10-Q 1 nre0630201610-q.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
Commission File Number: 001-37597
NORTHSTAR REALTY EUROPE CORP.
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or
Organization)
32-0468861
(IRS Employer
Identification No.)
399 Park Avenue, 18th Floor, New York, NY 10022
(Address of Principal Executive Offices, Including Zip Code)
(212) 547-2600
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 (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 x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
The Company has one class of common stock, $0.01 par value per share, 60,428,193 shares outstanding as of August 3, 2016.
 




NORTHSTAR REALTY EUROPE CORP.
FORM 10-Q
TABLE OF CONTENTS

Index
 
Page
 
 
 
 
 
 
 
 
 
 
 



2



FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue,” “future” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to the operating performance of our investments, our liquidity and financing needs, the effects of our current strategies and investment activities, our ability to grow our business, our expected leverage, our expected cost of capital, our ability to divest non-strategic properties, our management’s track record and our ability to raise and effectively deploy capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the economic environment. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements. These factors include, but are not limited to:
the effect of economic conditions, particularly in Europe, on the valuation of our investments and on the tenants of the real property that we own;
our rapid growth and relatively limited experience investing in Europe;
the ability of NorthStar Asset Management Group Inc., or NSAM or its successor company, if the pending merger is consummated, to scale its operations in Europe to effectively manage our company;
the unknown impact of the exit of the United Kingdom or one or more other countries from the European Union or the potential default of one or more counties in the European Union;
our ability to qualify and remain qualified as a real estate investment trust, or REIT;
adverse domestic or international economic conditions and the impact on the commercial real estate industry;
volatility, disruption or uncertainty in the financial markets;
access to debt and equity capital and our liquidity;
our substantial use of leverage and our ability to comply with the terms of our borrowing arrangements;
our ability to monetize our assets on favorable terms or at all;
our ability to obtain mortgage financing on our real estate portfolio on favorable terms or at all;
our ability to acquire attractive investment opportunities and the impact of competition for attractive investment opportunities;
the effects of being an externally-managed company, including our reliance on NSAM and its affiliates and sub-advisors/co-venturers and successors in providing management services to us, the payment of substantial base management and incentive fees to our manager, the allocation of investments by NSAM among us and NSAM’s other sponsored or managed companies and strategic vehicles and various conflicts of interest in our relationship with NSAM;
performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments and available for distribution;
the impacts on our business as a result of NSAM’s announcement that it entered into a merger agreement with Colony Capital, Inc., or Colony and NorthStar Realty Finance Corp., or NorthStar Realty;
restrictions on our ability to engage in certain activities and the requirement that we may be required to access capital at inopportune times as a result of our borrowings;
our ability to make borrowings under our credit facility;
the impact of adverse conditions affecting office properties;
illiquidity of properties in our portfolio;
our ability to realize current and expected return over the life of our investments;

3


tenant defaults or bankruptcy;
any failure in our due diligence to identify all relevant facts in our underwriting process or otherwise;
the impact of terrorism or hostilities involving Europe;
our ability to manage our costs in line with our expectations and the impact on our cash available for distribution, or CAD, and net operating income, or NOI, of our properties;
environmental and regulatory requirements, compliance costs and liabilities relating to owning and operating properties in our portfolio and to our business in general;
effect of regulatory actions, litigation and contractual claims against us and our affiliates, including the potential settlement and litigation of such claims;
changes in European, international and domestic laws or regulations governing various aspects of our business;
future changes in foreign, federal, state and local tax law that may have an adverse impact on the cash flow and value of our investments;
our ability to effectively structure our investments in a tax efficient manner, including foreign, federal, state and local tax purposes;
the impact that a rise in future interest rates may have on our floating rate financing;
potential devaluation of foreign currencies, predominately the Euro, relative to the U.S. dollar due to quantitative easing in Europe and/or other factors which could cause the U.S. dollar value of our investments to decline;
general foreign exchange risk associated with properties located in European countries located outside of the Euro Area, including the United Kingdom and Sweden;
the loss of our exemption from the definition of an “investment company” under the Investment Company Act of 1940, as amended;
NSAM’s ability to hire and retain qualified personnel and potential changes to key personnel providing management services to us;
the lack of historical financial statements for properties we have acquired and may acquire in compliance with U.S. Securities and Exchange Commission, or SEC, requirements and U.S. generally accepted accounting principles, or U.S. GAAP, as well as the lack of familiarity of our tenants and third-party service providers with such requirements;
the potential failure to maintain effective internal controls and disclosure controls and procedures;
the historical combined consolidated financial statements included in this Quarterly Report on Form 10-Q not providing an accurate indication of our performance in the future or reflecting what our financial position, results of operations or cash flow would have been had we operated as an independent public company during the periods presented;
our status as an emerging growth company; and
compliance with the rules governing REITs.
The foregoing list of factors is not exhaustive. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.
Factors that could have a material adverse effect on our operations and future prospects are set forth in our filings with the SEC included in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, in Part II, Item 1A. of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and in Part II, Item 1A. of this Form 10-Q, each under “Risk Factors.” The risk factors set forth in our filings with the SEC could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.


4


PART I. Financial Information
Item 1.    Financial Statements
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
    
 
June 30, 2016 (Unaudited)
 
December 31,
2015
Assets

 
 
Operating real estate, gross
$
1,765,653

 
$
2,120,460

Less: accumulated depreciation
(48,615
)
 
(35,303
)
Operating real estate, net
1,717,038

 
2,085,157

Cash and cash equivalents
125,102

 
283,844

Restricted cash
13,913

 
20,871

Receivables, net of allowance of $399 and $115 as of June 30, 2016 and December 31, 2015, respectively
9,214

 
9,663

Unbilled rent receivable
8,418

 
5,869

Assets held for sale
299,953

 
6,094

Derivative assets, at fair value
11,672

 
23,792

Intangible assets, net
173,139

 
241,519

Other assets, net
9,817

 
6,241

Total assets
$
2,368,266


$
2,683,050

Liabilities
 
 
 
Mortgage and other notes payable, net
$
1,377,584

 
$
1,424,610

Senior notes, net
109,233

 
333,798

Credit facility
58,642

 

Accounts payable and accrued expenses
27,678

 
39,964

Due to related party (refer to Note 5)
3,606

 
3,995

Derivative liabilities, at fair value
1,221

 

Intangible liabilities, net
36,075

 
40,718

Liabilities held for sale
10,565

 

Other liabilities
33,600

 
42,654

Total liabilities
1,658,204

 
1,885,739

Commitments and contingencies

 

Redeemable non-controlling interest (refer to Note 8)
1,598

 
1,569

Equity
 
 
 
NorthStar Realty Europe Corp. Stockholders’ Equity
 
 
 
Preferred stock, $0.01 par value, 200,000,000 shares authorized, no shares issued and outstanding as of June 30, 2016 and December 31, 2015

 

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 60,418,459 and 59,325,730 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively
604

 
593

Additional paid-in capital
968,871

 
968,662

Retained earnings (accumulated deficit)
(266,915
)
 
(186,246
)
Accumulated other comprehensive income (loss)
(2,955
)
 
2,560

Total NorthStar Realty Europe Corp. stockholders’ equity
699,605

 
785,569

Non-controlling interests
8,859

 
10,173

Total equity
708,464

 
795,742

Total liabilities and equity
$
2,368,266

 
$
2,683,050

    


Refer to accompanying notes to combined consolidated financial statements.

5


NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,


2016(1)

2015(1)

2016(1)

2015(1)

Revenues








Rental income
$
33,990


$
28,344


$
68,823


$
29,853


Escalation income
5,908


3,213


11,998


3,890


Other revenue
46


67


749


68


Total revenues
39,944


31,624


81,570


33,811


Expenses








Properties - operating expenses
8,540


5,423


17,771


6,257


Interest expense
11,641


6,072


24,183


6,824


Transaction costs
1,652


79,120


2,483


88,124


Impairment losses
27,468

 

 
27,468

 

 
Management fee, related party(2)
3,500




7,000




Other expenses
3,041


2,799


6,731


2,799


General and administrative expenses
1,502


306


2,978


1,234


Compensation expense
3,766




7,034




Depreciation and amortization
18,404


14,694


37,275


15,620


Total expenses
79,514


108,414


132,923


120,858


Other income (loss)












Unrealized gain (loss) on investments and other (refer to Note 10)
383


3,629


(15,788
)

(2,402
)

Realized gain (loss) on investments and other
5,398


41


3,368


35


Income (loss) before income tax benefit (expense)
(33,789
)

(73,120
)

(63,773
)

(89,414
)

Income tax benefit (expense)
(520
)

11,379


139


11,379


Net income (loss)
(34,309
)

(61,741
)

(63,634
)

(78,035
)

Net (income) loss attributable to non-controlling interests
400


30


743


61


Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
$
(33,909
)

$
(61,711
)

$
(62,891
)

$
(77,974
)

Earnings (loss) per share:











Basic
$
(0.57
)

$
(0.98
)
(3) 
$
(1.06
)

$
(1.24
)
(3) 
Diluted
$
(0.57
)

$
(0.98
)
(3) 
$
(1.06
)

$
(1.24
)
(3) 
Weighted average number of shares:
 




 



Basic
59,115,895


62,987,863

(3) 
59,266,850


62,987,863

(3) 
Diluted
59,805,545


62,987,863

(3) 
59,957,559


62,987,863

(3) 
Dividends per share of common stock
$
0.15


N/A


$
0.30


N/A


____________________
(1)
The combined consolidated financial statements for the three and six months ended June 30, 2016 represent the Company’s results of operations following the Spin-off on October 31, 2015. The combined consolidated financial statements for the three and six months ended June 30, 2015 represent: (i) the Company’s results of operations of the European Real Estate Business as if the transferred business was the business for the periods in which common control was present (refer to Notes 1 and 3); and (ii) an allocation of costs related to the Company. As a result, results of operations for the three and six months ended June 30, 2016 may not be comparable to the Company’s results of operations reported for the prior periods presented.
(2)
The Company began paying fees on November 1, 2015, in connection with the management agreement with NSAM (refer to Note 5).
(3)
Basic and diluted earnings per common share for the three and six months ended June 30, 2015 were calculated using the common stock distributed on November 1, 2015 in connection with the Spin-off (refer to Note 7).













