10-K 1 nre1231201610-k.htm 10-K Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
x  
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
o 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o   No x  
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. x
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
x
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2016, was $544,292,209. As of March 9, 2017, the registrant had issued and outstanding 54,903,050 shares of common stock, $0.01 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE
None.
 
 
 
 
 




NORTHSTAR REALTY EUROPE CORP.
FORM 10-K
TABLE OF CONTENTS
Index
 
Page
 
 
 
 
 
 
 
 








2


FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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;
the effect of the Mergers (as defined in Item 1. Business) on our business;
the ability of Colony NorthStar Inc., or CLNS, to scale its operations in Europe to effectively manage our company;
the unknown impact of the exit of the United Kingdom, or Brexit, or one or more other countries from the European Union, or EU, or the potential default of one or more countries in the EU or the potential break-up of the EU;
our ability to qualify and remain qualified as a real estate investment trust, or REIT;
adverse domestic or international economic geopolitical 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 effect of increased activist stockholders and stockholder activism generally;
the effects of being an externally-managed company, including our reliance on CLNS and its affiliates and sub-advisors/co-venturers in providing management services to us, the payment of substantial base management and incentive fees to our manager, the allocation of investments by CLNS among us and CLNS’s other sponsored or managed companies and strategic vehicles and various conflicts of interest in our relationship with CLNS;
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;
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;
tenant defaults or bankruptcy;

3


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;
our ability to satisfy and manage our capital requirements;
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;
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 and U.K. Pound Sterling, relative to the U.S. dollar due to quantitative easing in Europe, Brexit 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;
the loss of our exemption from the definition of an “investment company” under the Investment Company Act of 1940, as amended;
CLNS’ 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 consolidated financial statements included in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 “Risk Factors” in this Annual Report on Form 10-K beginning on page 13. 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
Item 1. Business
References to “we,” “us” or “our” refer to NorthStar Realty Europe Corp. and its subsidiaries unless the context specifically requires otherwise. References to “our Manager” refer to NorthStar Asset Management Group Inc. for the period prior to the Mergers (refer below) and Colony NorthStar, Inc., for the period subsequent to the Mergers. As part of the Merger, NSAM changed its name to Colony NorthStar, Inc.
Overview
NorthStar Realty Europe Corp., a publicly-traded real estate investment trust, or REIT, is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France. Our objective is to provide our stockholders with stable and recurring cash flow supplemented by capital growth over time. We commenced operations on November 1, 2015 following the spin-off by NorthStar Realty Finance Corp., or NorthStar Realty, of its European real estate business (excluding its European healthcare properties) into a separate publicly-traded company, NorthStar Realty Europe Corp., a Maryland corporation, or the Spin-off.
Upon completion of the Spin-off, NorthStar contributed: (i) its business activities related to the launch of the European real estate business and the acquisition of a multi-tenant office complex located in the United Kingdom, or the U.K. Complex, acquired on September 16, 2014, or the Acquisition Date, referred to as the NorthStar Europe Predecessor; (ii) other European real estate portfolios acquired in the second and third quarters of 2015 primarily comprised of multi-tenant office properties, or 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, our common stock began trading on the New York Stock Exchange, or the NYSE, under the symbol “NRE.” We are externally managed and advised by an affiliate of our Manager. Substantially all of our assets, directly or indirectly, are held by, and we conduct our operations, directly or indirectly, through NorthStar Realty Europe Limited Partnership, a Delaware limited partnership and our operating partnership, or our Operating Partnership. We have elected to be taxed and will continue to conduct our operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.
Significant Developments
Sales Initiatives
In 2016, we announced a strategy to focus on prime office properties located in key cities within Germany, the United Kingdom and France, or our Core Market. As a result, we undertook a sales initiative, selling 22 properties as of March 1, 2017 and realizing $380 million of net proceeds. Consequently, we no longer operate in Belgium, Italy or Sweden. In 2017, we expect to continue executing on our sales initiatives primarily with the goal of maximizing long-term stockholder value.
Senior Notes
In July 2015, we issued $340 million aggregate principal amount of 4.625% senior stock-settlable notes due December 2016, or the Senior Notes. In 2016, we repurchased approximately $272.3 million of the Senior Notes and settled the remaining amount in cash at maturity.
Mergers Agreement among NSAM, NorthStar Realty and Colony Capital, Inc.
On January 10, 2017, our external manager, NorthStar Asset Management Group Inc., or NSAM, completed a tri-party merger with NorthStar Realty and Colony Capital, Inc., or Colony, under which the companies combined in an all-stock merger, or the Mergers, of equals transaction to create a diversified real estate and investment management company. Under the terms of the merger agreement, NSAM, Colony and NorthStar Realty, through a series of transactions, merged with and into NSAM, which was renamed Colony NorthStar Inc., or Colony NorthStar or CLNS, (NYSE: CLNS). Colony NorthStar is a leading global equity REIT with an embedded investment management platform.

5


Our Investments
The following presents a summary of our portfolio as of December 31, 2016, adjusted for sales through March 1, 2017:
 
 
 
Portfolio by Geographic Location
 
 
2016(4)
2015
Total portfolio, at cost(1)
$2.0 billion
a2016piechart04.jpg
a2015piechart04.jpg
Number of properties
30
Number of countries
6
Total square meters(2)
367,078
Weighted average occupancy
84%
Weighted average lease term
6.2 years
In-place rental income:(3)
 
Core Markets
83%
Other
17%
___________________________________
(1)
Amount includes transaction costs incurred, deferred financing costs and other assets assumed and is translated using exchange rates as of December 31, 2016.
(2)
Based on contractual rentable area, located in many key European markets, including Frankfurt, Hamburg, Berlin, London and Paris.
(3)
In-place rental income represents gross rent adjusted for vacancies based on the rent roll as of December 31, 2016.
(4)
Excludes revenue from Belgium, Italy and Sweden in which we no longer operate due to asset sales.

Our European Real Estate Business as of December 31, 2016, adjusted for sales through March 1, 2017, includes the following (dollars in millions):
Portfolio
 
Acquisition Date
 
Primary Location(s)
 
Property Type
 
Cost(1)
 
Properties
 
Ownership Interest
 
U.K. Complex
 
Sept-14
 
United Kingdom
 
Multi-tenant office
 
$
72

 
1
 
93%

SEB Portfolio
 
Apr-15
 
Germany, United Kingdom, France
 
Multi-tenant office
 
922

 
7
 
95%
(2) 
Internos Portfolio
 
Apr-15
 
Germany, France
 
Office/Hotel/Industrial/Retail
 
160

 
7
 
95%
(2) 
IVG Portfolio
 
Apr-15
 
Germany, United Kingdom, France
 
Multi-tenant office
 
128

 
9
 
95%
(2) 
Deka Portfolio
 
Apr-15
 
Germany
 
Multi-tenant office
 
58

 
3
 
95%
(2) 
Trianon Tower
 
Jul-15
 
Germany
 
Multi-tenant office
 
611

 
3
 
95%
(2) 
Total
 
 
 
 
 
 
 
$
1,951

 
30
 
 
 
__________________
(1)
Amount includes transaction costs incurred, deferred financing costs and other assets assumed and is translated using exchange rates as of December 31, 2016.
(2)
We hold equity interests in these portfolios and are entitled to 100% of net income (loss) based on the allocation formula, as set forth in the governing documents.
The following table presents the sales activity from inception through March 1, 2017 (dollars in thousands):
Location
 
Properties
 
Carrying Value(5)
 
Sales Price(3)
 
Net Proceeds
 
Realized Gain (Loss)(4)
Germany
 
3

 
$
16,066

 
$
23,040

 
$
22,413

 
$
6,347

France
 
1

 
22,316

 
30,986

 
30,668

 
8,352

Other(1)(2)
 
18

 
311,251

 
334,225

 
327,372

 
16,121

Total
 
22


$
349,633


$
388,251


$
380,453


$
30,820

__________________
(1)
Includes the sale of one non-core asset in February 2017.
(2)
Includes sales of assets in Portugal, Netherlands, Belgium and Sweden and assets outside our Core Market in Germany and the United Kingdom.
(3)
Net of associated property debt repayments.
(4)
Translated to the U.S. dollar using the average currency exchange rate for the year ended December 31, 2016.
(5)
Includes certain net assets of the company where we sold the underlying asset.

6



The following table presents significant tenants in our portfolio, based on in-place rental income as of December 31, 2016:
Significant tenants:
 
Industry
 
Square Meters(1)
 
Weighted Average Lease Term (in years)
 
Percentage of In-Place Rental Income
DekaBank Deutsche Girozentrale
 
Finance
 
36,301
 
7.4
 
19%
BNP PARIBAS RE
 
Finance
 
15,406
 
3.1
 
8%
Deloitte Holding B.V.
 
Legal, Tax & Management Consultancy
 
23,684
 
2.9
 
6%
Deutsche Bundesbank
 
Finance
 
15,304
 
8.0
 
5%
BNP PARIBAS SA
 
Finance
 
11,235
 
4.3
 
5%
Cushman & Wakefield LLP
 
Legal, Tax & Management Consultancy
 
5,150
 
8.3
 
5%
Morgan Lewis & Bockius LLP
 
Legal, Tax & Management Consultancy
 
4,848
 
8.7
 
4%
PAREXEL International GmbH
 
Public Utilities & Telecommunications
 
18,254
 
17.5
 
3%
Moelis & Co UK LLP
 
Legal, Tax & Management Consultancy
 
3,366
 
8.3
 
3%
Invesco UK Limited
 
Finance
 
2,043
 
6.4
 
2%
__________________
(1)
Based on contractual rentable area.
The following table presents rental concentration by geographical location for our portfolio from inception through March 1, 2017:
Country
 
Number of Properties
 
Square Meters(1)
 
Weighted Average Lease Term (in years)
 
Percentage of In-Place Rental Income(3)
Germany
 
11
 
154,293

 
7.6
 
41%
United Kingdom
 
5
 
46,520

 
7.1
 
26%
France
 
4
 
32,075

 
4.3
 
16%
Other(2)
 
10
 
134,190

 
3.5
 
17%
Total
 
30
 
367,078

 
 
 
100%
__________________
(1)
Based on contractual rentable area.
(2)
Includes assets in Portugal, Netherlands and Spain and assets outside our Core Market in Germany, the United Kingdom and France.
(3)
In-place rental income represents gross rent adjusted for vacancies based on the rent roll as of December 31, 2016.
Investing Strategy
We seek to provide our stockholders with a stable and recurring cash flow for distribution supplemented by capital growth over time. Our business is predominantly focused on prime office properties located in key cities within our Core Markets. Our Core Markets are not only the largest economies in Europe, but are the most established, liquid and among the most stable office markets in Europe. We seek to utilize our established local networks to source suitable investment opportunities. We have a long term investment approach and expect to make equity investments, directly or indirectly through joint ventures.
Financing Strategy
We seek to access a wide range of secured and unsecured debt and public and private equity capital sources to fund our investment activities. We predominantly use investment-level financing as part of our strategy to seek to prudently leverage our investments and deliver attractive risk-adjusted returns to our stockholders. We target overall leverage of 40% to 50% over time, although there is no assurance that this will be the case.
We pursue a variety of financing arrangements such as mortgage notes and bank loans available from the commercial mortgage-backed securities market, finance companies and banks. In addition, we may use corporate-level financing such as credit facilities and other term borrowings. We generally seek to limit our reliance on recourse borrowings. Borrowing levels for our investments may be dependent upon the nature of the investments and the related financing that is available.
Attractive long-term, non-recourse, non-mark-to-market, financing continues to be available in the European markets. We predominately use floating rate financing and we seek to mitigate the risk of interest rates rising through hedging arrangements including interest rate swaps and caps.
In May 2016, we entered into a $75 million revolving credit facility with certain commercial bank lenders with an initial one year term. In October 2016, we reduced the aggregate commitment under the revolving credit facility to $35 million.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for discussion of liquidity requirements and sources of capital resources.

