchase of various N-STAR bonds.

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 June 30, 2009 was approximately $262.7 million, including $105.5 million of unrestricted cash and cash equivalents and
$157.2 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 and
July 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

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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 quarterly dividends declared to date
relative to prior periods, future dividend levels are subject to further adjustment based upon our evaluation of the factors described above, as well as other factors that our Board of Directors may,
from time to time, deem relevant to consider when determining an appropriate common stock dividend.

We
currently believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs; however, our 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 June 30, 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 $379.7 million
at June 30, 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 $12.2 million and
$23.3 million outstanding balances, respectively, as of June 30, 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. We intend to fully repay the JP Facility on its August 2009
initial maturity date.

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 June 30, 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. The WA Term Loans also require that a portion of the proceeds from sales of equity securities be used for a partial repayment of
principal if certain covenant levels are not met. These levels were not met as of June 30, 2009 under the WA Term Loans. As a result, we will be required to use a portion of the proceeds from
any sales of equity securities under our equity distribution agreement with JMP Securities LLC to repay indebtedness until those covenant levels are again achieved. 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.

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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 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, 2009, we entered into an equity distribution agreement with JMP Securities, LLC, or JMP. In accordance with the terms of
the agreement, we may offer and sell up to 10,000,000 shares of our common stock from time to time through JMP. JMP will receive a commission from us of up to 2.5% of the gross sales price of all
shares sold through it under the equity distribution agreement. We may offer and sell shares of our common stock pursuant to our equity distribution agreement over the next six months if we believe
the economics are attractive, and may use the proceeds for investments, debt repayment or general corporate purposes. If we use the proceeds from sales of shares of common stock under the equity
distribution plan for debt repayment, we would repay indebtedness under our WA Term Loans, which mature in October 2009, subject to an extension at our option, provided that we are in compliance with
the terms of the loans which bear interest at an annual rate of LIBOR plus 2.00%.

As
of June 30, 2009, we issued 1,251,628 common shares and received $4.0 million of cash proceeds related to our equity distribution agreement with JMP.

For
the six months ended June 30, 2009, we did not issue any shares of common stock related to our existing 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 six months ended June 30, 2009, we issued a total of 32,030 common shares pursuant to the Plan for a gross sales price of approximately $0.1 million.

Debt Repurchases

During the three and six months ended June 30, 2009, we repurchased approximately $21.6 million and $82.6 million
of our 7.25% exchangeable senior notes for a total of $9.4 million and $35.2 million, respectively. We recorded a net realized gain of $11.9 million and $46.2 million for
the three and six months ended June 30, 2009, respectively, in connection with the repurchase of our notes. The repurchases also represented a $12.2 million and $47.4 million
discount to the par value of the debt, respectively.

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Wakefield Preferred Equity

On July 9, 2008, Wakefield sold a $100 million convertible preferred equity interest to Inland American Real Estate
Trust, Inc., or 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 was to convert its interests to
common equity.

Cash Flows

The net cash flow provided by operating activities of $22.4 million, decreased by $28.2 million for the six months ended
June 30, 2009 from $50.6 million for the six months
ended June 30, 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 $24.5 million for the six months ended June 30, 2009 compared to the net cash used by investing activities of
$82.6 million for the six months ended June 30, 2008. This decrease from 2008 was primarily a result of decreased 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 $26.4 million for the six months ended June 30, 2009 compared to $15.1 million of cash provided by financing
activities for the six months ended June 30, 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.

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Contractual Obligations and Commitments

As of June 30, 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

$
894,642

$
3,555

$
103,014

$
174,445

$
613,628Mezzanine loan payable


12,055


1,479


3,845


4,425


2,306Exchangeable senior notes(1)


158,165








158,165


Bonds payable


1,679,445











1,679,445Credit facilities


12,182


12,182








Secured term loans(2)


402,989


402,989








Liability to subsidiary trusts issuing preferred securities


280,133











280,133Repurchase agreements














Capital leases(3)


16,375


244


974


997


14,160Operating leases


73,618


2,812


11,211


10,869


48,726Placement fees


304


304








Outstanding unfunded commitments(4)


97,176


88,964


8,212





Total contractual obligations

$
3,627,084

$
512,529

$
127,256

$
348,901

$
2,638,398


---

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

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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 June 30, 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 June 30, 2009:

CollateralJune 30, 2009

Term NotesJune 30, 2009Issuance

Date
Closed

Par Value
of Collateral

Weighted
Average
Interest Rate

Weighted Average
Expected Life
(years)(1)

Outstanding
Term Notes(2)

Weighted
Average
Interest Rate

Stated
MaturityN-Star I(3)


8/21/2003

$
284,449


6.60
%

4.24

$
267,056


6.21
%

8/01/2038N-Star II


7/01/2004


299,151


.22


5.00


268,241


5.50


6/01/2039N-Star III


3/10/2005


421,309


3.60


5.36


358,446


4.19


6/01/2040N-Star V


9/22/2005


569,671


4.98


5.84


456,319


4.42


9/05/2045Total




$
1,574,580


5.14
%

5.26

$
1,350,062


4.93
%


---

Any
potential losses in our off balance sheet term debt transactions is limited to the amortized cost of our investment of $108.9 million at June 30, 2009.