Refer to accompanying notes to combined consolidated financial statements.

6


NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(34,309
)
 
$
(61,741
)
 
$
(63,634
)
 
$
(78,035
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net
(32,363
)
 
34,620

 
(5,789
)
 
33,683

Total other comprehensive income (loss)
(32,363
)

34,620


(5,789
)
 
33,683

Comprehensive income (loss)
(66,672
)

(27,121
)
 
(69,423
)

(44,352
)
Comprehensive (income) loss attributable to non-controlling interests
65

 
31

 
469

 
63

Comprehensive income (loss) attributable to NorthStar Realty Europe Corp.
$
(66,607
)

$
(27,090
)

$
(68,954
)
 
$
(44,289
)






















Refer to accompanying notes to combined consolidated financial statements.

7


NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF EQUITY
(Dollars and Shares in Thousands)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total NorthStar Stockholders’ Equity
 
Non-controlling
Interests
 
Total
Equity
 
 
Shares
 
Amount
 
Balance as of December 31, 2014


$


$
116,982


$
(33,630
)

$
(4,336
)

$
79,016


$
1,058


$
80,074

Net transactions with NorthStar Realty

 

 
653,534

 

 

 
653,534

 

 
653,534

Capital contribution of NorthStar Realty
62,988

 
630

 
249,370

 

 

 
250,000

 

 
250,000

Non-controlling interests - contributions

 

 

 

 

 

 
192

 
192

Formation of Operating Partnership (refer to Note 8)

 

 
(8,749
)
 

 

 
(8,749
)
 
8,749

 

Reallocation of interest in Operating Partnership (refer to Note 8)

 

 
(852
)
 

 

 
(852
)
 
852

 

Amortization of equity-based compensation

 

 
311

 

 

 
311

 
526

 
837

Issuance of common stock to directors
18

 

 

 

 

 

 

 

Tax withholding related to vesting of equity-based compensation

 

 
(547
)
 

 

 
(547
)
 

 
(547
)
Retirement of shares of common stock
(3,680
)
 
(37
)
 
(41,387
)
 

 

 
(41,424
)
 

 
(41,424
)
Other comprehensive income (loss)

 

 

 

 
6,896

 
6,896

 
75

 
6,971

Dividends on common stock and equity-based compensation

 

 

 
(9,480
)
 

 
(9,480
)
 
(104
)
 
(9,584
)
Net income (loss)

 

 

 
(143,136
)
 

 
(143,136
)
 
(1,175
)
 
(144,311
)
Balance as of December 31, 2015
59,326


593


968,662


(186,246
)

2,560


785,569


10,173


795,742

Reallocation of interest in Operating Partnership (refer to Note 8)

 

 
1,360

 

 

 
1,360

 
(1,360
)
 

Amortization of equity-based compensation

 

 
5,246

 

 

 
5,246

 
1,271

 
6,517

Issuance of restricted stock, net of tax withholding
1,686

 
17

 
(17
)
 

 

 

 

 

Tax withholding related to vesting of equity-based compensation

 

 
(113
)
 

 

 
(113
)
 

 
(113
)
Retirement of shares of common stock
(594
)
 
(6
)
 
(6,267
)
 

 

 
(6,273
)
 

 
(6,273
)
Other comprehensive income (loss)

 

 

 

 
(5,515
)
 
(5,515
)
 
(274
)
 
(5,789
)
Dividends on common stock and equity-based compensation

 

 

 
(17,778
)
 

 
(17,778
)
 
(208
)
 
(17,986
)
Net income (loss)

 

 

 
(62,891
)
 

 
(62,891
)
 
(743
)
 
(63,634
)
Balance as of June 30, 2016 (unaudited)
60,418


$
604


$
968,871


$
(266,915
)

$
(2,955
)

$
699,605


$
8,859


$
708,464

























Refer to accompanying notes to combined consolidated financial statements.

8


NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(63,634
)
 
$
(78,035
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
37,275

 
15,620

Amortization of deferred financing costs
3,789

 
798

Amortization of equity-based compensation
6,517

 

Allowance for uncollectible accounts
287

 

Unrealized (gain) loss on investments and other
15,788

 
2,402

Realized (gain) loss on investments and other
(3,368
)
 
(35
)
Impairment losses
27,468

 

Amortization of capitalized above/below market leases
2,318

 
434

Straight line rental income
(3,825
)
 
(1,441
)
Deferred income taxes, net
(859
)
 
14,121

Changes in assets and liabilities:
 
 
 
Restricted cash
(4,142
)
 
(868
)
Receivables
(4,788
)
 
(3,036
)
Other assets
(691
)
 
17,153

Accounts payable and accrued expenses
(5,902
)
 
14,436

Due to related party
(389
)
 

Other liabilities
2,914

 
21,796

Net cash provided by (used in) operating activities
8,758

 
3,345

Cash flows from investing activities:
 
 
 
Acquisition of operating real estate

 
(1,635,413
)
Improvements of operating real estate
(5,792
)
 
(705
)
Proceeds from sale of operating real estate
74,923

 

Other assets
(10,691
)
 

Changes in restricted cash
9,915

 

Net cash provided by (used in) investing activities
68,355

 
(1,636,118
)
Cash flows from financing activities:
 
 
 
Repayment of mortgage and other notes payable
(32,088
)
 

Borrowings from credit facility
65,000

 

Borrowings from mortgage and other notes payable

 
938,698

Repayment of credit facility
(6,358
)
 

Payment of financing costs
(2,271
)
 
(714
)
Settlement of derivatives
(1,195
)
 

Purchase of derivative instruments
(380
)
 
(14,064
)
Repurchase of Senior Notes
(230,782
)
 

Tax withholding related to vesting of equity-based compensation
(113
)
 

Retirement of shares of common stock
(4,919
)
 

Dividends
(17,986
)
 

Net transactions with NorthStar Realty

 
745,264

Contributions from non-controlling interest

 
65

Net cash provided by (used in) financing activities
(231,092
)
 
1,669,249

Effect of foreign currency translation on cash and cash equivalents
(4,763
)
 
(2,888
)
Net increase (decrease) in cash and cash equivalents
(158,742
)

33,588

Cash and cash equivalents—beginning of period
283,844

 
1,552

Cash and cash equivalents—end of period
$
125,102

 
$
35,140

 
 
 
 







Refer to accompanying notes to combined consolidated financial statements.

9


NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Continued)
(Unaudited)

 
Six Months Ended June 30,
 
2016
 
2015
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Reclassification of operating real estate to assets held for sale
$
276,513

 
$

Reclassification of intangible assets and liabilities of operating real estate to assets and liabilities held for sale
37,394

 

Reclassification of other assets and other liabilities to assets and liabilities held for sale
7,593

 

Reclassification related to measurement adjustments/other
5,628

 

Retirement of shares of common stock
1,351

 

Reallocation of interest in Operating Partnership
1,360

 

Reclassification from other assets to operating real estate
774

 







































Refer to accompanying notes to combined consolidated financial statements.