7



Risk Management
Risk management is a significant component of our strategy to deliver consistent risk-adjusted returns to our stockholders. Given our need to maintain our qualification as a REIT for U.S. federal income tax purposes, we closely monitor our portfolio and actively seek to manage risks associated with, among other things, our assets, interest rates and foreign exchange rates. In addition, the audit committee of our board of directors, in consultation with management, will periodically review our policies with respect to risk assessment and risk management, including key risks to which we are subject, such as credit risk, liquidity risk, financing risk, foreign currency risk and market risk, and the steps that management has taken to monitor and control such risks. The audit committee of our board of directors maintains oversight of financial reporting risk matters.
Underwriting
Prior to making any equity investments, our underwriting team, in conjunction with third-party providers, undertakes a rigorous asset-level due diligence process, involving intensive data collection and analysis, to seek to ensure that we understand fully the state of the market and the risk-reward profile of the asset. In addition, we evaluate material accounting, legal, financial and business issues surrounding such investment. These issues and risks are built into the valuation of an asset and ultimate pricing of an investment.
During the underwriting process, we review the following data, including, but not limited to: property financial data including historic and budgeted financial statements, liquidity and capital expenditure plans, property operating metrics (including occupancy, leasing activity, lease expirations, sales information, tenant credit review, tenant delinquency reports, operating expense efficiency and property management efficiency) and local real estate market conditions including vacancy rates, absorption, new supply, rent levels and comparable sale transactions, as applicable.
In addition to evaluating the merits of any particular proposed investment, we evaluate the diversification of our portfolio of assets. Prior to making a final investment decision, we determine whether a target asset will cause our portfolio of assets to be too heavily concentrated with, or cause too much risk exposure to, any one real estate sector, geographic region, source of cash flow such as tenants or borrowers, or other geopolitical issues. If we determine that a proposed investment presents excessive concentration risk, we may decide not to pursue an otherwise attractive investment.
Portfolio Management
Our Manager performs portfolio management services on our behalf. In addition, we rely on the services of local third-party service providers. The comprehensive portfolio management process includes day-to-day oversight by the portfolio management team, regular management meetings and a quarterly investment review process. These processes are designed to enable management to evaluate and proactively identify investment-specific issues and trends on a portfolio-wide basis. Nevertheless, we cannot be certain that such review will identify all potential issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific investments; therefore, potential future losses may also stem from investments that are not identified during these investment reviews.
Our Manager uses many methods to actively manage our risks to seek to preserve our income and capital, which includes our ability to manage our investments and our tenants in a manner that preserves cost and income and minimizes credit losses that could decrease income and portfolio value. Frequent re-underwriting, dialogue with tenants/partners and regular inspections of our properties have proven to be an effective process for identifying issues early. Monitoring tenant creditworthiness is an important component of our portfolio management process, which may include, to the extent available, a review of financial statements and operating statistics, delinquencies, third party ratings and market data. During the quarterly portfolio review, or more frequently as necessary, investments may be put on highly-monitored status and identified for possible asset impairment based upon several factors, including missed or late contractual payments, tenant rating downgrades (where applicable) and other data that may indicate a potential issue in our ability to recover our invested capital from an investment.
We may need to make unplanned capital expenditures in connection with changes in laws and governmental regulations in relation to real estate. Where properties are being repositioned or refurbished, we may be exposed to unforeseen changes in scope to budgeted capital expenditures.
Given our need to maintain our qualification as a REIT for U.S. federal income tax purposes, and in order to maximize returns and manage portfolio risk, we may dispose of an asset earlier than anticipated or hold an asset longer than anticipated if we determine it to be appropriate depending upon prevailing market conditions or factors regarding a particular asset. We can provide no assurances, however, that we will be successful in identifying or managing all of the risks associated with acquiring, holding or disposing of a particular asset or that we will not realize losses on certain assets.

8


Interest Rate and Foreign Currency Hedging
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. The goal of our interest rate management strategy is to minimize or eliminate the effects of interest rate changes on the value of our assets, to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of financing such assets.
In addition, because we are exposed to foreign currency exchange rate fluctuations, we employ foreign currency risk management strategies, including the use of, among others, currency hedges, and matched currency financing.
We can provide no assurances, however, that our efforts to manage interest rate and foreign currency exchange rate volatility will successfully mitigate the risks of such volatility on our portfolio.
Regulation
We are subject, in certain circumstances, to supervision and regulation by international, federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things:
•    regulate our public disclosures, reporting obligations and capital raising activity;
•    require compliance with applicable REIT rules;
•    regulate credit granting activities;
•    require disclosures to customers;
•    govern secured transactions;
•    set collection, taking title to collateral, repossession and claims-handling procedures and other trade practices;
•    regulate land use and zoning;
•    regulate the foreign ownership or management of real property or mortgages;
regulate the ability of foreign persons or corporations to remove profits earned from activities within the country to the person’s or corporation’s country of origin;
•    regulate tax treatment and accounting standards; and
regulate use of derivative instruments and our ability to hedge our risks related to fluctuations in interest rates and exchange rates.
We qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, beginning with the year ended December 31, 2015 upon filing our initial U.S. federal income tax. As a REIT, we must currently distribute, at a minimum, an amount equal to 90% of our taxable income. In addition, we must distribute 100% of our taxable income to avoid paying corporate U.S. federal income taxes. REITs are also subject to a number of organizational and operational requirements in order to elect and maintain REIT status. These requirements include specific share ownership tests and assets and gross income composition tests. If we fail to continue to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. Even if we qualify for taxation as a REIT, we may be subject to tax in foreign jurisdictions in which we operate or own property and state and local income taxes and to U.S. federal income tax and excise tax on our undistributed income.
We believe that we are not, and intend to conduct our operations so as not to become regulated as, an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. We have relied, and intend to continue to rely on current interpretations of the staff of the Securities and Exchange Commission, or SEC, in an effort to continue to qualify for an exemption from registration under the Investment Company Act. For more information on the exemptions that we use refer to Item 1A. “Risk Factors - Risks Related to Regulatory Matters and Our REIT Tax Status.”
Real estate properties owned by us and the operations of such properties are subject to various international laws and regulations concerning the protection of the environment, including air and water quality, hazardous or toxic substances and health and safety. In addition, such properties are required to comply with applicable fire and safety regulations, building codes, legal or regulatory provisions regarding access to our properties for persons with disabilities and other land use regulations. For further information regarding environmental matters, refer to “Environmental Matters” below.

9


In addition, we currently own two hotels, leased to third-party operators, which are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas. We believe each of our hotels have the necessary permits and approvals to operate its business.
In the judgment of management, while we do incur significant expense complying with the various regulations to which we are subject, existing statutes and regulations have not had a material adverse effect on our business. However, it is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon our future business, financial condition and results of operations or prospects.
Environmental Matters
A wide variety of environmental and occupational health and safety laws and regulations affect our properties. These complex laws, and their enforcement, involve a myriad of regulations, many of which involve strict liability on the part of the potential offender. Some of these laws may directly impact us. Under various local environmental laws, ordinances and regulations, an owner of real property, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal or property damages and the owner’s liability therefore could exceed or impair the value of the property, and/or the assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral which, in turn, could reduce our revenues.
Selected Regulations Regarding our Operations in Germany, the United Kingdom and France
Our commercial real estate investments are subject to a variety of laws and regulations in Europe. If we fail to comply with any of these laws and regulations, we may be subject to civil liability, administrative orders, fines or even criminal sanctions. The following provides a brief overview of selected regulations that are applicable to our business operations in Germany, the United Kingdom and France, where a majority of our properties in terms of contribution to rental income are located.
Germany
Land-use Regulations, Building Regulations and Tenancy Law for Commercial Properties
Land-use Regulations. There are several regulations regarding the use of land including German planning law and urban restructuring planning by communities.
Urban Restructuring Planning. Communities may designate certain areas as restructuring areas and undertake comprehensive modernization efforts regarding the infrastructure in such areas. While this may improve the value of properties located in restructuring areas, being located in a restructuring area also imposes certain limitations on the affected properties (e.g., the sale, encumbrance and leasing of such properties, as well as reconstruction and refurbishment measures, are generally subject to special consent by municipal authorities).
Building Regulations. German building laws and regulations are quite comprehensive and address a number of issues, including, but not limited to, permissible types of buildings, building materials, proper workmanship, heating, fire safety, means of warning and escape in case of emergency, access and facilities for the fire department, hazardous and offensive substances, noise protection, ventilation and access and facilities for disabled people. Owners of erected buildings may be required to conduct alterations or improvements of the property if safety or health risks with respect to users of the building or the general public occur, including fire risks, traffic risks, risks of collapse and health risks from injurious building materials such as asbestos. To our knowledge, there are currently no official orders demanding any alterations to existing buildings owned by us.
Tenancy Law for Commercial Properties. German tenancy laws for commercial properties generally provide landlords and tenants with far-reaching discretion in how they structure lease agreements and use general terms and conditions. Certain legal restrictions apply with regard to the strict written form requirements regarding the lease agreement and any addenda thereto, transfer of operating costs and maintenance costs, cosmetic repairs and final decorative repairs. Lease agreements with a term of more than one year must be executed in writing or are deemed to have been concluded for an indefinite period. As a consequence, and regardless of the contractually agreed lease term, such lease agreements can then be terminated by the lessor or the lessee at the end of one year turning over the leased property to the lessee at the earliest, and on the third working day of a calendar quarter to the end of the following calendar quarter thereafter. Subject to certain exceptions, operating costs of commercial tenancies may be apportioned to the tenants if the lease agreement stipulates explicitly and specifically which operating costs shall be borne by the tenant. Responsibility for maintenance and repair costs may be transferred to tenants, except for the full cost transfer of maintenance and repair costs for roof, structures and areas used by several tenants in general terms and conditions. Expenses for cosmetic repairs (Schönheitsreparaturen) may, in principle, be allocated to tenants, provided that the obligation to carry out ongoing cosmetic repairs is not combined with an undertaking to perform initial and/or final decorative repairs. German law considers standardized terms to be invalid if they are not clear and comprehensive or if they are disproportionate and provide an unreasonable