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
June 30, 2009, we had invested a total of $43.2 million in the Securities Fund and the carrying value of our investment was $19.4 million, representing a 49.2%
interest.

For
the three and six months ended June 30, 2009 and 2008, we recognized equity in losses of $3.1 million and $5.0 million and $5.4 million and
$5.6 million, respectively. We also earned $0.1 million and $0.2 million and $0.1 million and $0.3 million in management fees from the Securities Fund for the three
and six months ended June 30, 2009 and 2008.

Recent Developments

Dividends

On July 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 August 14, 2009 to the stockholders of record as of the close of business on
August 4, 2009.

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Debt Repurchases

During July 2009, we repurchased approximately $10.0 million of our 7.25% exchangeable senior notes and $18.3 million of
our 11.50% exchangeable senior notes for a total of $14.4 million. We recorded a net realized gain of approximately $12.9 million in connection with the repurchase of our notes.

Incentive Compensation Plan

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

The
incentive pool will be divided into the following three separate incentive compensation components: (1) an annual cash bonus, tied to our annual performance and paid after
year end at or around completion of the year end audit; (2) a deferred cash bonus, determined based on the same year's performance, but paid 50% following the close of each of the first and
second years after such incentive pool is determined, subject to the participant's continued employment through each payment date; and (3) a long-term incentive, paid at the end of
a three-year period based on our achievement of cumulative performance goals for the three-year period, subject to the participant's continued employment through the payment
date. Performance goals for each component will be set by the Committee initially upon the adoption of the Plan and at the beginning of each subsequent calendar year for each new cycle. The goals will
generally be divided into five distinct ranges of performance, each of which will correspond to a pay-out level equal to a percentage (0%, 25%, 50%, 75% or 100%) of a participant's pool
allocation for such component.

The
annual bonus component for 2009 will be calculated based on AFFO and liquidity targets (weighted 50% and 25%, respectively) with the remaining 25% of the 2009 annual bonus determined
in the Committee's discretion. The deferred bonus component will be calculated based on the same performance measures as the annual bonus, but paid as described above. For the long-term
incentive component, each participant will initially be granted a number of restricted stock units determined by dividing the value of the participant's pool allocation for this component by the
20-day average closing price of our common stock at the end of the first year of the grant cycle (such amount, the "Initial Long-Term Allocation"). Upon the conclusion of the
three-year performance period, the participant will receive a
payout equal to the value of one share of common stock at the time of such payout with respect to a share of common stock during the three-year performance period, for each unit actually
earned based on our achievement of cumulative AFFO and/or a stock price goal during the performance period (the "Long-Term Payout"). The Long-Term Payout will be made in the
form of shares of common stock to the extent available under our equity compensation plans or, if all or a portion of such shares are not available, in cash; provided, that the amount of cash paid to
any participant with respect to the 2009 long-term incentive component shall not exceed such participant's Initial Long-Term Allocation. For the three-year
performance period ending December 31, 2011, the stock price goal is $8.21 per share.

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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.

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

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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.

Set
forth below is a reconciliation of FFO and AFFO to net income from continuing operations before non-controlling interest for the three and months ended June 30,
2009 and 2008:

Three Months Ended
June 30,

Six Months Ended
June 30,2009

2008

2009

2008Funds from Operations:Consolidated net income (loss)

$
2,469

($
23,267
)
$
105,200

$
198,885Non-controlling interest in joint ventures


(1,976
)

448


(4,440
)

203Consolidated net income (loss) before non-controlling interest in operating partnership


493


(22,819
)

100,760


199,088Adjustments:Preferred stock dividends


(5,231
)

(5,231
)

(10,463
)

(10,462
)Depreciation and amortization


17,382


9,977


32,196


19,915Real estate depreciation and amortization unconsolidated ventures


247


247


494


494Funds from Operations

$
12,891

($
17,826
)
$
122,987

$
209,035Adjusted Funds from Operations:Funds from Operations

$
12,891

($
17,826
)
$
122,987

$
209,035Straight-line rental income, net


(699
)