10


NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Formation and Organization
NorthStar Realty Europe Corp. (“NorthStar Europe” or the “Company”), a publicly-traded real estate investment trust (“REIT”), is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France. The Company’s objective is to provide its stockholders with stable and recurring cash flow supplemented by capital growth over time. The Company commenced operations on November 1, 2015 following the spin-off by NorthStar Realty Finance Corp. (“NorthStar Realty”) of its European real estate business (excluding its European healthcare properties) into a separate publicly-traded company, NorthStar Europe, a Maryland corporation (the “Spin-off”).
Upon completion of the Spin-off, NorthStar Realty contributed: (i) its business activities related to a multi-tenant office complex located in the United Kingdom (the “U.K. Complex”) acquired on September 16, 2014; (ii) other European real estate portfolios acquired in the second and third quarters of 2015 and primarily comprised of multi-tenant office properties (the “New European Investments”); and (iii) certain other assets and liabilities related to NorthStar Realty’s European real estate business, herein collectively referred to as the European Real Estate Business.
On November 2, 2015, the Company’s common stock began trading on the New York Stock Exchange (“NYSE”). The Company is externally managed and advised by an affiliate of NorthStar Asset Management Group Inc. (NYSE: NSAM), which together with its affiliates is referred to as NSAM. Substantially all of the Company’s assets, directly or indirectly, are held by, and the Company conducts its operations, directly or indirectly, through NorthStar Realty Europe Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the “Operating Partnership”). The Company intends to conduct its operations so as to qualify as a REIT for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2016.
All references herein to the Company refer to NorthStar Realty Europe Corp. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.
Sales Initiatives
The Company continues to execute a series of sales initiatives with the goal of maximizing long-term shareholder value.
2.
Summary of Significant Accounting Policies
Basis of Quarterly Presentation
The accompanying unaudited combined consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the combined consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These combined consolidated financial statements should be read in conjunction with the Company’s combined consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the Securities and Exchange Commission (the “SEC”). The three and six months ended June 30, 2015 are presented on a carve-out basis and have been prepared from the historical consolidated balance sheets, statements of operations, comprehensive income (loss) and cash flows of NorthStar Realty.
The contribution of the European Real Estate Business to the Company has been determined to be a combination of entities under common control that results in a change in the reporting entity which requires retrospective application to the Company’s financial statements under U.S. GAAP. Accordingly, the operations of the European Real Estate Business of NorthStar Realty transferred to the Company upon the Spin-off are presented as if the transferred business was the business of the Company for periods in which common control was present and at the carrying value of such assets and liabilities recorded in NorthStar Realty’s historical books and records.
Historically, financial statements of the Company have not been prepared as it had not operated separately from NorthStar Realty. These combined consolidated financial statements reflect the revenues and direct expenses of the Company and include material assets and liabilities of NorthStar Realty that are specifically identifiable to the European Real Estate Business and contributed to the Company upon completion of the Spin-off. The combined consolidated financial statements for the three and six months ended June 30, 2015, represent the Company prior to the Spin-off and include certain consolidated subsidiaries. Subsequent to the Spin-off, the financial statements are presented on a consolidated basis.

11

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The combined consolidated financial statements for the three and six months ended June 30, 2015 include an allocation of costs and expenses by NorthStar Realty related to the Company (primarily compensation and other general and administrative expenses of $0.3 million and $0.8 million, respectively) based on an estimate of expenses as if the Company was managed as an independent entity. This allocation method is principally based on relative headcount and management’s knowledge of the operations of the Company. The amounts allocated in the accompanying combined consolidated financial statements are not necessarily indicative of the actual amounts of such indirect expenses that would have been recorded had the Company been a separate independent entity. The Company believes the assumptions underlying its allocation of indirect expenses are reasonable. In addition, an estimate of management fees to NSAM of $0.1 million and $0.2 million for the three and six months ended June 30, 2015, respectively, is recorded as if the Company was managed as an independent entity and is included in general and administrative expense in the combined consolidated statements of operations. The Company began paying management fees to NSAM on November 1, 2015 pursuant to the terms of the Company’s management agreement with NSAM (refer to Note 5).
Principles of Consolidation
The combined consolidated financial statements include the combined accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“VIE”) where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.
Variable Interest Entities
A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.
The Company will evaluate its investments in unconsolidated ventures to determine whether they are a VIE. The Company analyzes new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.
Voting Interest Entities
A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party or through a simple majority vote.
The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.

12

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Non-controlling Interests
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. A non-controlling interest is required to be presented as a separate component of equity on the combined consolidated balance sheets and presented separately as net income (loss) and other comprehensive income (loss) (“OCI”) attributable to non-controlling interests. An allocation to a non-controlling interest may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents.
Estimates
The preparation of combined consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the combined consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions.
Reclassifications
Certain prior period amounts have been reclassified in the combined consolidated financial statements to conform to current period presentation.
Comprehensive Income (Loss)
The Company reports combined consolidated comprehensive income (loss) in separate statements following the combined consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and OCI. The components of OCI principally include the foreign currency translation adjustment, net.
Restricted Cash
Restricted cash primarily consists of amounts related to operating real estate such as escrows for taxes, insurance, capital expenditures, tenant security deposits and payments required under certain lease agreements and amounts related to the Company’s borrowings.
Operating Real Estate
Operating real estate is carried at historical cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred. Major replacements and improvements which extend the life of the asset are capitalized and depreciated over their useful life. Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets.
The Company accounts for purchases of operating real estate that quality as business combinations using the acquisition method, where the purchase price is allocated to tangible assets such as land, building, tenant and land improvements and other identified intangibles, such as in-place leases, above/below-market leases and goodwill. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in the combined consolidated statements of operations.
Assets and Liabilities Held For Sale
Operating real estate which has met the criteria to be classified as held for sale is separately presented on the combined consolidated balance sheets. Such operating real estate is recorded at the lower of its carrying value or its estimated fair value less the cost to sell net of the intangible assets associated with the asset. Once a property is determined to be held for sale, depreciation is no longer recorded. The Company records a gain or loss on sale of real estate when title is conveyed to the buyer and the Company has no substantial economic involvement with the property. If the sales criteria for the full accrual method are not met, the Company defers some or all of the gain or loss recognition by applying the finance, leasing, profit sharing, deposit, installment or cost recovery method, as appropriate, until the sales criteria are met.

13

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Deferred Costs
Deferred costs primarily include deferred financing costs and deferred lease costs. Such costs related to borrowings are recorded net against the carrying value of such borrowings. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized to interest expense over the term of the financing using either the effective interest method or straight-line method depending on the type of financing. Unamortized deferred financing costs are expensed when the associated borrowing is repaid before maturity. Costs incurred in seeking financing transactions, which do not close, are expensed in the period such financing transaction was terminated. Deferred lease costs consist of fees incurred to initiate and renew operating leases, which are amortized on a straight-line basis over the remaining lease term and are recorded to depreciation and amortization in the combined consolidated statements of operations.
Intangible Assets and Intangible Liabilities
The Company records acquired identified intangibles, which includes intangible assets (such as value of the above-market leases, in-place leases, below-market ground leases, goodwill and other intangibles) and intangible liabilities (such as the value of below-market leases), based on estimated fair value. The value allocated to the above or below-market leases is amortized net adjustment to rental income, the value of below-market ground leases is amortized into properties - operating expense and in-place leases is amortized into depreciation and amortization expense, respectively, in the combined consolidated statements of operations on a straight-line basis over the respective remaining lease term.
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination and is not amortized. The Company analyzes goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit, related to such goodwill, is less than the carrying amount as a basis to determine whether the two-step impairment test is necessary. The first step in the impairment test compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds fair value, the second step is required to determine the amount of the impairment loss, if any, by comparing the implied fair value of the reporting unit goodwill with the carrying amount of such goodwill. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date, allocating the reporting unit’s estimated fair value to its net assets and identifiable intangible assets. The residual amount represents the implied fair value of goodwill. To the extent this amount is below the carrying value of goodwill, an impairment loss is recorded in the combined consolidated statements of operations.
The following table presents identified intangibles as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
June 30, 2016 (unaudited)
 
December 31, 2015
 
Gross Amount
 
Accumulated Amortization
 
Net
 
Gross Amount
 
Accumulated Amortization
 
Net
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
In-place lease
$
94,785

 
$
(24,803
)
 
$
69,982

 
$
121,004

 
$
(20,120
)
 
$
100,884

Above-market lease
40,421

 
(6,753
)
 
33,668

 
53,236

 
(5,806
)
 
47,430

Below-market ground lease
55,608

 
(669
)
 
54,939

 
70,971

 
(618
)
 
70,353

Goodwill(1)
14,550

 
NA

 
14,550

 
22,852

 
NA

 
22,852

Total
$
205,364


$
(32,225
)

$
173,139


$
268,063


$
(26,544
)
 
$
241,519

 
 
 
 
 
 
 
 
 
 
 
 
Intangible liabilities:
 
 
 
 
 
 
 
 
 
 
 
Below-market lease
$
37,283

 
$
(6,251
)
 
$
31,032

 
$
40,213

 
$
(4,490
)
 
$
35,723

Above-market ground lease
5,109

 
(66
)
 
5,043

 
5,026

 
(31
)
 
4,995

Total
$
42,392

 
$
(6,317
)
 
$
36,075

 
$
45,239

 
$
(4,521
)
 
$
40,718

_______________________
(1)
Represents goodwill associated with certain share-deal acquisitions of the New European Investments in exchange for the Company’s shares. The goodwill and a corresponding deferred tax liability is recorded at acquisition based on tax basis differences.