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disadvantage for the other party. For example, clauses allocating decorative repair costs and ancillary costs have been subject to extensive case law in Germany.
Regulation Relating to Environmental Damage and Contamination
The portion of our commercial real estate portfolio located in Germany is subject to various rules and regulations relating to the remediation of environmental damage and contamination.
Soil Contamination. Pursuant to the German Federal Soil Protection Act (Bundesbodenschutzgesetz), the responsibility for residual pollution and harmful changes to soil, or Contamination, lies with, among others, the perpetrator of the Contamination, such perpetrator’s universal successor, the current owner of the property, the party in actual control of the property and, if the title was transferred after March 1999, the previous owner of the property if such owner knew or should have known about the Contamination, or the Liable Persons. The Liable Person that carried out the remediation work may claim indemnification on a pro rata basis from the other Liable Persons. Independently, from the aforementioned liability, civil law liability for Contaminations can arise from contractual warranty provisions or statutory law.
United Kingdom
For a discussion of the impact of regulations in the United Kingdom, refer to Item 1A. “Risk Factors — Risks Related to our Financing Strategy- “We are subject to risks associated with obtaining mortgage financing on our real estate, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to stockholders.”
France
Participation in an Organismes de placement collectif en immobilier
We hold participations in Organismes de placement collectif en immobilier, or OPCIs, each of which takes the form of a Société de Placement à Prépondérance Immobilière à Capital Variable, or SPPICAV. Both the SPPICAV and its management company, Swiss Life Reim (France), are authorized and supervised by the French Autorité des Marchés Financiers.
Commercial Lease Regulation
The contractual conditions applying to commercial lease periods, renewal, rent and rent indexation are heavily regulated. The minimum duration of commercial leases is nine years. We cannot terminate the lease before such period, except in very specific cases (such as reconstructing or elevating an existing building). The tenant, on the other hand, has the power to terminate the lease at the end of each three-year period, subject to a six-month prior notice requirement. However, in leases of premises to be used exclusively as office spaces, such power of the tenant can be contractually removed.
The tenant has also a right of renewal of the lease at the end of its initial period and a right to a revision of the rent every three years. The rent variation is capped. Except in the case where the rental value considerably changes (increase by more than 10% in case of a revision upon a three-year period), the variation of the rent, in case of a revision upon a three-year period or in case of a renewal, cannot exceed the variation of the Commercial Rents Index (indice trimestriel des loyers commerciaux) or the Retail Rental Index (indice trimestriel des loyers des activités tertiaires). However, this provision does not apply in case of a renewal of a lease, the initial duration of which exceeded nine years or the effective duration of which exceeded twelve years. In addition, even in the case of a renewed or revised lease where the rental value has considerably changed, the rent increase cannot exceed 10% of the rent paid during the previous year.
Moreover, the tenant has a right of first refusal if the leased premises are offered for sale.
The legal distribution of charges between us and the tenant can be contractually determined. However, articles L. 145-40-2 and R. 145-35 of the French commercial code, which result from French law no. 2014-626 of June 18, 2014, make it mandatory for the property owner in leases entered into on or after November 3, 2014 to incur expenditures for major repairs, in particular those related to the obsolescence of the properties and those required to meet changing legal regulation. It also forces the property owner to incur certain taxes.
Bankruptcy Law
In France, a safeguarding (sauvegarde), judicial restructuring (redressement judiciaire) or judicial liquidation (liquidation) procedure commencement order against an insolvent tenant does not lead to the automatic termination of the lease. In such cases, we will not be able to get paid directly by the tenant any rent due before the commencement order. Furthermore, the tenant, via the insolvency court appointed receiver, will have the choice to continue or reject any unexpired lease. If the tenant chooses to continue an unexpired lease, but still fails to pay the rent in connection with the occupancy after the issue of the commencement order, we cannot legally request the termination of the lease before the end of a three-month period from the date of issue of the commencement order.

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Environmental Law
In France, our investments are subject to regulations regarding the accessibility of buildings to persons with disabilities, public health and the environment, covering a number of areas, including the ownership and use of classified facilities, the use, storage, and handling of hazardous materials in building construction; inspections for asbestos, lead, and termites; inspection of gas and electricity facilities; assessments of energy efficiency; and assessments of technological and natural risks.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Act, or JOBS Act and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We have availed ourselves of some of the reduced regulatory and reporting requirements that are available to us as long as we qualify as an emerging growth company, except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act.
We will, in general, remain as an emerging growth company for up to five full fiscal years following December 31, 2015. We would cease to be an emerging growth company and, therefore, become ineligible to rely on the above exemptions, if we:
have more than $1 billion in annual revenue in a fiscal year;
issue more than $1 billion of non-convertible debt during the preceding three-year period; or
become a “large accelerated filer” as defined in Exchange Act Rule 12b-2, which would occur at the end of the fiscal year after: (i) we have filed at least one annual report pursuant to the Exchange Act; (ii) we have been an SEC-reporting company for at least 12 months; and (iii) the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter.
Competition
We are subject to increased competition in seeking investments. We compete with many third parties engaged in real estate investment activities including publicly-traded REITs, insurance companies, commercial and investment banking firms, private equity funds, sovereign wealth funds and other investors. Some of these competitors, including other REITS and private real estate companies and funds, have substantially greater financial resources than we do. Such competitors may also enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.
Future competition from new market entrants may limit the number of suitable investment opportunities offered to us. It may also result in higher prices, lower yields and a narrower spread over our borrowing costs, making it more difficult for us to originate or acquire new investments on attractive terms.
Employees
We are externally managed by our Manager and do not have our own employees.
Available Information and Corporate Governance
We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board of directors consists of a majority of independent directors; the audit, compensation and nominating and corporate governance committees of the board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics, which delineate our standards for our officers, directors and employees.
Our internet address is www.nrecorp.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K. We make available, free of charge through a link on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed or furnished with the SEC, as soon as reasonably practicable after such filing or furnishing. We also post corporate presentations on our website from time-to-time. Our website further contains our code of business conduct and ethics, code of ethics for senior financial officers, corporate governance guidelines and the charters of our audit committee, nominating and corporate governance committee and compensation committee of our board of directors. Within the time period required by the rules of the SEC and the NYSE we will post on our website any amendment to our code of business conduct and ethics and our code of ethics for senior financial officers as defined in the code.


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Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or that generally apply to all businesses also may adversely impact our business. If any of the following risks occur, our business, financial condition, operating results, cash flow and liquidity could be materially adversely affected.
Risks Related to Our Business
The commercial real estate industry has been and may continue to be adversely affected by economic conditions and geopolitical events in Europe, the United States, China and elsewhere.
Our business and operations are dependent on the commercial real estate industry generally, which in turn is dependent upon global economic conditions and geopolitical events in Europe, the United States, China and elsewhere. Concerns over global economic conditions, energy and commodity prices, geopolitical events, acts of war and terrorism, inflation, deflation, divergent central bank policy making, foreign exchange rates, the durability of the Euro as a currency, the availability and cost of credit, the sovereign debt crisis, the Chinese economy, the U.K. vote on June 23, 2016 to leave the European Union, or Brexit, the rise of protectionism and populism in the United States and Europe, and weak consumer confidence in many markets continue to contribute to increased economic uncertainty for the global economy. These factors, combined with the volatile prices of oil and declining business and consumer confidence in certain markets could precipitate an economic slowdown, as well as cause extreme volatility in security prices. Global economic and political headwinds, along with global market instability, the risk of maturing commercial real estate debt that may have difficulties being refinanced, and divergent central bank policy making, may continue to cause periodic volatility in the commercial real estate market for some time. Adverse economic conditions in the commercial real estate industry, geopolitical events, acts of war or terrorism could harm our business and financial condition by, among other factors, reducing the value of our properties, limiting our access to debt and equity capital, impairing our ability to obtain new financing or refinance existing obligations and otherwise negatively impacting our operations.
Liquidity in the capital markets is essential to our business.
Liquidity is essential to our business. Our business may be adversely affected by disruptions in the debt and equity capital markets and institutional lending market, including a lack of access to capital or prohibitively high costs of obtaining or replacing capital, both within the United States and abroad. We depend on external financing to fund the growth of our business mainly because one of the requirements of the Internal Revenue Code for a REIT is that we distribute 90% of our taxable income to our stockholders, including taxable income where we do not receive corresponding cash. Our access to equity or debt financing depends on the willingness of third parties to make equity and debt investments in us. It also depends on conditions in the capital markets generally. Companies in the real estate industry, including us, are currently experiencing, and have at times historically experienced, limited availability of capital and new capital sources may not be available on acceptable terms. Our ability to raise capital could be impaired if the capital markets have a negative perception of our long-term or short-term financial prospects or the prospects for REITs and the commercial real estate market generally. Sufficient funding or capital may not be available to us in the future on terms that are acceptable to us. If we cannot obtain sufficient funding on acceptable terms, we will not be able to grow our business and may have difficulty maintaining liquidity and making distributions to our stockholders, which would have a negative impact on the market price of our common stock. For information about our available sources of funds, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in Item 7 of Part II of this Annual Report on Form 10-K and the notes to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K.
We use significant leverage in connection with our investments, which increases the risk of loss associated with our investments and restricts our ability to engage in certain activities.
As of December 31, 2016, we had $1.1 billion of borrowings outstanding. We may also incur additional borrowings in the future to satisfy our capital and liquidity needs. Although the use of leverage may enhance returns and increase the number of investments that we can make, it may increase our risk of loss, impact our liquidity and restrict our ability to engage in certain activities. Our substantial borrowings, among other things, may:
require us to dedicate a large portion of our cash flow to pay principal and interest on our borrowings, which will reduce the availability of cash flow to fund working capital, capital expenditures and other business activities;
require us to maintain minimum unrestricted cash;
increase our vulnerability to general adverse economic and industry conditions;

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require us to post additional reserves and other additional collateral to support our financing arrangements, which could reduce our liquidity and limit our ability to leverage our assets;
subject us to maintaining various debt, operating income, net worth, cash flow and other covenants and financial ratios;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict our operating policies and ability to make strategic acquisitions, dispositions or exploit business opportunities;
require us to maintain a borrowing base of assets;
place us at a competitive disadvantage compared to our competitors that have fewer borrowings;
put us in a position that necessitates raising equity capital at a time that is unfavorable to us and dilutive to our stockholders;
limit our ability to borrow additional funds (even when necessary to maintain adequate liquidity), dispose of assets or make distributions to our stockholders; and
increase our cost of capital.
If we fail to comply with the covenants in the instruments governing our borrowings or do not generate sufficient cash flow to service our borrowings, our liquidity may be materially and adversely affected. If we default or fail to meet certain coverage tests, we may be required to repay outstanding obligations, together with penalties, prior to the stated maturity, post additional collateral, sell assets to generate cash at inopportune times, subject our assets to foreclosure and/or require us to seek protection under bankruptcy laws.
Continuing concerns regarding European debt, market perceptions concerning the instability and suitability of the Euro as a single currency, recent volatility and price movements in the rate of exchange between the U.S. dollar and the Euro could adversely affect our business, results of operations and financing.
Concerns persist regarding the debt burden of certain Euro Area countries and their potential inability to meet their future financial obligations, the overall stability of the Euro and the suitability of the Euro as a single currency, given the diverse economic and political circumstances in individual Euro Area countries, Brexit and recent declines and volatility in the value of the Euro. These concerns could lead to the re-introduction of individual currencies in one or more Euro Area countries, or, in more extreme circumstances, the possible dissolution of the Euro currency entirely. Should the Euro dissolve entirely, the legal and contractual consequences for holders of Euro-denominated obligations would be uncertain. Such uncertainty would extend to, among other factors, whether obligations previously expressed to be owed and payable in Euros would be re-denominated in a new currency (with considerable uncertainty over the conversion rates), what laws would govern and which country’s courts would have jurisdiction. These potential developments, or market perceptions concerning these and related issues, could materially adversely affect the value of our Euro-denominated investments and obligations.
Furthermore, market concerns about economic growth in the Euro Area relative to the United States and speculation surrounding the potential impact on the Euro of a possible Greek or other country sovereign default and/or exit from the Euro Area as well as the resurgence of distress in certain Euro Area banking sectors, such as Italy, may continue to exert downward pressure on the rate of exchange between the U.S. dollar and the Euro, which may adversely affect our results of operations and our ability to obtain financing.
The U.K. vote to leave the European Union, or EU, could adversely impact our business, results of operations and financial condition.
Brexit, could adversely impact our business, results of operations and financial condition due to the resulting substantial uncertainty. Any impact of the Brexit vote depends on the terms of the U.K.’s withdrawal from the EU, which still need to be determined and could take several years to accomplish. The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against the U.K. Pound Sterling. The strengthening of the U.S. dollar relative to the U.K. Pound Sterling may adversely affect our results of operations, in a number of ways, including:

All of the rent payments under our leases are denominated in Euro or U.K. Pounds Sterling. A significant portion of our operating expenses and borrowings are also transacted in local currency. We report our results of operations and consolidated financial information in U.S. dollars. As a result, to the extent we are unable to fully hedge our exchange

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rate exposure, our results of operations as reported in U.S. dollars is impacted by fluctuations in the value of the local currencies in which we conduct our business.
While we seek to mitigate the risk of fluctuations in currency exchange rates by utilizing hedging strategies to reduce the impact of exchange rates fluctuations on our income, we do not employ any hedging techniques on our Euro or U.K. Pound Sterling denominated assets, which fully exposes our asset values to exchange rate risk. 
The U.K.’s withdrawal from the EU could result in a global economic downturn, which could depress the demand for European commercial real estate. The U.K. also could lose access to the single EU market and to the global trade deals negotiated by the EU on behalf of its members, depressing trade between the U.K. and other countries, which would negatively impact the demand for our properties located in the U.K. Additionally, we may face new regulations in the U.K. Compliance with any such regulations could be costly, negatively impacting our business, results of operations and financial condition. Further, the U.K.’s withdrawal from the EU could include changes to the U.K.’s border and immigration policy, which could negatively impact our Manager’s ability to recruit and retain employees from outside the U.K.
Risks Related to Our Manager
Our ability to achieve our investment objectives and to pay distributions to our stockholders depends in substantial part upon the performance of our manager.
We rely upon our Manager to manage our day-to-day operations and our investments. Our ability to achieve our investment objectives and grow our business is dependent upon the performance of our Manager in the acquisition or disposition of investments, the determination of financing arrangements and the management of our investments and operation of our day-to-day activities under the supervision of, and subject to the policies and guidelines established by, our board of directors. If our manager performs poorly and as a result is unable to manage our investments successfully, we may be unable to achieve our investment objectives or to pay distributions to our stockholders.
Our Manager faces risks different from those previously faced by NSAM, Colony and NorthStar Realty, which may affect its management of our company.
The business of our Manager differs from that of NSAM, Colony and NorthStar Realty, and, accordingly, the results of operations and financial condition of our Manager may be affected by factors different from those that affected NSAM’s, Colony’s or NorthStar Realty’s results of operations and financial condition prior to the Mergers, and such new factors may create new or increased risks in operations of our Manager and consequently, adversely affect the management of our company. Examples of new or increased risks our Manager faces, which may impact the management of our company, include:
a large increase in the amount of assets under management and a diversification of types of assets under management, which may create risks related to scaling and combining of the platforms necessary to effectively manage the combined assets of the managed entities and strategic ventures;
additional conflicts between and among the managed entities, strategic ventures and the other clients of our Manager, which may not be resolved in our favor;
certain managed entities or strategic vehicles may compete for investment opportunities allocated by our Manager and may adversely impact the extent of opportunities allocated to us; and
our Manager’s larger and newly combined team of management and employees may require time to become fully effective and may not be able to achieve its anticipated synergies, which may impact the management of our company.
Service providers to whom our Manager may delegate certain asset management functions may also be strained by our growth or the growth of their other clients. Our Manager, or its service providers, may be unable to make significant investments on a timely basis or at reasonable costs and its failure in this regard could disrupt our business and operations. Further, during periods of economic retraction, our Manager, or its service providers, may be incented to reduce its personnel and costs, which could have an adverse effect on us.
Our Manager will be subject to business uncertainties and certain operation restrictions following the Mergers.
Uncertainty about the effect of the Mergers on employees, clients and business of our Manager may have an adverse effect on our Manager and subsequently, the managed entities, strategic vehicles and us following the Mergers. These uncertainties could disrupt our Manager’s business and impair its ability to attract, retain and motivate key personnel, and cause clients and others that deal with our Manager to seek to change existing business relationships, cease doing business with our Manager or cause potential new clients to delay doing business with our Manager. Retention and motivation of certain employees may be challenging due to the uncertainty and difficulty of integration or a desire not to remain with our Manager. As a result of the foregoing, management of our company may be adversely affected.

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Any adverse changes in our Manager’s financial health, the public perception of our Manager or our relationship with our Manager could hinder our operating performance and adversely affect our financial condition and results of operations.
Because our Manager is a publicly-traded company, any negative reaction by the stock market reflected in the price of its securities or deterioration in the public perception of our Manager could result in an adverse effect on its ability to manage our portfolio, including acquiring or disposing of assets and obtaining financing from third parties on favorable terms or at all. Our Manager depends upon the management and other fees and reimbursement of costs that it receives from us and our Manager’s other managed companies in connection with the acquisition, management and sale of properties to conduct its operations. Any adverse changes in the financial condition of our Manager or our relationship with our Manager could hinder our Manager’s ability to successfully support our business, which could have a material adverse effect on our financial condition and results of operations.
Failure of our Manager to effectively perform its obligations to us, including under the management agreement, could have an adverse effect on our business and performance.
We have engaged our Manager to provide asset management and other services to us pursuant to a management agreement. Our ability to achieve our investment and business objectives and to make distributions to our stockholders depends in substantial part upon the performance of our Manager and its ability to provide us with asset management and other services. We are also dependent on other third party service providers to whom our Manager has delegated various responsibilities or engaged on our behalf. If for any reason our Manager or any other service provider is unable to perform such services at the level we require, our ability to replace our Manager or any other service providers is limited under the terms of our management agreement. For example, even if we were able to terminate our management agreement with our Manager, alternate service providers may not be readily available on acceptable terms or at all, which could adversely affect our performance and materially harm our ability to execute our business plan.
Our ability to terminate our management agreement with our Manager is very limited.
Our management agreement with our Manager is only terminable by us for cause. We are unable to terminate our management agreement for any other reason, including if our Manager performs poorly or is unable to manage our company successfully. The term “cause” is limited to specific circumstances set forth in the management agreement. Termination for unsatisfactory financial performance does not constitute “cause” under our management agreement. In addition, we are contractually committed to our Manager’s management for an initial term of approximately 20 years from October 2015, with automatic renewal terms thereafter. These provisions increase our risk that our Manager may not perform well and our business could suffer. If our Manager’s performance as our manager does not meet our or our stockholders’ expectations, and we are unable to terminate the management agreement, the market price of our common stock could suffer.
Substantially all of the fees payable to our Manager are payable regardless of the performance or size of our portfolio and may fail to appropriately incentivize our Manager when managing our portfolio.
We pay our Manager an annual base management fee regardless of the performance or size of our portfolio. Consequently, we may be required to pay our Manager significant base management fees despite dispositions of assets, repurchases of our common stock or experiencing a net loss or a decline in the value of our portfolio. This in turn could harm both our ability to make distributions to our stockholders and the market price of our common stock.
Our Manager’s entitlement to compensation regardless of our performance could reduce its incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio, particularly if other management agreements to which our Manager is a party have a performance-based fee structure. In addition, our Manager has the ability to earn incentive fees each quarter based on our CAD, which may create an incentive for our Manager to invest in investments with higher yield potential, that are generally riskier or more speculative, or sell an investment prematurely for a gain and pay down borrowings, in an effort to increase our short-term net income and thereby increase the incentive fees to which it is entitled. Furthermore, the compensation payable to our Manager will increase as a result of future issuances of our equity securities, even if the issuances are dilutive to existing stockholders. If our interests and those of our Manager are not aligned, the execution of our business plan and our results of operations could be adversely affected, which could materially and adversely affect our ability to make distributions to our stockholders and the market price of our common stock.
The fees we pay to our Manager in connection with the acquisition and management of our investments pursuant to our management agreement were not determined on an arm’s length basis; therefore, we did not have the benefit of arm’s length negotiations of the type normally conducted between unrelated parties.
The fees we pay to our Manager for services it provides to us pursuant to the management agreement were not determined on an arm’s length basis. As a result, the fees are determined without the benefit of arm’s length negotiations of the type normally conducted between unrelated parties and may be in excess of amounts that we would otherwise pay to third parties for such services.

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In addition to the management fees we pay to our Manager, we reimburse our Manager for costs and expenses incurred on our behalf, including indirect personnel and employment costs of our Manager, which costs and expenses may be substantial.
We pay our Manager substantial fees for the services it provides to us and we also have an obligation to reimburse our Manager for costs and expenses it may incur and pay on our behalf. Subject to certain limitations and exceptions, we reimburse our Manager for both direct expenses as well as indirect costs, including a portion of our Manager’s personnel and employment costs. The costs and expenses our Manager incurs on our behalf, including the compensatory costs incurred by our Manager and its affiliates, may be substantial. There are conflicts of interest that could arise when our Manager makes allocation determinations. For the year ended December 31, 2016, our Manager allocated $0.2 million of expense to us. In addition, we are required to issue equity awards to our Manager employees at our Manager’s request under the terms of our management agreement. For the year ended December 31, 2016, our Manager granted $17.9 million in the aggregate in our equity awards to its employees, including to employees who serve as our executive officers. Our Manager could allocate costs and expenses to us in excess of what we anticipate and such costs and expenses could have an adverse effect on our financial performance and ability to make cash distributions to our stockholders.
There are conflicts of interest in our relationship with our Manager that could result in decisions that are not in the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationship with our Manager, its affiliates, managed entities and strategic ventures. In particular, we expect to compete for investment opportunities directly with other companies and/or accounts that our Manager or its strategic or joint venture partners manage. Our Manager and certain of our Manager’s managed companies, along with companies, funds and vehicles that are subject to a strategic relationship between our Manager and its strategic or joint venture partners (which we refer to collectively as strategic vehicles), may have investment mandates and objectives that target the same investments as us.
In addition, our Manager may have additional managed companies or strategic vehicles that will compete directly with us for investment opportunities in the future. We adopted an investment allocation policy with our Manager that is intended to ensure that investments are allocated fairly and appropriately among us, our Manager, and our Manager’s other managed companies or strategic vehicles over time, but there is no assurance that our Manager will be successful in eliminating the conflicts arising from the allocation of investment opportunities. When determining the entity for which an investment opportunity would be the most suitable, the factors that our Manager may consider include, among other factors, the following:
investment objectives, strategy and criteria;
cash requirements and amount of funds available;
effect of the investment on the diversification of the portfolio, including by geography, size of investment, type of investment and risk of investment;
leverage policy and the availability of financing for the investment by each entity;
anticipated cash flow of the investment to be acquired;
income tax effects of the purchase;
the size of the investment;
cost of capital;
risk return profiles;
targeted distribution rates;
anticipated future pipeline of suitable investments;
the expected holding period of the investment and the remaining term of our Manager’s managed company, if applicable;
affiliate and/or related party considerations; and