(716
)

(1,171
)

(1,473
)Straight-line rental income and fair value lease revenue (SFAS 141 adjustment), unconsolidated ventures


(25
)

(39
)

(57
)

(85
)Amortization of equity-based compensation


5,320


5,966


10,464


12,957Fair value lease revenue (SFAS 141 adjustment)


163


(305
)

(162
)

(611
)Unrealized (gains)/losses from mark-to-market adjustments


(3,847
)

36,833


(98,410
)

(176,595
)Unrealized losses from mark-to-market adjustments, unconsolidated ventures


5,728


5,292


8,493


9,647Adjusted Funds from Operations

$
19,531

$
29,205

$
42,144

$
52,875


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,

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including
the timing and amount of investment fundings, repayments and asset sales, capital raised and leverage used, and the yield on investments funded.

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

Three Months
Ended June 30,
2009

Annualized
June 30,
2009(2)

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

[A]

$
19,531

$
78,124

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










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




19,531





98,376Plus: General & Administrative Expenses




16,973





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




5,320





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




531





AFFO, excluding G&A

[B]


30,653


122,614


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

[C]

$
1,348,759




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

[A]/[C]


5.8
%




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

[B]/[C]


9.1
%




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 June 30, 2009, a hypothetical
100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $30.9 million offset by an increase in our interest
expense of approximately $22.9 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.

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We
generally hold these instruments for investment rather than trading purposes. These investments bear interest at either a floating or fixed rate. The interest rates on our floating rate investments
typically float at a fixed spread over an index such as LIBOR. These instruments typically reprice every 30 days based upon LIBOR in effect at that time. Given the frequent and periodic
repricing of our floating rate investments, changes in benchmark interest rates are unlikely to materially affect the value of our floating rate portfolio. Changes in short-term rates
will, however, affect earnings from our 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.

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

Derivatives and Hedging Activities

We use derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap
agreements and the primary objective is to minimize interest rate risks associated with the our investment and financing activities. The counterparties of these arrangements

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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 June 30, 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 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 June 30, 2009 and 2008,
we recorded in earnings a mark-to-market unrealized gain of $4.2 million and $4.0 million and a reclassification from accumulated other comprehensive income of
$1.4 million and $22.5 million, respectively, for the non-qualifying interest rate swaps. For the six months ended June 30, 2009 and 2008, we recorded in earnings a
mark-to-market unrealized gain of $5.2 million and a loss of $2.5 million and a reclassification from accumulated other comprehensive income of
$2.8 million and $23.8 million for the non-qualifying interest rate swaps, respectively.

The
following table summarizes the notional amounts and fair (carrying) values of our derivative financial instruments as of June 30, 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 June 30, 2009


34

$
1,487,628

$
(53,901
)
2.50% - 5.63%

October 2009 - 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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PART II. OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security Holders

Our Annual Meeting of shareholders was held on May 21, 2009 (the "Meeting"). At the close of business on the record date for the
Meeting (which was April 21, 2009), there were 66,787,592 shares of common stock outstanding and eligible to vote at the Meeting. Holders of 61,419,471 shares of common stock (representing a
like number of votes) were present at the Meeting, either in person or by proxy.

At
the Meeting, the following individuals were elected to our Board of Directors to hold office for a one-year term and until his or her successor is duly elected and
qualified, by the following vote:

Nominee

In Favor

WithheldPreston Butcher


59,156,686


2,262,785David T. Hamamoto


59,236,876


2,182,595Judith A. Hannaway


59,225,989


2,193,482Wesley D. Minami


59,231,572


2,187,899Louis J. Paglia


58,990,238


2,429,233Frank V. Sica


58,302,362


3,117,109


At
the Meeting, our shareholders ratified the appointment of Grant Thornton LLP as our independent registered public accounting firm for fiscal year 2009, by the following vote:

In Favor

Against

Abstained60,395,454

652,447

371,570


Item 6.    Exhibits

Exhibit
Number

Description of Exhibit3.1

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

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

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

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

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


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Exhibit
Number

Description of Exhibit3.6

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

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

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

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

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

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

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)


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Exhibit
Number

Description of Exhibit10.12

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

Fourth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 24, 2007 (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance
Corp. Current Report on Form 8-K filed May 29, 2007)10.14

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)10.15

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)10.16

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))10.17

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)10.18

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)10.19

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)10.20

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)10.21

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)10.22

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)


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Exhibit
Number

Description of Exhibit10.23

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)10.24

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)10.25

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))10.26

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)10.27

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)10.28

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)10.29

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)10.30

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