14

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Other Assets and Other Liabilities
The following tables present a summary of other assets and other liabilities as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
June 30, 2016 (Unaudited)
 
December 31, 2015
Other assets:
 
 
 
Prepaid expenses
$
4,032

 
$

Deferred lease costs
3,377

 
220

Deferred tax assets, net
1,011

 
3,041

Investment deposits and pending deal costs

 
2,007

Other
1,397

 
973

Total
$
9,817

 
$
6,241

 
 
 
 
 
June 30, 2016 (Unaudited)
 
December 31, 2015
Other liabilities:

 
 
Deferred tax liabilities
$
11,274

 
$
22,026

Prepaid rent and unearned revenue
14,601

 
10,450

Tenant security deposits
4,817

 
4,953

Prepaid service charge reimbursement
2,201

 
1,988

Other
707

 
3,237

Total
$
33,600

 
$
42,654


Revenue Recognition
Operating Real Estate
Rental and escalation income from operating real estate is derived from leasing of space to various types of tenants. Rental revenue recognition commences when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. The leases are for fixed terms of varying length and generally provide for annual rentals, subject to indexation, and expense reimbursements to be paid in quarterly or monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in unbilled rent receivable on the combined consolidated balance sheets. The Company amortizes any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Escalation income represents revenue from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by the Company on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.
In a situation in which a lease or leases associated with a significant tenant have been, or are expected to be, terminated early, the Company evaluates the remaining useful life of depreciable or amortizable assets in the asset group related to the lease that will be terminated (i.e., tenant improvements, above and below market lease intangibles, in-place lease value and leasing commissions). Based upon consideration of the facts and circumstances surrounding the termination, the Company may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within depreciation and amortization in the combined consolidated statements of operations.
Impairment on Investments
Operating Real Estate
The Company’s real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if management’s estimate of the aggregate expected future undiscounted cash flow to be generated by the property is less than the carrying value of the property. In conducting this review, management considers global macroeconomic factors, real estate sector conditions, together with investment specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value of the property and recorded in impairment losses in the combined consolidated statements of operations.

15

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of a tenant to make required rent and other payments contractually due. Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts.
Equity-Based Compensation
The Company accounts for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award. Awards may be based on a variety of measures such as time, performance, market or a combination thereof. For time-based awards, fair value is determined based on the stock price on the grant date. The Company recognizes compensation expense over the vesting period on a straight-line basis or the attribution method depending if the grant is to an employee or non-employee. For performance-based awards, fair value is determined based on the stock price at the date of grant and an estimate of the probable achievement of such measure. The Company recognizes compensation expense over the requisite service period, net of estimated forfeitures, using the accelerated attribution expense method. For market-based measures, fair value is determined using a Monte Carlo analysis under a risk-neutral premise using a risk-free interest rate. The Company recognizes compensation expense, over the requisite service period, net of estimated forfeitures, on a straight-line basis. For awards with a combination of performance or market measures, the Company estimates the fair value as if it were two separate awards. First, the Company estimates the probability of achieving the performance measure. If it is not probable the performance condition will be met, the Company records the compensation expense based on the fair value of the market measure, as described above. This expense is recorded even if the market-based measure is never met. If the performance-based measure is subsequently estimated to be achieved, the Company records compensation expense based on the performance-based measure. The Company would then record a cumulative catch-up adjustment for any additional compensation expense.
Equity-based compensation issued to non-employees is accounted for using the fair value of the award at the earlier of the performance commitment date or performance completion date. Time-based awards are remeasured every quarter based on the stock price as of the end of the reporting period until such awards vest, if any.
Derivatives
The Company seeks to use derivative instruments to manage exposure to interest rate risk and foreign currency exchange rate risk. The change in fair value for a derivative is recorded in earnings.
The Company’s derivative instruments are recorded on the combined consolidated balance sheets at fair value and do not qualify as hedges under U.S. GAAP. Therefore, the change in fair value of derivative instruments are recorded in earnings.
Foreign Currency
Assets and liabilities denominated in a functional foreign currency are translated using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are translated into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency translation adjustment (“CTA”), net, is recorded as a component of accumulated OCI in the combined consolidated statements of equity. For the three and six months ended June 30, 2016, the Company reclassified $0.3 million and $0.7 million of CTA to realized gains (losses) in the combined consolidated statements of operations due to the sale of certain real estate assets (refer to Note 3).
Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are remeasured into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency remeasurement adjustment is recorded in unrealized gain (loss) on investments and other in the combined consolidated statements of operations.
Earnings Per Share
The Company’s basic earnings per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common stock outstanding. Diluted EPS includes restricted stock and the potential dilution that could occur if outstanding restricted stock units (“RSUs”) or other contracts to issue common stock, assuming performance hurdles have been met, were converted to common stock (including limited partnership interests in the Operating Partnership owned by holders other than the Company (“Common Units”) and Common Units which are structured as profits interests (“LTIP Units” collectively referred to as Unit Holders) (refer to Note 7), where such exercise or conversion would result in a lower EPS. The dilutive effect of such RSUs and Unit Holders is calculated assuming all units are converted to common stock.

16

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Income Taxes
The Company will elect to be taxed as a REIT for U.S. federal income tax purposes with the initial filing of its 2015 U.S. federal tax return and will comply with the related provisions of the Internal Revenue Code of 1986, as amended, the (“Internal Revenue Code”). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. The Company distributes to its stockholders 100% of its taxable income and therefore no provision for U.S. federal income taxes has been included in the accompanying combined consolidated financial statements for the three and six months ended June 30, 2016.
The Company conducts its business through foreign subsidiaries which may be subject to local level income tax in the European jurisdictions it operates. The Company has also elected taxable REIT subsidiary (“TRS”) status for one of the Company’s foreign subsidiaries. This enables the Company to provide services that would otherwise be considered impermissible for REITs and participate in activities that do not qualify as “rents from real property.” The TRS is not resident in the U.S. and, as such, not subject to U.S. taxation but is subject to foreign income taxes only. In addition, the REIT will not generally be subject to any additional U.S. taxes on the repatriation of its earnings.
For the Company’s foreign subsidiaries, including the Company’s foreign TRS, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the foreign tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. The Company evaluates the realizability of its deferred tax assets (e.g. net operating loss) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Due to past and projected losses in certain local jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company recognized net cumulative valuation allowances against the Company’s deferred tax assets. The Company will continue to review its deferred tax assets in accordance with U.S. GAAP.
The Company recorded an income tax expense for the three months ended June 30, 2016 of $0.5 million and an income tax benefit for the six months ended June 30, 2016 of $0.1 million.
Other
Refer to Note 2 of the combined consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for further disclosure of the Company’s significant accounting policies.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers. The accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The effective date of the new revenue standard for the Company will be January 1, 2018. The Company is in the process of evaluating the impact, if any, of the update on its combined consolidated financial position, results of operations and financial statement disclosures.
In February 2015, the FASB issued updated guidance that changes the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this guidance in the first quarter 2016 and determined the Company’s Operating Partnership is considered a VIE. The Company is the primary beneficiary of the VIE, the VIE’s assets can be used for purposes other than the settlement of the VIE’s obligations and the Company’s partnership interest is considered a majority voting interest. In addition, the Company identified each of its properties that have non-controlling interests as VIEs. These entities are VIEs because the non-controlling interests do not have substantive kick-out or participating rights and the Company is the primary beneficiary. As such, this standard resulted in the identification of additional VIEs, however it did not have a material impact on the Company’s combined consolidated financial position or results of operations.
In January 2016, the FASB issued an accounting update that addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance is effective for fiscal years and interim periods within those years,

17

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

beginning after December 15, 2017. The Company is currently assessing the impact of the guidance on the Company’s combined consolidated financial position, results of operations and financial statement disclosures.
In February 2016, the FASB issued an accounting update that requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact that this guidance will have on its combined consolidated financial position, results of operations and financial statement disclosures.
In March 2016, the FASB issued guidance clarifying that an assessment of whether an embedded contingent put or call option is clearly and closely related to a borrowing requires only an analysis of the four-step decision sequence. Additionally, entities are not required to separately assess whether the contingency itself is clearly and closely related. Entities are required to apply the guidance to existing instruments in scope using a modified retrospective transition method as of the period of adoption. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted. The Company is evaluating the impact, if any, that this guidance will have on its combined consolidated financial position, results of operations and financial statement disclosures.
In March 2016, the FASB issued guidance which amends several aspects of the accounting for equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. The Company is evaluating the impact, if any, that this guidance will have on its combined consolidated financial position, results of operations and financial statement disclosures.
In June 2016, the FASB issued guidance which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Additionally, entities will have to disclose significantly more information, including information used to track credit quality by year of origination, for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of the guidance on its combined consolidated financial position, results of operations and financial statement disclosures.
3.
Operating Real Estate
The following table presents operating real estate, net as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
 
June 30, 2016 (Unaudited)
 
December 31, 2015
Land
 
$
399,828

 
$
456,703

Buildings and improvements
 
1,069,602

 
1,256,002

Building leasehold interests and improvements
 
232,565

 
334,970

Furniture, fixtures and equipment
 
244

 
218

Tenant improvements
 
63,414

 
72,567

Subtotal
 
1,765,653

 
2,120,460

Less: Accumulated depreciation
 
(48,615
)
 
(35,303
)
Operating real estate, net
 
$
1,717,038

 
$
2,085,157



18

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Real Estate Held for Sale
The following table summarizes the Company’s operating real estate held for sale as of June 30, 2016 (dollars in thousands):
 
 
 
 
Assets
 
 
Description(1)
 
Properties
 
Operating Real Estate, Net
 
Intangible Assets, Net
 
Other assets
 
Total(2)
 
Intangible Liabilities, Net
 
Other Liabilities
 
Total(2)(3)
Internos Portfolio
 
1
 
$
11,551

 
$
1,273

 
$
3,867

 
$
16,691

 
$

 
$
461

 
$
461

IVG Portfolio
 
3
 
43,504

 
5,733

 
7,391

 
56,628

 
3,787

 
1,571

 
5,358

SEB Portfolio
 
3
 
215,849

 
3,580

 
1,523

 
220,952

 
1,639

 
3,107

 
4,746

Deka Portfolio
 
1
 
5,610

 
72

 

 
5,682

 

 

 

Total
 
8

$
276,514


$
10,658


$
12,781

 
$
299,953


$
5,426


$
5,139

 
$
10,565

___________________
(1)
The assets classified as held for sale will be sold on the open market as asset deals subject to standard industry terms and conditions. The assets contributed $5.0 million and $5.2 million of revenue and a pretax loss of $31.8 million and $32.2 million for the three and six months ended June 30, 2016.
(2)
Represents operating real estate and intangible assets and liabilities, net of depreciation and amortization of $2.0 million.
(3)
Excludes the mortgage payable associated with these held for sale assets of $63.5 million.