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whether a strategic vehicle has received a special allocation (as defined in the investment allocation policy).
If, after consideration of the relevant factors, our Manager determines that an investment is equally suitable for us and one of its managed companies or strategic vehicles, the investment will be allocated among each of the applicable entities, including us, on a rotating basis. Our Manager’s new clients, including us, will be initially added at the end of the rotation. If, after an investment has been allocated to us or any other entity, a subsequent event or development, such as delays in structuring or closing on the investment, makes it, in the opinion of our Manager, more appropriate for a different entity to fund the investment, our Manager may determine to place the investment with the more appropriate entity while still giving credit to the original allocation. In certain situations, our Manager may determine to allow more than one investment vehicle, including us, to co-invest in a particular investment.
There is no assurance this policy will remain in place during the entire period we are seeking investment opportunities. In addition, our Manager may sponsor additional managed companies or strategic vehicles in the future and, in connection with the creation of such managed companies or strategic vehicles, may revise these allocation procedures. The result of a revision to the allocation procedures may, among other things, be to increase the number of parties who have the right to participate in investment opportunities sourced by our Manager or us, thereby reducing the number of investment opportunities available to us.
In addition, under this policy, our Manager’s investment professionals may consider the investment objectives and anticipated pipeline of future investments of its managed companies or strategic vehicles. The decision of how any potential investment should be allocated among us and one of our Manager’s managed companies or strategic vehicles for which such investment may be suitable may, in many cases, be a matter of subjective judgment which will be made by our Manager. Pursuant to the investment allocation policy, our Manager may choose to allocate favorable investments to its other managed companies instead of to us. Our investment allocation policy with our Manager could produce unfavorable results for us that could harm our business.
Our Manager also has acquired and may in the future acquire additional interests in third parties, such as management firms that manage certain of our properties, which may cause its interests to differ from ours. Our Manager may also encourage our use of third party service providers, including those in which our Manager owns an interest, for which we pay a fee. In addition, we may enter into principal transactions or cross transactions with our Manager’s other managed companies or strategic vehicles. In certain transactions our Manager may receive a fee from the managed company. There is no guaranty that any such transactions will be favorable to us. Because our interests and our Manager’s interests may not be aligned, we may face conflicts of interest that result in action or inaction that is detrimental to us.
Further, there are conflicts of interest that arise when our Manager makes expense allocation determinations, as well as in connection with any fees payable between us and our Manager.  These fees and allocation determinations are sometimes based on estimates or judgments, which may not be correct and could result in our Manager’s failure to allocate and pay certain fees and costs to us appropriately.
Our Manager’s professionals who perform services for us face competing demands relating to their time and conflicts of interests relating to performing services on our behalf, which may cause our operations to suffer.
We rely on our Manager’s professionals to perform services related to the operation of our business. Our Manager professionals performing services for us also perform services for our Manager’s other managed companies or strategic vehicles. As a result of their interests in our Manager, other managed companies and the fact that they engage in other business activities on behalf of others, these individuals may face conflicts of interest in allocating their time among us, our Manager and other managed companies or strategic vehicles and other business activities in which they are involved. In addition, certain management personnel performing services on behalf of our Manager own equity interests in our Manager or other managed companies and our Manager may grant additional equity interests in our Manager or other managed companies to such persons in connection with their continued services. These conflicts of interest, as well as the loyalties of these individuals to other entities and investors, could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment opportunities. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to our stockholders or to maintain or increase the value of our portfolio.
Further, at times when there are turbulent conditions in the real estate markets or distress in the credit markets or other times when we will need focused support and assistance from our Manager, our Manager’s other managed companies or strategic vehicles may likewise require greater focus and attention, placing our Manager’s resources in high demand. In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed or if our Manager did not act as a manager for other entities.
Our executive officers are employees of our Manager and face conflicts of interest related to their positions and interests in our Manager, which could hinder our ability to implement our business strategy.
Our executive officers are employees of our Manager and provide services to us solely in such capacity pursuant to our Manager’s obligations to us under the management agreement. We do not have employment agreements with any of our executive officers. If the management agreement with our Manager were to be terminated, we would lose the services of all our executive officers

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and other our Manager investment professionals acting on our behalf. Furthermore, if any of our executive officers ceased to be employed by our Manager, such individual would also no longer serve as one of our executive officers. Our Manager is an independent contractor and controls the activities of its employees, including our executive officers. Our executive officers therefore owe duties to our Manager and its stockholders, which may from time-to-time conflict with the duties they owe to us and our stockholders. In addition, our executive officers may also own equity in our Manager or its other managed companies. As a result, the loyalties of these individuals to other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment opportunities.
Both our board of directors and our Manager’s board of directors have adopted, and will likely in the future adopt, certain incentive plans to create incentives that will allow us and our Manager to retain and attract the services of key employees. These incentive plans may be tied to the performance of our common stock or our Manager’s common stock and any decline in our stock price may result in us or our Manager being unable to motivate and retain our management and these other employees. Our inability to motivate and retain these individuals could also harm our business and our prospects. Additionally, competition for experienced real estate professionals could require our Manager or us to pay higher wages and provide additional benefits to attract qualified employees, which could result in higher compensation expenses to us.
We may not realize the anticipated benefits of our manager’s strategic partnerships and joint ventures.
Our Manager may enter into strategic partnerships and joint ventures to further its own interests or the interests of its managed companies, including us. Our Manager may not be able to realize the anticipated benefits of these strategic partnerships and joint ventures. These strategic partnerships and/or joint ventures may also subject our Manager and its managed companies, including us, to additional risks and uncertainties, as our Manager and its managed companies, including us, may be dependent upon, and subject to, liability, losses or reputational damage relating to systems, control and personnel that are not under our Manager’s control. In addition, where our Manager does not have a controlling interest, it may not be able to take actions that are in our best interests due to a lack of full control. Furthermore, to the extent that our Manager’s partners provide services to us, certain conflicts of interests may exist. Moreover, disagreements or disputes between our Manager and its partners could result in litigation, which could potentially distract our Manager from our business.
Our Manager manages our portfolio pursuant to very broad investment guidelines and our board of directors does not approve each investment and financing decision made by our Manager unless required by our investment guidelines.
Our Manager is authorized to follow very broad investment guidelines established by our board of directors. Our board of directors periodically reviews our investment guidelines and our investment portfolio but does not, and is not required to review all of our proposed investments, except in limited circumstances as set forth in our investment guidelines. Our board of directors may also make modifications to our investment guidelines from time to time as it deems appropriate. In addition, in conducting periodic reviews or modifying our investment guidelines, our board of directors may rely primarily on information provided to them by our Manager. Furthermore, transactions entered into by our Manager on our behalf may be costly, difficult or impossible to unwind by the time they are reviewed by our board of directors. Our Manager has flexibility within the broad parameters of our investment guidelines in determining the types and amounts of investments in which to invest on our behalf, including making investments that may result in returns that are substantially below expectations or result in losses, which could materially and adversely affect our business and results of operations, or may otherwise not be in the best interests of our stockholders.
Our Manager’s liability is limited under the management agreement and we have agreed to indemnify our Manager against all liabilities incurred in accordance with and pursuant to the management agreement.
We have entered into a management agreement with our Manager, which governs our relationship with our Manager. Our Manager maintains a fiduciary relationship with us. Under the terms of the management agreement, and subject to applicable law, our Manager, its directors, officers, employees, partners, managers, members, controlling persons, and any other person or entity affiliated with our Manager are not liable to us or our subsidiaries for acts taken or omitted to be taken in accordance with and pursuant to the management agreement, except those resulting from acts of willful misfeasance or bad faith in the performance of our Manager’s duties under the management agreement. In addition, subject to applicable law, we have agreed to indemnify our Manager and each of its directors, officers, employees, partners, managers, members, controlling persons and any other person or entity affiliated with our Manager from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our Manager’s performance of its duties or obligations under the management agreement or otherwise as our manager, except where attributable to acts of willful misfeasance or bad faith in the performance of our Manager’s duties under the management agreement.
Our Manager is subject to extensive regulation as an investment adviser and/or fund manager, which could adversely affect its ability to manage our business.
Certain of our Manager’s affiliates, including our manager, are subject to regulation as investment advisers and/or fund managers by various regulatory authorities that are charged with protecting the interests of our Manager’s managed companies, including us. Instances of criminal activity and fraud by participants in the investment management industry and disclosures of trading and

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other abuses by participants in the financial services industry have led the U.S. government and regulators in foreign jurisdictions to consider increasing the rules and regulations governing, and oversight of, the financial system. This activity is expected to result in continued changes to the laws and regulations governing the investment management industry and more aggressive enforcement of the existing laws and regulations. Our Manager could be subject to civil liability, criminal liability, or sanction, including revocation of its registration as an investment adviser in the United States or in any foreign jurisdictions where it is registered, revocation of the licenses of its employees, censures, fines or temporary suspension or permanent bar from conducting business, if it is found to have violated any of these laws or regulations. Any such liability or sanction could adversely affect its ability to manage our business.
Our Manager must continually address conflicts between its interests and those of its managed companies, including us. In addition, the SEC and other regulators have increased their scrutiny of potential conflicts of interest. However, appropriately dealing with conflicts of interest is complex and difficult and if our Manager fails, or appears to fail, to deal appropriately with conflicts of interest, it could face litigation or regulatory proceedings or penalties, any of which could adversely affect its ability to manage our business.
Risks Related to Our Investments
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our investments.
Our investments may be susceptible to economic slowdowns or recessions, which could lead to financial losses and a decrease in revenues, earnings and asset values. Any economic slowdown or recession, most particularly affecting the jurisdictions in which we own properties, in addition to other non-economic factors such as an excess supply of properties, could have a material negative impact on the values of our investments. Declining real estate values will reduce the value of our properties, as well as our ability to refinance our properties and use the value of our existing properties to support the purchase or investment in additional properties. Slower than expected economic growth pressured by a strained labor market, along with overall financial uncertainty, could result in lower occupancy rates and lower lease rates across many property types and may create obstacles for us to achieve our business plans. We may also be less able to pay principal and interest on our borrowings, which could cause us to lose title to properties securing our borrowings. Any of the foregoing could significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.
We are subject to significant competition and we may not be able to compete successfully for investments.
We are subject to significant competition for attractive investment opportunities from other real estate investors, some of which have greater financial resources than us, including publicly-traded REITs, non-traded REITs, insurance companies, commercial and investment banking firms, private institutional funds, hedge funds, private equity funds, sovereign wealth funds and other investors. We may not be able to compete successfully for investments. In addition, the number of entities and the amount of funds competing for suitable investments may increase. If we pay higher prices for investments, our returns may be lower and the value of our investments may not increase or may decrease significantly below the amount we paid for such investments. If such events occur, we may experience lower returns on our investments.
While we are primarily focused on investing in office properties within Germany, the United Kingdom, and France, we have no established investment criteria limiting the particular country or region, industry concentration or investment type of our investments. If our investments are concentrated in a particular country or region or property type that experiences adverse economic conditions, our investments may lose value and we may experience losses.
Properties that we may acquire may be concentrated in a particular country or region or in a particular property type. These current and future investments carry the risks associated with significant regional or industry concentration. We have not established and do not plan to establish any investment criteria to limit our exposure to these risks for future investments. As a result, properties underlying our investments may be overly concentrated in certain countries or regions or industries and we may experience losses as a result. A worsening of economic conditions, a natural disaster or civil disruptions in a particular country or region in which our investments may be concentrated, or economic upheaval with respect to a particular property type, could have an adverse effect on our business, including impairing the value of our properties.
Approximately 96% of our in-place rental income is generated from office properties, which increases the likelihood that risks related to owning office properties will become more material to our business and results of operations.
Our exposure to the risks inherent in the office sector may make us more vulnerable to a downturn or slowdown in the office sector. A downturn in the office industry could negatively affect our lessees’ ability to make lease payments to us and our ability to pay distributions to our stockholders. These adverse effects may be more pronounced than if our investments were more diversified.
We are subject to additional risks due to the international nature of our investments, which could adversely impact our business and results of operations.
All of our investments are located within Europe, primarily within Germany, the United Kingdom and France.