In the second quarter 2016, the Company sold five none-core assets with a carrying value of $49.9 million for $59.2 million. The Company received $54.8 million of proceeds, net of sales costs. In connection with the sale, the Company recorded a $7.8 million realized gain in the Company’s combined consolidated statements of operations, which represented a reversal of previously recorded accumulated depreciation.
4.
Borrowings
The following table presents borrowings as of June 30, 2016 and December 31, 2015 (dollars in thousands):





June 30, 2016 (Unaudited)

December 31, 2015

Final
Maturity

Contractual
Interest Rate
(2)

Principal
Amount

Carrying
Value

Principal
Amount

Carrying
Value
Mortgage and other notes payable:(1)
 
 
 








U.K. Complex - Floating
Jan-20
 
GBP LIBOR + 1.75%(3)
 
$
54,460

 
$
53,409

 
$
60,369

 
$
59,210

U.K. Complex - Fixed
Jan-20
 
8.325%(3)
 
12,553

 
12,466

 
13,641

 
13,369

Internos Portfolio
Dec-20
 
(4) 
 
75,288

(7) 
74,478

 
81,494

 
80,528

IVG Portfolio
Dec-20
 
(4) 
 
69,591

(7) 
68,380

 
77,896

 
75,308

Deka Portfolio
Dec-20
 
(4) 
 
44,722

(7) 
44,028

 
43,963

 
44,423

SEB Portfolio
Apr-22
 
(5) 
 
647,622

(7) 
638,812

 
684,540

 
674,543

SEB Portfolio - Preferred
Apr-60
 
(6) 
 
117,700

(7) 
117,339

 
115,604

 
115,219

Trianon Tower
Jul-23
 
(8) 
 
366,425

 
364,629

 
359,898

 
357,996

Other - Preferred
Oct-45
 
(9) 
 
6,497

 
4,043

 
6,691

 
4,014

Total mortgage and other notes payable
 
 
 
 
1,394,858

 
1,377,584

 
1,444,096

 
1,424,610

Senior Notes:
 
 
 
 
 
 
 
 
 
 
 
Senior Notes(10)
Dec-16
 
4.625%
 
109,460

 
109,233

 
340,000

 
333,798

Credit Facility
 
 
 
 
 
 
 
 
 
 
 
Credit Facility
May-17(11)
 
LIBOR + 2.75%
 
58,642

 
58,642

 

 

Grand Total
 
 
 
 
$
1,562,960


$
1,545,459


$
1,784,096


$
1,758,408

____________________________________________________________
(1)
All borrowings are non-recourse and are interest-only through maturity, subject to compliance with covenants of the respective borrowing and denominated in the same currency as the assets securing the borrowing.
(2)
Refer to Note 10 for further disclosure regarding derivative instruments which are used to manage interest rate exposure.
(3)
In May 2016, the loan was syndicated and as such the margins on the floating and fixed interest rates were adjusted.
(4)
Represents cross-collateralized borrowings among the IVG Portfolio, Internos Portfolio and Deka Portfolio. Comprised of $4.8 million principal amount of floating rate borrowings at EURIBOR plus 2.7%, $102.0 million principal amount of floating rate borrowings at EURIBOR plus 1.55%, $65.6 million principal amount of floating rate borrowings at EURIBOR plus 1.65% and $17.2 million of floating rate borrowings at GBP LIBOR plus 2.7%.
(5)
Comprised of $332.1 million principal amount of floating rate borrowing at EURIBOR plus 1.8% and $254.1 million of floating rate borrowing at GBP LIBOR plus 1.8%.
(6)
Represents preferred equity certificates with a contractual interest rate of 3.0% per annum through May 2019, which can be prepaid at that time without penalty in part or in full, which increases to EURIBOR plus 12.0% through May 2022 and subsequently to EURIBOR plus 15.0% through final maturity. Certain prepayments prior to May 2019 are subject to the payment of the unpaid coupon on outstanding principal amount through May 2019.

19

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(7)
Prepayment provisions include a fee based on principal amount ranging from 0.25% to 1.0% through December 2019 for the Internos Portfolio, the IVG Portfolio and the Deka Portfolio borrowing and 0.5% to 1.5% through April 2019 for the SEB Portfolio borrowing.
(8)
In June 2016, the Company amended the contractual interest rate from EURIBOR plus 1.45% to EURIBOR plus 1.30%. In addition, a prepayment provision was added in the amendment to include a fee based on principal amount of 0.80% through June 30, 2017, 0.60% through June 30, 2018 and 0.30% through June 30, 2019.
(9)
Includes assets associated preferred equity certificates each with a fixed contractual interest rate of 1.0% per annum plus variable interest based on specified income levels associated to the German property companies of the IVG Portfolio, Deka Portfolio and Internos Portfolio, respectively, which can be prepaid at any time without penalty through final maturity, being thirty years from the issuance date.
(10)
The Company has the right to redeem the Senior Notes prior to maturity, in whole or in part from time to time, provided that no redemption in part results in the aggregate principal amount of the Senior Notes outstanding being reduced to less than $100 million. The cash redemption price is equal to the greater of: (i) 100% of the principal amount of the Senior Notes; and (ii) the sum of the present values of the remaining scheduled payments of interest and principal of the Senior Notes discounted to such date of redemption on a semiannual basis at a rate of 0.5% per annum.
(11)
Subject to one year extensions.

The following table presents a reconciliation of principal amount to carrying value of the Company’s mortgage and other notes payables, the Senior Notes and the Credit Facility as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
 
June 30, 2016 (Unaudited)
 
December 31, 2015
Principal amount
 
$
1,562,960

 
$
1,784,096

Premium (discount), net
 
(456
)
 
(1,144
)
Deferred financing costs, net(1)
 
(17,045
)
 
(24,544
)
Carrying value
 
$
1,545,459

 
$
1,758,408

________________
(1)
Includes $0.2 million relating to the Senior Notes.
The following table presents scheduled principal on borrowings, based on final maturity as of June 30, 2016 (dollars in thousands):

 
Total
 
Mortgage
and Other Notes
Payable
 
Senior Notes
 
Credit Facility
July 1 to December 31, 2016
 
$
109,460

 
$

 
$
109,460

 
$

Years ending December 31:
 

 
 
 
 
 
 
2017
 
58,642

 

 

 
58,642

2018
 

 

 

 

2019
 

 

 

 

2020
 
263,111

 
263,111

 

 

Thereafter
 
1,131,747

 
1,131,747

 

 

Total
 
$
1,562,960

 
$
1,394,858

 
$
109,460

 
$
58,642

As of June 30, 2016 and December 31, 2015, the Company was in compliance with all of its financial covenants.
Senior Notes
In July 2015, the Company issued $340.0 million principal amount of 4.625% senior stock-settlable notes due December 2016 (the “Senior Notes”) for aggregate net proceeds of $331.0 million, after deducting the underwriters’ discount and other expenses. The Senior Notes are senior unsubordinated and unsecured obligations of the Company and NorthStar Realty and NorthStar Realty’s operating partnership guarantee payments on the Senior Notes. Subject to specified conditions being met, such as public notice at least 60 days prior to maturity, the Company may elect to settle all or part of the principal amount of the Senior Notes in the Company’s common stock in lieu of cash, in which case the number of shares delivered per note will be based on the Company’s common stock prices during a measurement period immediately preceding the maturity date.
The proceeds from the issuance of the Senior Notes were distributed to subsidiaries of NorthStar Realty, which used such amounts for general corporate purposes, including, among other things, the funding of acquisitions, including the Trianon Tower and the repayment of NorthStar Realty’s borrowings. Such distribution to NorthStar Realty was recorded in equity in net transactions with NorthStar Realty. In February 2016, the Company repurchased approximately $150.0 million of the Senior Notes, at a slight discount to par value, through privately negotiated transactions. In June 2016, the Company repurchased approximately $80.0 million of the Senior Notes, at a slight premium to par value, through privately negotiated transactions.

20

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Credit Facility
In May 2016, the Company entered into a $75.0 million corporate revolving credit facility (the “Credit Facility”) with certain commercial bank lenders, with an initial one year term. The Credit Facility is secured by collateral relating to a borrowing base and guarantees by certain subsidiaries of the Company. In July 2016, the Credit Facility was repaid.
5.    Related Party Arrangements
NorthStar Asset Management Group
Management Agreement
Upon completion of the Spin-off, the Company entered into a management agreement with an affiliate of NSAM for an initial term of 20 years, which automatically renews for additional 20-year terms each anniversary thereafter unless earlier terminated. As asset manager, NSAM is responsible for the Company’s day-to-day operations, subject to supervision and management of the Company’s board of directors. Through its global network of subsidiaries and branch offices, NSAM performs services and engages in activities relating to, among other things, investments and financing, portfolio management and other administrative services, such as accounting and investor relations, to the Company and its subsidiaries. The management agreement with NSAM provides for a base management fee and incentive fee. The management contract with NSAM commenced on November 1, 2015, and as such, there were no management fees incurred for the three and six months ended June 30, 2015.
Base Management Fee
For the three and six months ended June 30, 2016, the Company incurred $3.5 million and $7.0 million, respectively, related to the base management fee. As of June 30, 2016, $3.5 million is recorded in due to related party on the combined consolidated balance sheets. The base management fee to NSAM could increase subsequent to June 30, 2016 by an amount equal to 1.5% per annum of the sum of:
any equity the Company issues in exchange or conversion of exchangeable or stock-settlable notes;
any other issuances by the Company of common equity, preferred equity or other forms of equity, including but not limited to LTIP Units in the Operating Partnership (excluding units issued to the Company and equity-based compensation, but including issuances related to an acquisition, investment, joint venture or partnership); and
cumulative cash available for distribution (“CAD”), if any, of the Company in excess of cumulative distributions paid on common stock, LTIP Units or other equity awards which began with our fiscal quarter ended March 31, 2016.
Incentive Fee
For the three and six months ended June 30, 2016, the Company did not incur an incentive fee. The incentive fee is calculated and payable quarterly in arrears in cash, equal to:
the product of: (a) 15.0% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of $0.30 per share and up to $0.36 per share; plus
the product of: (a) 25.0% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of $0.36 per share;
multiplied by the Company’s weighted average shares outstanding for the calendar quarter.
Weighted average shares represents the number of shares of the Company’s common stock, LTIP Units or other equity-based awards (with some exclusions), outstanding on a daily weighted average basis. With respect to the base management fee, all equity issuances are allocated on a daily weighted average basis during the fiscal quarter of issuance. With respect to the incentive fee, such amounts will be appropriately adjusted from time to time to take into account the effect of any stock split, reverse stock split, stock dividend, reclassification, recapitalization or other similar transaction.
Additional Management Agreement Terms
If the Company were to spin-off any asset or business in the future, such entity would be managed by NSAM on terms substantially similar to those set forth in the management agreement between the Company and NSAM. The management agreement further provides that the aggregate base management fee in place immediately after any future spin-off will not be less than the aggregate base management fee in place at the Company immediately prior to such spin-off.

21

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The Company’s management agreement with NSAM provides that in the event of a change of control of NSAM or other event that could be deemed an assignment of the management agreement, the Company will consider such assignment in good faith and not unreasonably withhold, condition or delay the Company’s consent. The management agreement further provides that the Company anticipates consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over $10 billion of assets under management. The management agreement also provides that, notwithstanding anything in the agreement to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction by the Company or NSAM, directly or indirectly, the surviving entity will succeed to the terms of the management agreement.
Payment of Costs and Expenses and Expense Allocation
The Company is responsible for all of its direct costs and expenses and reimburses NSAM for costs and expenses incurred by NSAM on the Company’s behalf. In addition, NSAM may allocate indirect costs to the Company related to employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the Company’s management agreement with NSAM (the “G&A Allocation”). The Company’s management agreement with NSAM provides that the amount of the G&A Allocation will not exceed the following: (i) 20% of the combined total of: (a) the Company’s and NorthStar Realty’s (the “NorthStar Listed Companies”) general and administrative expenses as reported in their combined consolidated financial statements excluding: (1) equity-based compensation expense, (2) non-recurring items, (3) fees payable to NSAM under the terms of the applicable management agreement and (4) any allocation of expenses to the NorthStar Listed Companies (“NorthStar Listed Companies’ G&A”); and (b) NSAM’s general and administrative expenses as reported in its consolidated financial statements, excluding equity-based compensation expense and adding back any costs or expenses allocated to any managed company of NSAM; less (ii) the NorthStar Listed Companies’ G&A. The G&A Allocation may include the Company’s allocable share of NSAM’s compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing the Company’s affairs, based upon the percentage of time devoted by such personnel to the Company’s affairs. The G&A Allocation may also include rental and occupancy, technology, office supplies, travel and entertainment and other general and administrative costs and expenses, which may be allocated based on various methodologies, such as weighted average employee count or the percentage of time devoted by personnel to such NorthStar Listed Companies’ affairs. In addition, the Company will pay directly or reimburse NSAM for an allocable portion of any severance paid pursuant to any employment, consulting or similar service agreements in effect between NSAM and any of its executives, employees or other service providers.
In connection with the Spin-off and the related agreements, the NorthStar Listed Companies’ obligation to reimburse NSAM for the G&A Allocation and any severance are shared among the NorthStar Listed Companies, at NSAM’s discretion, and the 20% cap on the G&A Allocation, as described above, applies on an aggregate basis to the NorthStar Listed Companies. NSAM currently determined to allocate these amounts based on assets under management.
For the three and six months ended June 30, 2016, NSAM allocated an immaterial amount and $0.1 million, respectively.
In addition, the Company, together with NorthStar Realty and any company spun-off from the Company or NorthStar Realty, will pay directly or reimburse NSAM for up to 50% of any long-term bonus or other compensation that NSAM’s compensation committee determines shall be paid and/or settled in the form of equity and/or equity-based compensation to executives, employees and service providers of NSAM during any year. Subject to this limitation and limitations contained in any applicable management agreement between NSAM and NorthStar Realty or any company spun-off from the Company or NorthStar Realty, the amount paid by the Company, NorthStar Realty and any company spun-off from the Company or NorthStar Realty will be determined by NSAM in its discretion. At the discretion of NSAM’s compensation committee, this compensation may be granted in shares of the Company’s restricted stock, restricted stock units, long-term incentive plan units or other forms of equity compensation or stock-based awards; provided that if at any time a sufficient number of shares of the Company’s common stock are not available for issuance under the Company’s equity compensation plan, such compensation shall be paid in the form of RSUs, LTIP Units or other securities that may be settled in cash. The Company’s equity compensation for each year may be allocated on an individual-by-individual basis at the discretion of the NSAM compensation committee and, as long as the aggregate amount of the equity compensation for such year does not exceed the limits set forth in the management agreement, the proportion of any particular individual’s equity compensation may be greater or less than 50%.
NSAM purchase of common stock
In June 2016, NSAM purchased 0.2 million shares of the Company’s common stock through open market purchases for an aggregate purchase price of $2.3 million.

22

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

6.
Compensation Expense
The following summarizes the equity-based compensation plans of the Company and NorthStar Realty, as they relate to compensation payable by the Company or its Operating Partnership:
NorthStar Realty Europe Equity Plan
In October 2015, the board of directors of the Company adopted the NorthStar Realty Europe Corp. 2015 Omnibus Stock Incentive Plan (the “2015 Plan”), which was subsequently approved by the Company’s sole stockholder at the time. The 2015 Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, shares of common stock of NorthStar Europe, in the form of restricted shares and other equity-based awards such as LTIP Units or any combination of the foregoing. Following the completion of the Spin-off, the 2015 Plan is administered by the compensation committee of the board of directors of the Company. The eligible participants in the 2015 Plan include directors, officers, employees, co-employees, consultants and advisors of the Company, NSAM or of any parent or subsidiary who provides services to the Company. 10 million shares of common stock are reserved and available for issuance under the 2015 Plan, plus on January 1, 2017 and each January 1 thereafter, an additional 2% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 will become available for issuance. In addition, shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise of a stock option or settlement of an award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of common stock or otherwise terminated (other than by exercise) will be added back to the shares of common stock available for issuance under the 2015 Plan. No equity awards under the 2015 Plan were issued prior to the Spin-off.
In March 2016, as contemplated in connection with the Spin-off, the Company granted an aggregate of 995,698 restricted shares of common stock and 1,493,551 RSUs to executive officers and employees of NSAM or one of its subsidiaries. The restricted shares of common stock vest over the approximately four-year period ending December 31, 2019, subject to continued employment with NSAM or one of its subsidiaries and the RSUs are subject to the achievement of performance-based vesting conditions and continued employment with NSAM or one of its subsidiaries. Approximately one-half of these RSUs are market-based awards and are subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return and continued employment with NSAM or one of its subsidiaries over the approximately four-year period from the grant date through December 31, 2019 (“Absolute RSUs”). The other approximately one-half of these RSUs are market-based awards and are subject to the achievement of performance-based hurdles based on the Company’s total stockholder return relative to the MSCI US REIT Index and continued employment with NSAM or one of its subsidiaries over the approximately four-year period from the grant date through December 31, 2019 (“Relative RSUs”). Award recipients may earn up to 100% of the Absolute RSUs that were granted and up to 125% of the Relative RSUs that were granted. Upon vesting pursuant to the terms of the Absolute RSUs and Relative RSUs, the RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each share that vests) on or after the date the RSUs were initially granted.
NSAM Bonus Plan
Pursuant to the Company’s management agreement with NSAM, the Company and NorthStar Realty are responsible for paying up to 50% of the long-term bonuses earned under the NorthStar Asset Management Group Inc. Executive Incentive Bonus Plan (“NSAM Bonus Plan”). Long-term bonuses are generally paid to executives in the form of equity-based awards of the Company, NorthStar Realty and NSAM, subject to performance-based and time-based vesting conditions over a four-year performance period.
In connection with the NSAM Bonus Plan, for 2015, a portion of the long-term bonus was paid in restricted shares of common stock and a portion of the long-term bonus was paid by the Company by issuing RSUs. In connection with the 2015 long-term bonuses paid by the Company, in February 2016, the Company granted 335,336 restricted shares of common stock to NSAM’s executive officers, of which 25% were vested upon grant and the remainder is subject to vesting in equal installments on December 31, 2016, 2017 and 2018, subject to the recipient’s continued employment with NorthStar Realty or NSAM through the applicable vesting dates. In connection with the issuance of these shares, in February 2016, the Company retired 44,214 of the vested shares of common stock to satisfy the minimum statutory withholding requirements. In addition, in February 2016, the Company granted 194,422 RSUs to NSAM’s executive officers, which are subject to vesting based on the total stockholder return of NorthStar Realty for the period prior to the Spin-off and the combined total stockholder return of NorthStar Realty and the Company for the period after the Spin-off, CAD of the Company and continued employment with NorthStar Realty or NSAM over the four-year period ending December 31, 2018. Following the determination of the number of these performance-based RSUs that vest, the Company will settle the vested RSUs by issuing an equal number of shares of common stock and the NSAM executives will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each RSU that vests) on or after