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Our investments may be affected by factors peculiar to the laws of the jurisdiction in which the property is located and these laws may expose us to risks that are different from and/or in addition to those commonly found in the United States. We and our Manager may not be as familiar with the potential risks to our investments outside of the United States and we may incur losses as a result. These risks include:
governmental laws, rules and policies including laws relating to the foreign ownership of real property or mortgages and laws relating to the ability of foreign persons or corporations to remove profits earned from activities within the country to the person’s or corporation’s country of origin;
translation and transaction risks related to fluctuations in foreign currency exchange rates;
adverse market conditions caused by inflation, deflation or other changes in national or local political and economic conditions;
challenges of complying with a wide variety of foreign laws, including corporate governance, operations, taxes and litigation;
changes in relative interest rates;
changes in the availability, cost and terms of borrowings resulting from varying national economic policies;
changes in real estate and other tax rates, the tax treatment of transaction structures and other changes in operating expenses in a particular country where we have an investment;
our REIT tax status not being respected under foreign laws, in which case any income or gains from foreign sources be subject to foreign taxes and withholding taxes;
lack of uniform accounting standards (including availability of information in accordance with accounting principles generally accepted in the United States, or U.S. GAAP);
changes in land use and zoning laws;
more stringent environmental laws or changes in such laws;
changes in the social stability or other political, economic or diplomatic developments in or affecting a country where we have an investment;
changes in applicable laws and regulations in the United States that affect foreign operations; and
legal and logistical barriers to enforcing our contractual rights in other countries, including insolvency regimes, landlord/tenant rights and ability to take possession of collateral.
Each of these risks might adversely affect our performance and impair our ability to make distributions to our stockholders required to qualify and remain qualified as a REIT. In addition, there is generally less publicly available information about foreign companies and a lack of uniform financial accounting standards and practices (including the availability of information in accordance with U.S. GAAP) which could impair our ability to analyze transactions and receive timely and accurate financial information from tenants necessary to meet our reporting obligations to financial institutions or governmental or regulatory agencies.
Our business is also subject to extensive regulation by various non-U.S. regulators, including governments, central banks and other regulatory bodies, in the jurisdictions in which the business operates. In many countries, the laws and regulations applicable to the financial services and securities industries are uncertain and evolving and it may be difficult for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our inability to remain in compliance with local laws in a particular market and manage our relationships with regulators could have a significant and adverse effect not only on our businesses in that market but also on our reputation generally.
Our joint venture partners could take actions that decrease the value of an investment to us and lower our overall return.
We currently are party to and may in the future enter into joint ventures with third parties to make investments. We may also make investments in partnerships or other co-ownership arrangements or participations. Such investments may involve risks not otherwise present with other methods of investment, including, for example, the following risks:
our joint venture partner in an investment could become insolvent or bankrupt;
fraud or other misconduct by our joint venture partners;
we may share decision-making authority with our joint venture partner regarding certain major decisions affecting the ownership of the joint venture and the joint venture property, such as the sale of the property or the making of additional capital contributions for the benefit of the property, which may prevent us from taking actions that are opposed by our joint venture partner;

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such joint venture partner may at any time have economic or business interests or goals that are or that become in conflict with our business interests or goals, including for example the operation of the properties owned by such joint venture;
such joint venture partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;
our joint venture partners may be structured differently than us for tax purposes and this could create conflicts of interest and risk to our REIT status; and
the terms of our joint ventures could restrict our ability to sell or transfer our interest to a third party when we desire on advantageous terms, which could result in reduced liquidity.
Any of the above might subject us to liabilities and thus reduce our returns on our investment with that joint venture partner. In addition, disagreements or disputes between us and our joint venture partner could result in litigation, which could increase our expenses and potentially limit the time and effort our officers and directors are able to devote to our business.
Because real estate investments are relatively illiquid, we may not be able to vary our portfolio in response to changes in economic and other conditions, which may result in losses.
Real estate investments are relatively illiquid. A variety of factors could make it difficult for us to dispose of any of our investments on acceptable terms even if a disposition is in the best interests of our stockholders. We cannot predict whether we will be able to sell any property for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Certain properties may also be subject to transfer restrictions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of financing that can be placed or repaid on that property. We may be required to expend cash to correct defects or to make improvements before a property can be sold, and we cannot assure you that we will have cash available to correct those defects or to make those improvements. The Internal Revenue Code also places limits on our ability to sell certain properties held for fewer than two years.
We may also give our tenants a right of first refusal or similar options. As a result, our ability to sell investments in response to changes in economic and other conditions could be limited. To the extent we are unable to sell any property for its book value or at all, we may be required to take a non-cash impairment charge or loss on the sale, either of which would reduce our earnings. Limitations on our ability to respond to adverse changes in the performance of our properties may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
We are subject to risks, such as declining real estate values and operating performance, associated with future advance or capital expenditure obligations and our capital expenditure projections may prove inaccurate.
Future funding obligations subject us to significant risks such as that the property may have declined in value, projects to be completed with the additional funds may have cost overruns and the tenant may be unable to generate enough cash flow and execute its business plan, or sell or refinance the property, in order to repay our indebtedness. We may also need to fund capital expenditures and other significant expenses for our investments in excess of those projected at the time of our underwriting because of, among other reasons, inaccurate or incomplete technical advice from our advisors at the time of underwriting that results in greater than expected expenditures.
We could also determine that we need to fund more money than we originally anticipated in order to maximize the value of our investment even though there is no assurance additional funding would be the best course of action. Further, future funding obligations require us to maintain higher liquidity than we might otherwise maintain and these funding obligations could reduce the overall return on our investments. We could also find ourselves in a position with insufficient liquidity to fund future obligations, which could result in material losses.
We may obtain only limited warranties when we purchase a property, which increases the risk that we may lose some or all of our invested capital in the property or rental income from the property if losses are incurred that are not covered by the limited warranties, which, in turn, could materially adversely affect our business, financial condition and results from operations and our ability to make distributions to our stockholders.
The seller of a property often sells such property in an “as is” condition on a “where is” basis and “with all faults.” In addition, the related real estate purchase and sale agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Despite our efforts, we may fail to uncover all material risks during our diligence process. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property, as well as the loss of rental income from that property if losses are incurred that are not covered by the limited warranties. If we experience losses that are not recoverable under the limited warranties provided by a seller, it may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. In addition, we may be further limited in our ability to enforce against breaches of certain representations

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and warranties granted in the purchase and sale agreement beyond a very limited period of time or at all where a seller is in financial distress or where the seller of a property we purchase is a liquidating fund or funds after our purchase of the property.
We may be required to indemnify purchasers of our assets against certain liabilities and obligations, which may affect our returns on dispositions.
We may be required to enter into real estate purchase and sale agreements with warranties, representations and indemnifications, which may expose us to liabilities and obligations following dispositions of our assets. Despite our efforts, we may fail to identify all liabilities, which may materially impair the anticipated returns on any dispositions. Further, we may be forced to incur unexpected significant expense in connection with such liabilities and obligations, which could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to stockholders.
The price we pay for acquisitions of real property is based on our projections of market demand, occupancy and rental income, as well as on market factors, and our return on our investment may be lower than expected if any of our projections are inaccurate.
The price we pay for real property investments is based on our projections of market demand, occupancy levels, rental income, the costs of any development, redevelopment or renovation of property and other factors. In addition, increased competition in the real estate market may drive up prices for commercial real estate. If any of our projections are inaccurate or we overpay for investments and their value subsequently drops or fails to rise because of market factors, returns on our investment may be lower than expected and we could experience losses. This may be particularly pronounced during periods of market dislocation.
Our lease transactions may not result in market rates over time, which could have an adverse impact on our income and distributions to our stockholders.
We expect substantially all of our rental and escalation income to come from lease transactions, which may have longer terms than one year or renewal options that specify maximum rate increases. If we do not accurately judge the potential for increases in market rates, rental and escalation increases, the terms of our lease transactions may fail to result in fair market rates over time. Further, we may have no ability to terminate our lease transactions or adjust the rent to then-prevailing market rates. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not enter into lease agreements with longer terms or renewal options that specify maximum rates increase, which could have an adverse impact on our income and distributions to our stockholders.
We may enter into short term leases that are subject to heightened lease turnover risk or we may invest in single tenant properties or properties that are leased primarily to one tenant, which could negatively impact our ability to comply with financial covenants under our borrowings and could materially impact our income and distributions to our stockholders.
We may also enter into leases that are short term in nature and therefore subject to heightened lease turnover risk. Additionally, for single tenant properties or our properties that are primarily leased to one tenant, such as certain of our French and Dutch properties in the SEB portfolio and the Trianon Tower, lease expirations may impact our ability to comply with financial covenants under our borrowings. As a result, we could be subject to a sudden and material change in value of our portfolio and available cash flow from such investments in the event that these leases are not renewed or in the event that we are not able to comply with or obtain relief from our financial covenants under the borrowings related to, or cross-collateralized with, the properties that are subject to these leases.
We may not be able to relet or renew leases at our properties on favorable terms, or at all.
The ability to relet or renew leases underlying our properties may be negatively impacted by challenging economic conditions in general or challenging market conditions in a particular region or asset class. For example, upon expiration or earlier termination of leases for space located at our properties, the space may not be relet or, if relet, the terms of the renewal or reletting (including the cost of required renovations or concessions to tenants) may be less favorable than current lease terms. We may be receiving above market rental rates in certain instances at our properties, which may decrease upon renewal. Any such decrease could adversely impact our income and could harm our ability to service our debt and operate successfully. Weak economic conditions would likely reduce tenants’ ability to make rent payments in accordance with the contractual terms of their leases and could lead to early termination of leases. Furthermore, commercial space needs may contract, resulting in lower lease renewal rates and longer releasing periods when leases are not renewed. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. Additionally, to the extent that market rental rates are reduced, property-level cash flow would likely be negatively affected as existing leases renew at lower rates. If we are unable to relet or renew leases for all or substantially all of the space at these properties, if the rental rates upon such renewal or reletting are significantly lower than expected or if our reserves for these purposes prove inadequate, we will experience a reduction in net income and may be required to reduce or eliminate cash distributions to our stockholders.

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Additionally, the open market lease review process in certain jurisdictions can be a lengthy one and often results in resolution though arbitration. While the agreed rent level generally applies retroactively to the lease review date, this can be a lengthy and costly process.
Many of our investments are dependent upon tenants successfully operating their businesses and their failure to do so could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
We depend on our tenants to manage their day-to-day business operations in a manner that generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage, pay real estate taxes and maintain the properties under their operational control in a manner that does not jeopardize their operating licenses or regulatory status. We may not be able to find suitable tenants to lease our properties, and the ability of our tenants to fulfill their obligations to us may depend, in part, upon the overall profitability of their operations, including any other facilities, properties or businesses they may acquire or operate. The cash flow generated by the operation of our properties may not be sufficient for a tenant to meet its obligations to us. Tenants who are having trouble with their cash flow are more likely to expose our properties to liens and other risks to our investments. In addition, we may have trouble recovering from tenants who are insolvent or in financial distress. Our financial position could be weakened and our ability to fulfill our obligations under our real estate borrowings could be limited if our tenants are unable to meet their obligations to us or we fail to renew or extend our contractual relationship with any of our tenants. In addition, to the extent we seek to replace a tenant following a default we may incur substantial delays and expenses. Further, we may be required to fund certain expenses and obligations to preserve the value of our properties while they are being marketed to secure a new tenant. Once a suitable tenant is located, it may still take an extended period of time before the replacement tenant takes possession of the property. Any of these results could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
We may become responsible for unexpected capital improvements. To the extent such capital improvements are not undertaken, the ability of our tenants to manage our properties effectively and on favorable terms may be affected, which in turn could materially adversely affect our business, financial conditions and results of operations and our ability to make distributions to our stockholders.
We may be responsible under local law of certain jurisdictions in which we own property for unexpected capital improvements. In France, the legal distribution of charges between us and the tenant may be contractually set out. However, certain French law makes it mandatory for us, as owners of the real properties, for leases entered into or renewed on or after November 3, 2014, to incur expenditures for major repairs, in particular those related to the obsolescence of the properties and those required to meet changing legal regulation. French law may also force us to pay certain taxes. These expenditures, which cannot be contractually transferred to the tenant, could have a material adverse effect on our business if they exceed our expectations.
In addition, under German law, maintenance and modernization measures may be required to meet changing legal, environmental or market requirements (e.g., with regard to health and safety requirements and fire protection). The costs associated with keeping properties up to market demand are borne primarily by the property owner. Lease agreements for commercial properties may also transfer responsibility for the maintenance and repair of leased properties to tenants. However, the costs of maintenance and repairs to the roof and structures and of areas located in the leased property used by several tenants may not be fully transferred to tenants by use of general terms and conditions and requires contractual limitation on the amount apportioned.
Furthermore, although tenants are generally responsible for capital improvement expenditures under typical net lease structures applicable in the United Kingdom, it is possible that a tenant may not be able to fulfill its obligations to keep a property in good operating condition. To the extent capital improvements are not undertaken or are deferred, occupancy rates and the amount of rental and reimbursement income generated by the property may decline, which would negatively impact the overall value of the affected property. We may be forced to incur unexpected significant expense to maintain our properties, even those that are subject to net leases. Any of these results could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
We could incur additional costs if the actual costs of maintaining or modernizing our properties exceed our estimates, if we are not permitted to raise rents in connection with maintenance and modernization measures, if hidden defects not covered by insurance or contractual warranties are discovered during the maintenance or modernization process or if additional spending is required. Any failure to undertake appropriate maintenance and modernization measures could adversely affect our rental income and entitle tenants to withhold or reduce rental payments or even to terminate existing lease agreements. If we incur substantial unplanned maintenance, repair and modernization costs or fail to undertake appropriate maintenance measures, this could have a material adverse effect on our business, net assets, financial condition, cash flows or results of operations.