23

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

January 1, 2015. In February 2016, the Company also granted 283,305 restricted shares of common stock to certain of NSAM’s non-executive employees, including executive officers of the Company, with substantially similar terms to the executive awards subject to time-based vesting conditions.
NorthStar Realty Equity Plans
NorthStar Realty issued equity-based awards to directors, officers, employees, consultants and advisors pursuant to the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (as amended from time to time, the “NorthStar Realty Stock Plan”) and the NorthStar Realty Executive Incentive Bonus Plan, as amended (the “NorthStar Realty Plan” and collectively the “NorthStar Realty Equity Plans”).
All of the vested and unvested equity-based awards granted by NorthStar Realty prior to the Spin-off remain outstanding following the Spin-off. In connection with the Spin-off, holders of shares of common stock of NorthStar Realty and LTIP units of NorthStar Realty’s operating partnership subject to outstanding equity awards received one share of the Company’s common stock or one Common Unit in the Company’s operating partnership, respectively, for every six shares of common stock of NorthStar Realty or LTIP units of NorthStar Realty’s operating partnership held (prior to NorthStar Realty’s one-for-two reverse stock split effected immediately following the Spin-off), all of which generally remain subject to the same vesting and other terms that applied prior to the Spin-off. Other equity and equity-based awards relating to NorthStar Realty’s common stock, such as RSUs, were adjusted to also relate to one-third of a share of the Company’s common stock (after giving effect to NorthStar Realty’s one-for-two reverse stock split effected immediately following the Spin-off), but otherwise generally remain subject to the same vesting and other terms that applied prior to the Spin-off. Performance-based vesting conditions based on total stockholder return of NorthStar Realty or NorthStar Realty and NSAM were adjusted to refer to combined total stockholder return of NorthStar Realty and the Company or NorthStar Realty, NSAM and the Company, respectively, with respect to periods after the Spin-off and references to a change of control or similar term in outstanding awards, which referred to a change of control of either NorthStar Realty or NSAM, were adjusted, to the extent such awards relate to common stock of the Company or Common Units in the Company’s Operating Partnership, to refer to a change of control of either the Company or NSAM.
Following the Spin-off, NorthStar Realty and the compensation committee of its board of directors continues to administer all awards issued under the NorthStar Realty Equity Plans but the Company is obligated to issue shares of the Company’s common stock or other equity awards of its subsidiaries or make cash payments in lieu thereof or with respect to dividend or distribution equivalent obligations to the extent required by these awards under the NorthStar Realty Equity Plans. These awards continue to be governed by the NorthStar Realty Equity Plans, as applicable, and shares of the Company’s common stock issued pursuant to these awards will not be issued pursuant to, or reduce availability under the 2015 Plan.
In connection with the Spin-off, the Company issued the following related to the NorthStar Realty Equity Plans that remain outstanding as of June 30, 2016: 1,362 of restricted stock, net of forfeitures, which remain subject to vesting; 618,511 Common Units, net of forfeitures and conversions, of which 232,081 remain subject to vesting; 83,333 RSUs, which remain subject to vesting and 375,293 RSUs related to executives of NSAM only, which remain subject to vesting based on performance conditions and continued NSAM employment. On December 31, 2015, the performance hurdle for 117,472 RSUs was met pursuant to NorthStar Realty’s bonus plan for 2012 and the Company settled these RSUs on January 4, 2016. Additionally, in connection with the initial election of the independent members of the Company’s board of directors, the Company issued 17,528 restricted shares of common stock and 70,112 LTIP Units to such directors.

The following table presents activity related to the issuance, vesting and forfeitures of restricted stock and Common Units. The balance as of June 30, 2016 represents Common Units whether vested or not that are outstanding and unvested shares of restricted stock (grants in thousands):
 
Six Months Ended June 30, 2016
 
Restricted Stock(1)
 
Common Units
 
Total Grants
 
Weighted
Average
Grant Price
December 31, 2015
45

 
692

 
737

 
$
24.03

New grants
1,625

 

 
1,625

 
9.28

Vesting of restricted stock
(137
)
 

 
(137
)
 
9.51

Forfeited or canceled grants

 
(4
)
 
(4
)
 
22.40

June 30, 2016
1,533

 
688

 
2,221

 
$
14.14

___________________
(1)
Represents restricted stock included in common stock.

24

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

For the three and six months ended June 30, 2016, the Company recorded $3.8 million and $7.0 million, respectively, of equity-based compensation expense which is recorded in compensation expenses on the combined consolidated statements of operations. As of June 30, 2016, equity-based compensation expense to be recognized over the remaining vesting period through December 2019 is $21.9 million, provided there are no forfeitures.
In connection with the pending change in control of NSAM as a result of its pending merger (the “Merger”) with NorthStar Realty Finance Corp. and Colony Capital, Inc. substantially all outstanding time-based equity awards issued to NSAM executives will vest in accordance with their terms. In addition, all or a portion of the outstanding performance-based awards issued to executives will vest in accordance with their terms subject to forfeiture and reduction.
7.
Stockholders’ Equity
Spin-off
In connection with the Spin-off, NorthStar Realty distributed to its common stockholders all of the common stock of the Company in a pro rata distribution of one share of the Company’s common stock for each six shares of NorthStar Realty common stock.
Share Repurchase
In November 2015, the Company’s board of directors authorized the repurchase of up to $100 million of its outstanding common stock. The authorization expires in November 2016, unless otherwise extended by the Company’s board of directors. For the three months ended June 30, 2016, the Company repurchased 0.3 million shares of its common stock for approximately $2.3 million. For the six months ended June 30, 2016, the Company repurchased 0.6 million shares of its common stock for approximately $6.3 million. From November 2015 through June 30, 2016, the Company repurchased 4.3 million shares of its common stock for approximately $47.7 million with $52.3 million remaining under the stock repurchase plan.
Dividends
The following table presents dividends declared (on a per share basis) for the six months ended June 30, 2016:
Common Stock
Declaration Date
 
Dividend Per Share
March 15
 
$
0.15

May 10
 
$
0.15

Earnings Per Share
The following table presents EPS for the three and six months ended June 30, 2016 and 2015 (dollars and shares in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
Numerator:
 
 
 
 
 
 
 
 
Net income (loss) attributable to NorthStar Realty Europe Corp.
$
(33,909
)
 
$
(61,711
)
 
$
(62,891
)
 
$
(77,974
)
 
Net income (loss) attributable to Unit Holders non-controlling interest
(349
)
 

 
(700
)
 

 
Net income (loss) attributable to common stockholders and Unit Holders(1)
$
(34,258
)
 
$
(61,711
)
 
$
(63,591
)

$
(77,974
)

Denominator:(2)
 
 
 
 
 
 
 
 
Weighted average shares of common stock
59,116

 
62,988

(3) 
59,267

 
62,988

(3) 
Weighted average Unit Holders(1)
690

 

 
691

 

 
Weighted average shares of common stock and Unit Holders(2)
59,806

 
62,988

(3) 
59,958

 
62,988

(3) 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
Basic
$
(0.57
)
 
$
(0.98
)
(3) 
$
(1.06
)
 
$
(1.24
)
(3) 
Diluted
$
(0.57
)
 
$
(0.98
)
(3) 
$
(1.06
)
 
$
(1.24
)
(3) 
____________________________________________________________
(1)
The EPS calculation takes into account Unit Holders, which receive non-forfeitable dividends from the date of grant, share equally in the Company’s net income (loss) and convert on a one-for-one basis into common stock.

25

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(2)
Excludes the effect of restricted stock and RSUs outstanding that were not dilutive as of June 30, 2016. These instruments could potentially impact diluted EPS in future periods, depending on changes in the Company’s stock price and other factors.
(3)
Basic and diluted earnings per common share for the three and six months ended June 30, 2015 was calculated using the common stock issued in connection with the Spin-off and exclude the effect of any equity-based awards outstanding at that date that were not dilutive.
8.
Non-controlling Interests
Operating Partnership
Non-controlling interests include the aggregate Units Holders’ interest in the Operating Partnership. Net income (loss) attributable to this non-controlling interest is based on the weighted average Unit Holders’ ownership percentage of the Operating Partnership for the respective period. As the Operating Partnership was formed in conjunction with the Spin-off, non-controlling interest related to Unit Holders was recognized for the year ended December 31, 2015 to retrospectively adjust for common control of the business (refer to Note 2). The issuance of additional common stock, Common Units or LTIP Units changes the percentage ownership of both the Unit Holders and the Company. Since a Common Unit or LTIP Unit is generally redeemable for cash or common stock at the option of the Company, it is deemed to be equivalent to common stock. Therefore, such transactions are treated as capital transactions and result in an allocation between stockholders’ equity and non-controlling interests on the accompanying combined consolidated balance sheets to account for the change in the ownership of the underlying equity in the Operating Partnership. On a quarterly basis, the carrying value of such non-controlling interest is allocated based on the number of Unit Holders in total in proportion to the number of Units Holders plus the number of shares of common stock outstanding. In connection with the formation of the Operating Partnership in November 2015, the Company recorded a non-controlling interest of $8.7 million related to Unit Holders. As of June 30, 2016, 688,623 Common Units and LTIP Units were outstanding, representing a 1.1% ownership and non-controlling interest in the Operating Partnership. Net income (loss) attributable to the Operating Partnership non-controlling interest for the three and six months ended June 30, 2016 was a net loss of $0.3 million and $0.7 million.
Redeemable Non-controlling Interest
In connection with the acquisition of the Trianon Tower, the Company sold a 5.5% non-controlling interest in certain subsidiaries that own the Trianon Tower for $1.5 million. In conjunction with the sale, the Company entered into a put option whereby the holder can redeem its interest for cash at the greater of fair market value of such non-controlling interest or €2.1 million beginning in November 2020 through January 2021. The Company recorded the non-controlling interest at its acquisition date fair value as temporary equity, due to the redemption option and accretes the redeemable non-controlling interest to its redemption value. For the three and six months ended June 30, 2016 the Company recorded an immaterial amount of net (income) loss attributable to non-controlling interests to adjust the carrying value to its redemption value as of June 30, 2016.
9.
Fair Value
Fair Value Measurement
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities are recorded at fair value on the combined consolidated balance sheets and are categorized based on the inputs to the valuation techniques as follows:
Level 1.
Quoted prices for identical assets or liabilities in an active market.
Level 2.
Financial assets and liabilities whose values are based on the following:
(a)
Quoted prices for similar assets or liabilities in active markets.
(b)
Quoted prices for identical or similar assets or liabilities in non-active markets.
(c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
(d)
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
Level 3.
Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

26

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following is a description of the valuation techniques used to measure fair value of assets and liabilities accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.
Derivative Instruments
Derivative instruments are valued using a third-party pricing service. These quotations are not adjusted and are generally based on valuation models with observable inputs such as interest rates and contractual cash flow, and as such, are classified as Level 2 of the fair value hierarchy. Derivative instruments are also assessed for credit valuation adjustments due to the risk of non-performance by the Company and derivative counterparties.
Fair Value of Financial Instruments
In addition to the above disclosures regarding financial assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.
The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
June 30, 2016
 
December 31, 2015
 
Principal/Notional
Amount
 
Carrying
Value
 
Fair
Value
 
Principal/Notional
Amount
 
Carrying
Value
 
Fair
Value
Financial assets:(1)
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
1,304,338

 
$
11,672

 
$
11,672

 
$
1,583,569

 
$
23,792

 
$
23,792

Financial liabilities:(1)
 
 
 
 
 
 
 
 
 
 
 
Mortgage and other notes payable
$
1,394,858

 
$
1,377,584

 
$
1,377,584

 
$
1,444,096

 
$
1,424,610

 
$
1,424,610

Derivative liabilities
89,250

 
1,221

 
1,221

 

 

 

Senior notes
109,460

 
109,233

 
108,242

 
340,000

 
333,798

 
327,330

Credit Facility
58,642

 
58,642

 
58,642

 

 

 

_____________________________
(1)
The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of the reporting date. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
Mortgage and Other Notes Payable
As of the reporting date, the Company believes the carrying value of its mortgage and other notes payable approximates fair value. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
Senior Notes
For the Senior Notes, the Company uses available market information, which includes quoted market prices or recent transactions, if available, to estimate their fair value and are, therefore, based on observable inputs or quoted prices for similar liabilities in an active market, and as such, are classified as Level 2 of the fair value hierarchy.
Credit Facility
As of the reporting date, the Company believes the carrying value of the Credit Facility approximates fair value. The fair value measurement is based on observable inputs, and as such, is classified as Level 2 of the fair value hierarchy.

27

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

10.
Risk Management and Derivative Activities
Derivatives
The Company uses derivative instruments primarily to manage interest rate and currency risk and such derivatives are not considered speculative. These derivative instruments are in the form of interest cap agreements where the primary objective is to minimize interest rate risks associated with investment and financing activities and foreign currency forward agreements where the primary objective is to minimize foreign currency exchange rate risks associated with operating 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.
The following tables present derivative instruments that were not designated as hedges under U.S. GAAP as of June 30, 2016 and December 31, 2015 (dollars in thousands):

Number

Notional
Amount

Fair Value
Asset
(Liability)

Range of
Fixed GBP LIBOR / EURIBOR

Range of Maturity
As of June 30, 2016:
 
 
 
 
 
 
 
 
 
 
Interest rate caps
5

 
 
$
1,287,668

 
$
9,826

 
(1) 
 
October 2016 - July 2023
Foreign currency forwards(2)
2

 
 
105,920

 
625

 
N/A
 
July 2016 - November 2017
Total
7

 
 
$
1,393,588

 
$
10,451

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015:


 
 


 


 
 
 
 
Interest rate caps
6

 
 
$
1,429,216

 
$
23,375

 
(1) 
 
April 2016 - July 2023
Foreign currency forwards(2)
3

 
 
154,353

 
417

 
N/A
 
February 2016 - November 2017
Total
9

 
 
$
1,583,569

 
$
23,792

 
 
 
 
_____________________________
(1)    Includes a range of interest rate caps of 0.5% for EURIBOR and 2.0% for GBP LIBOR.
(2)    Includes Euro and U.K. Pounds Sterling currency forwards.
The following table presents the fair value of derivative instruments, as well as their classification on the combined consolidated balance sheets, as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
Balance Sheet
 
June 30,
2016
 
December 31,
2015

Location
 
 
Interest rate caps
Derivative assets
 
$
9,826

 
$
23,375

Foreign currency forwards
Derivative assets
 
$
1,846

 
$
417

Foreign currency forwards
Derivative liabilities
 
$
(1,221
)
 
$


28

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following table presents the effect of derivative instruments in the combined consolidated statements of operations for the three and six months ended June 30, 2016 and 2015 (dollars in thousands):
 
 
 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,

 

2016
 
2015
 
2016
 
2015
Amount of gain (loss) recognized in earnings:
Statements of operations location:(1)

 
 
 
 
 
 
 
Adjustment to fair value of interest rate caps
Unrealized gain (loss) on investments and other

$
(3,391
)
 
$
1,833

 
$
(14,175
)
 
$
1,755

Adjustment to fair value of foreign currency forwards
Unrealized gain (loss) on investments and other
 
4,638

 
(4,253
)
 
207

 
(4,253
)
Net cash receipt (payment) on derivatives
Unrealized gain (loss) on investments and other
 
(776
)
 

 
(1,194
)
 

_____________________________
(1)    Excludes the unrealized gain (loss) relating to foreign currency remeasurement adjustments.    
The Company’s counterparties held no cash margin as collateral against the Company’s derivative contracts as of June 30, 2016 and December 31, 2015. The Company had no derivative financial instruments that were designated as hedges in qualifying hedging relationships as of June 30, 2016 and December 31, 2015.
11.
Commitments and Contingencies
The Company is involved in various litigation matters arising in the ordinary course of its business. Although the Company is unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, the current legal proceedings are not expected to have a material adverse effect on the Company’s financial position or results of operations.
The Company engages third-party service providers for its portfolio who are remunerated based on either a fixed fee or a percentage of rental income. The contracts terms vary by party and are subject to break options. These costs are recorded in properties - operating expense and other expenses in the combined consolidated statements of operations.
12.
Segment Reporting
The Company currently conducts its business through the following two segments, based on how management reviews and manages its business:
Real Estate - The European commercial real estate business is predominantly focused on office properties. The Company acquired its first real estate investment in September 2014.
Corporate - The corporate segment includes corporate level interest expense, management fee and general and administrative expenses.

29