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We are party to commercial leases that are heavily regulated to protect the tenant and any future amendments to such regulation could increase our expenditures.
Commercial leases are heavily regulated in some countries in which we operate. In France, the contractual conditions applying to commercial leases duration, renewal, rent and rent indexation are considered matters of public policy, and as such are heavily regulated to protect the tenant. The minimum duration of a commercial lease is nine years. The tenant has the right to terminate the lease at the end of every three-year period, unless contractually agreed otherwise; the tenant also has a right of renewal of the lease upon termination of the lease’s initial period.
In addition, the tenant has a right of revision of the rent every three years. The rent variation, however, is capped. Except where the rental value considerably changes (increase by more than 10% in case of a revision upon a three-year period), the variation of the rent, in case of a revision upon a three-year period or in the case of a renewal, cannot exceed the variation of the indice trimestriel des loyers commerciaux, or the Commercial Rents Index, or the indice trimestriel des loyers des activités tertiaires, or the Retail Rental Index. However, this provision does not apply in case of a renewal of a lease, the initial duration of which exceeded nine years or the effective duration of which exceeded twelve years. In addition, even in the case of a renewed or revised lease where the rental value has considerably changed, the rent increase cannot exceed 10% of the rent paid during the previous year. Consequently, we cannot freely raise rents of ongoing leases in France.
Furthermore, changes in the content, interpretation or enforcement of these regulations could compromise some of the practices adopted by us in managing our property holdings and increase our costs for operating, maintaining and renovating our property holding and adversely affect the valuation of our property holding. In particular, recent changes to French law amended many provisions applicable to commercial leases in France, and more specifically:
canceled any reference in the French commercial code, with respect to the variation of the rent of a renewed or revised lease, to the indice national trimestriel mesurant le coût de la construction, or the Construction Cost Index, and replaced it with the Commercial Rents Index and the Retail Rental Index;
removed the possibility to contractually remove the right of the tenant to terminate the lease at the end of every three-year period, with the exception of leases for premises to be used exclusively as office space; and
made it mandatory for the property owner to incur certain charges.
In Germany, fixed-term lease agreements with a term exceeding one year can be terminated prior to their contractually agreed expiration date if certain formal requirements are not complied with. These include the requirement that there would be a document that contains all the material terms of the lease agreement, including all attachments and addenda and the signatures of all parties thereto. While the details of the applicable formal requirements are assessed differently by various German courts, most courts agree that such requirements are, in principle, strict. If any of our lease agreements would not satisfy the strict written form requirements, the respective lease agreement could be deemed to have been concluded for an indefinite term. Consequently, such lease agreement could be terminated one year after handover of the respective property to the tenant at the earliest, and at the beginning of a calendar quarter to the end of the following calendar quarter thereafter, which may result in a significantly shorter term of the lease. As a result, some of our tenants might attempt to invoke alleged non-compliance with these formal requirements in order to procure an early termination of their lease agreements or a renegotiation of the terms of such lease agreements to our disadvantage.
Moreover, we rely on certain standardized contractual general terms and conditions in Germany. As a general rule, standardized terms are regarded to be invalid under German law if they are not clear and comprehensive or if they are disproportionate and provide an unreasonable disadvantage for the other party. It is impossible to fully avoid risks arising from the use of standardized contractual terms because of the frequency of changes that are made to the legal framework and particularly court decisions relating to general terms and conditions of business. Even in the case of contracts prepared with legal advice, problems of this nature cannot be fully prevented, either from the outset or in the future due to subsequent changes in the legal framework, particularly case law, making it impossible for us to avoid the ensuing legal disadvantages. Such developments could lead to claims being brought against us or us being forced to bear costs that we had expected to be borne by our tenants (e.g., decorative repair costs during the lease term and at lease-end, the allocation of ancillary costs).
Furthermore, our lease terms in Germany typically include an annual indexation that is linked to the consumer price index for Germany (Verbraucherpreisindex für Deutschland (CPI)), which is calculated monthly by the German Federal Statistical Office (Statistisches Bundesamt). In accordance with applicable German law, these clauses provide not only for upward adjustments but also for downward adjustments tied to changes in the CPI. Consequently, rental proceeds may decrease if the macroeconomic environment worsens and hence consumer prices decline. Furthermore, rent adjustments from indexation will generally only be triggered if certain thresholds of the CPI are met or exceeded, when compared to the index level at the beginning of the lease or the previous rent adjustment. Consequently, we cannot freely raise rents of ongoing leases in Germany.

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Lease defaults, terminations or landlord-tenant disputes may reduce our income from our real estate investments.
The creditworthiness of our tenants in our real estate investments have been, or could become, negatively impacted as a result of challenging economic conditions or otherwise, which could result in their inability to meet the terms of their leases. Lease defaults or terminations by one or more tenants may reduce our revenues unless a default is cured or a suitable replacement tenant is found promptly. In addition, disputes may arise between the landlord and tenant that result in the tenant withholding rent payments, possibly for an extended period. These disputes may lead to litigation or other legal procedures to secure payment of the rent withheld or to evict the tenant. Upon a lease default, we may have limited remedies, be unable to accelerate lease payments or evict a defaulting tenant and have limited or no recourse against a guarantor. In addition, the legal process for evicting defaulting tenants may be lengthy and costly. Tenants as well as guarantors may have limited or no ability to satisfy any judgments we may obtain. We may also have duties to mitigate our losses and we may not be successful in that regard. Any of these situations may result in extended periods during which there is a significant decline in revenues or no revenues generated by a property. If this occurred, it could adversely affect our results of operations.
The bankruptcy, insolvency or financial deterioration of any of our tenants could significantly delay our ability to collect unpaid rents or require us to find new tenants.
Our financial position and our ability to make distributions to our stockholders may be adversely affected by financial difficulties experienced by any of our major tenants, including bankruptcy, insolvency or a general downturn in business, or the occurrence of any of our major tenants failing to renew or extend their lease.
We are exposed to the risk that our tenants may not be able to meet their obligations to us or other third parties, which may result in their bankruptcy or insolvency. Although some of our leases and loans permit us to evict a tenant, demand immediate repayment and pursue other remedies, bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant in bankruptcy may be able to restrict our ability to collect unpaid rents or interest during the bankruptcy proceeding. Furthermore, dealing with a tenant bankruptcy or other default may divert management’s attention and cause us to incur substantial legal and other costs.
Bankruptcy laws vary across the different jurisdictions in Europe. In certain jurisdictions, a debtor has the option to assume or reject an unexpired lease. A debtor cannot choose to keep the beneficial provisions of a contract while rejecting the burdensome ones; the contract must be assumed or rejected as a whole. In France, if the debtor chooses to continue an unexpired commercial lease, but still fails to pay the rent in connection with the occupancy after the bankruptcy procedure commencement order, we cannot legally request the termination of the lease before the end of a three-month period from the date of issue of the order relating to the bankruptcy procedure commencement.
Our tenants’ forms of entities may cause special risks or hinder our recovery.
Most of our tenants in the real estate that we own are legal entities rather than individuals. The obligations these entities owe us are typically non-recourse so we can only look to our collateral, and at times, the assets of the entity may not be sufficient to recover our investment. As a result, our risk of loss may be greater than for leases with individuals. Unlike individuals involved in bankruptcies, these legal entities will generally not have personal assets and creditworthiness at stake. As a result, the default or bankruptcy of one of our tenants, or a general partner or managing member of that tenant, may impair our ability to enforce our rights and remedies under the terms of the lease agreement.
Compliance with fire and safety and other regulations may require us or our tenants to make unanticipated expenditures which could adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Our properties are required to comply with jurisdiction-specific fire and safety regulations, building codes and other land regulations and licensing or certification requirements as they may be adopted by governmental agencies and bodies from time-to-time. We may be required to incur substantial costs to comply with those requirements. Changes in labor and other laws could also negatively impact us and our tenants. For example, changes to labor-related statutes or regulations could significantly impact the cost of labor in the workforce, which would increase the costs faced by our tenants and increase their likelihood of default.
Environmental compliance costs and liabilities associated with our properties may materially impair the value of our investments and expose us to liability.
Under various international and local environmental laws, ordinances and regulations, a current or previous owner of real property, such as us, and our tenants, may be liable in certain circumstances for the costs of investigation, removal or remediation of, or related releases of, certain hazardous or toxic substances, including materials containing asbestos, at, under or disposed of in connection with such property, as well as certain other potential costs relating to hazardous or toxic substances, including government fines and damages for injuries to persons and adjacent property. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal

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of such substances and liability may be imposed on the owner in connection with the activities of a tenant at the property. The presence of contamination or the failure to remediate contamination may adversely affect our or our tenants’ ability to sell or lease real estate, or to borrow using the real estate as collateral, which, in turn, could reduce our revenues. We, or our tenants, as owner of a site, may be liable to third parties for damages and injuries resulting from environmental contamination emanating from the site. The cost of any required investigation, remediation, removal, fines or personal or property damages and our or our tenants’ liability could significantly exceed the value of the property without any limits.
The scope of the indemnification our tenants have agreed to provide us may be limited. For instance, some of our agreements with our tenants do not require them to indemnify us for environmental liabilities arising before the tenant took possession of the premises. Further, any such tenant may not be able to fulfill its indemnification obligations. If we were deemed liable for any such environmental liabilities and were unable to seek recovery against our tenant, our business, financial condition and results of operations could be materially and adversely affected.
We may make investments that involve property types and structures with which we have less familiarity, thereby increasing our risk of loss.
We may determine to invest in property types with which we have limited or no prior experience. When investing in property types with which we have limited or no prior experience, we may not be successful in our diligence and underwriting efforts. We may also be unsuccessful in preserving value if conditions deteriorate and we may expose ourselves to unknown substantial risks. Furthermore, these investments could require additional management time and attention relative to investments with which we are more familiar. All of these factors increase our risk of loss.
We may dispose of properties that no longer meet our strategic plans. If the proceeds of our dispositions are not what we expect, or if we cannot effectively and timely deploy the proceeds from a disposal, there could be an adverse effect on our results of operations and our ability to make distributions to our stockholders.
We may dispose of properties that no longer meet our strategic plans. We then intend to use the proceeds generated from any potential disposition to acquire additional properties that meet the requirements of our strategic plans. We may not be able to dispose of properties for the amounts of proceeds we expect, or at all. In addition, if we are able to dispose of those properties, we may not be able to use the capital in a timely or more efficient manner. As such, we may not be able to adequately time any decrease in revenues from the sale of properties with a corresponding increase in revenues associated with the acquisition of new properties. The failure to dispose of properties, or to timely and more efficiently apply the proceeds from any disposition of properties to attractive acquisition opportunities could have an adverse effect on our results of operations and our ability to make distributions to our stockholders.
Uninsured losses relating to real estate and lender requirements to obtain insurance may reduce our returns.
There are types of losses relating to real estate, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, for which we may not obtain insurance unless we are required to do so by our mortgage lenders. If any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by any such uninsured loss. In addition, other than any reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large amounts for uninsured losses, we could suffer reduced earnings that would result in less cash available for distribution to our stockholders. In cases where we are required by mortgage lenders to obtain casualty loss insurance for catastrophic events or terrorism, such insurance may not be available, or may not be available at a reasonable cost, which could inhibit our ability to finance or refinance our properties. Additionally, if we obtain such insurance, the costs associated with owning a property would increase and could have a material adverse effect on the net income from the property, and, thus, the cash available for distribution to our stockholders.
Risks Related to Our Financing Strategy
We may not be able to access financing sources on attractive terms, if at all, which could adversely affect our ability to execute our business plan.
We use a variety of financing sources, including mortgage notes, credit facilities and other term borrowings, as well as preferred equity. For example, as of March 1, 2017, we had $1.1 billion of borrowings outstanding.
Our ability to effectively execute our financing strategy depends on various conditions in the financing markets that are beyond our control, including liquidity and credit spreads. While we seek non-recourse long-term financing, such financing may not be available to us on favorable terms or at all. If our strategy is not viable, we will have to find alternative forms of financing for our assets, which may include more restrictive recourse borrowings and borrowings with higher debt service that limit our ability to engage in certain transactions and reduce our cash available for distribution to stockholders. If alternative financing is not available on favorable terms, or at all, we may have to liquidate assets at unfavorable prices to pay off such financing. Our return

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on our investments and distributions to stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the earnings that we can derive from the assets we acquire or originate.
Substantially all of our borrowings are floating rate and fluctuations in interest rates may cause losses.
Substantially all of our existing borrowings bear, and future borrowing may bear, interest at variable rates. If market interest rates increase, the interest rate on our variable rate borrowings will increase and will create higher debt service requirements, which would adversely affect our cash flow and could adversely impact our results of operations. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions and other factors beyond our control. While we may enter into agreements limiting our exposure to higher debt service requirements, any such agreements may not offer complete protection from this risk.
Our interest rate risk sensitive assets, liabilities and related derivatives are generally held for non-trading purposes. Based on our current portfolio, a hypothetical increase to the interest rate caps in the applicable benchmark (EURIBOR and GBP LIBOR) applied to our floating-rate liabilities and related derivatives would result in an increase in net interest expense of approximately $8.0 million.
Our credit facility permits us to make significant borrowings, which restrict our ability to engage in certain activities and could require that we generate significant cash flow or access the capital markets to satisfy the payment and other obligations.
We may in the future make significant borrowings under our credit facility. We could also obtain additional facilities or increase our line of credit on our existing facility in the future. Our credit facility contains various affirmative and negative covenants, including, among other things, limitations on debt, liens and restricted payments, as well as financial covenants. Compliance with these covenants restrict our ability to engage in certain transactions, which could materially adversely affect our financial condition.
In addition, any future borrowings under our credit facility may exceed our cash on hand and/or our cash flows from operating activities. Our ability to meet the payment and other obligations under our credit facility depends on our ability to generate sufficient cash flow or access capital markets in the future. Our ability to generate cash flow or access capital markets, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us, in amounts sufficient to enable us to meet our payment obligations under our credit facility. If we are not able to generate sufficient cash flow to service our credit facility or other borrowing obligations, we may need to refinance or restructure our borrowings, reduce or delay capital investments, or seek to raise additional capital. There is no assurance we will be able to do any of the foregoing on favorable terms or at all. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under our credit facility, which could materially and adversely affect our liquidity.
We may not be able to borrow under our credit facility.
Our borrowings may restrict our ability to incur additional indebtedness, such as under our credit facility, based on the value of certain assets that make up a borrowing base. Such investment assets may fluctuate in value. Decreases in value would reduce our borrowing base and could prevent us from borrowing. In addition, our credit facility includes financial maintenance covenants and non-financial covenants. Breach of any such covenants would block additional borrowings under the facility. Our inability to borrow additional amounts could delay or prevent us from acquiring, financing, and completing desirable investments and could negatively affect our liquidity, which could materially and adversely affect our business. Inability to borrow could also prevent us from making distributions to our stockholders.
In a period of rising interest rates, our interest expense could increase while the income we earn on our investments would not change, which would adversely affect our profitability.
Our operating results depend in large part on differences between the income from our investments less our operating costs, reduced by any credit losses and financing costs. Income from our investments may respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may influence our net income. Increases in these rates may decrease our net income. Interest rate fluctuations resulting in our interest expense exceeding the income from our investments could result in losses for us and may limit our ability to make distributions to our stockholders. In addition, if we need to repay existing borrowings during periods of rising interest rates, we could be required to liquidate one or more of our investments at times that may not permit realization of the maximum return on those investments, which would adversely affect our profitability.
We may not successfully align the maturities of our liabilities with the maturities on our investments, which could harm our operating results and financial condition.
Our general financing strategy is focused on the use of “match-funded” structures. This means that we seek to align the maturities of our liabilities with the maturities on our investments in order to manage the risks of being forced to refinance our liabilities prior to the maturities of our investments. We may fail to appropriately employ match-funded structures on favorable terms, or

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at all. We may also determine not to pursue a fully match-funded strategy with respect to a portion of our financings for a variety of reasons. If we fail to appropriately employ match-funded strategies or determine not to pursue such a strategy, our exposure to interest rate volatility and exposure to matching liabilities prior to the maturity of the corresponding investment may increase substantially, which could harm our operating results, liquidity and financial condition.
We may use short-term borrowings to finance our investments and we may need to use such borrowings for extended periods of time to the extent we are unable to access long-term financing. This may expose us to increased risks associated with decreases in the fair value of the underlying collateral, which could cause an adverse impact on our results of operations.
We may be dependent on short-term financing arrangements that are not matched in duration to our financial assets. Short-term borrowing through credit facilities and other types of borrowings may put our investments and financial condition at risk. Any such short-term financing may also be recourse to us, which will increase the risk of our investments. We may obtain additional facilities and increase our lines of credit on existing facilities in the future. Our financing structures may economically resemble short-term, floating-rate financing and usually require the maintenance of specific loan-to-collateral value ratios and other covenants. In addition, the value of assets underlying any such short-term financing may be marked-to-market periodically by the lender, including on a daily basis. If the fair value of the investments subject to such financing arrangements decline, we may be required to provide additional collateral or make cash payments to maintain the loan-to-collateral value ratio. If we are unable to provide such collateral or cash repayments, we may lose our economic interest in the underlying investments. Further, such borrowings may require us to maintain a certain amount of cash reserves or to set aside unleveraged assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations. These facilities may be restricted to financing certain types of investments, which could impact our investment allocation. In addition, such short-term borrowing facilities may limit the length of time that any given asset may be used as eligible collateral. As a result, we may not be able to leverage our investments as fully as we would choose, which could reduce our income generated on such investments. In the event that we are unable to meet the collateral obligations for our short-term financing arrangements, our financial condition could deteriorate rapidly.
We are subject to risks associated with obtaining mortgage financing on our real estate, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
As of December 31, 2016, our real estate portfolio had $1.1 billion of total mortgage financing. Financing for new real estate investments and our maturing borrowings may be provided by credit facilities, private or public debt offerings, assumption of secured borrowings, mortgage financing on a portion of our owned portfolio or through joint ventures. We are subject to risks normally associated with financing, including the risks that our cash flow is insufficient to make timely payments of interest or principal, that we may be unable to refinance existing borrowings or support collateral obligations and that the terms of refinancing may not be as favorable as the terms of existing borrowing. If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds from other capital transactions or the sale of the underlying property, our cash flow may not be sufficient in all years to make distributions to our stockholders and to repay all maturing borrowings. This may entitle secured creditors to exercise their rights under their credit documentation which may include an acceleration of their claims and a foreclosure of security. The rights of creditors on foreclosure will be jurisdiction specific, but in the United Kingdom, for example, this may include the appointment of a receiver pursuant to the Law of Property Act 1925 who will be entitled to take possession and control of the relevant secured properties subject to the mortgage and to exercise a power of sale of a property in order discharge the secured indebtedness. This creates a risk that the proceeds will be insufficient to provide us with any equity in those properties. Alternatively, the secured creditors may have the right to appoint an administrator with respect to the property investments situated in the United Kingdom. An administrator is an officer of the court who will take possession, custody and control of the relevant company’s assets and undertaking and to exercise legislative powers that include a power of sale. The appointment of an administrator may similarly create a risk that the proceeds of realization of our assets in an administration will be insufficient to provide us with any equity in those properties or surplus proceeds.
Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, the interest expense relating to that refinanced borrowing would increase, which could reduce our profitability and the amount of distributions we are able to pay to our stockholders. Moreover, additional financing increases the amount of our leverage, which could negatively affect our ability to obtain additional financing in the future or make us more vulnerable in a downturn in our results of operations or the economy generally.

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Hedging against interest rate and currency exposure may adversely affect our earnings, limit our gains or result in losses, which could adversely affect cash available for distribution to our stockholders.
We have and may in the future enter into interest rate swap, cap or floor agreements or pursue other interest rate or currency hedging strategies. Our hedging activity will vary in scope based on interest rate levels, the type of investments held and other changing market conditions. Interest rate and/or currency hedging may fail to protect or could adversely affect us because, among other things:
interest rate and/or currency hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate and/or currency hedging may not correspond directly with the risk for which protection is sought;
the duration of the hedge may not match the duration of the related liability or investment;
our hedging opportunities may be limited by the treatment of income from hedging transactions under the rules determining REIT qualification;
the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;
the counterparties with which we trade may cease making markets and quoting prices in such instruments, which may render us unable to enter into an offsetting transaction with respect to an open position;
the party owing money in the hedging transaction may default on its obligation to pay; and
we may purchase a hedge that turns out not to be necessary, i.e., a hedge that is out of the money.
Any hedging activity we engage in may adversely affect our earnings, which could adversely affect cash available for distribution to our stockholders. Therefore, while we may enter into such transactions to seek to reduce interest rate and/or currency risks, unanticipated changes in interest rates or exchange rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not be able to establish a perfect correlation between hedging instruments and the investments being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. We may also be exposed to liquidity issues as a result of margin calls or settlement of derivative hedges.
Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearinghouse or regulated by any foreign or U.S. governmental authorities and involve risks and costs.
The cost of using hedging instruments increases as the period covered by the instrument lengthens and during periods of rising and volatile interest rates and change in foreign currency exchange rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising or foreign currency exchange rates are unfavorable and hedging costs have increased. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any foreign or U.S. governmental authorities. Consequently, there are no regulatory or statutory requirements with respect to recordkeeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we may enter into a hedging transaction will most likely result in a default. Default by a party with whom we may enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. It may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure stockholders that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
Refer to the below risk factor “- Risks Related to Regulatory Matters and Our REIT Tax Status - The direct or indirect effects of the Dodd-Frank Act, enacted in July 2010 for the purpose of stabilizing or reforming the financial markets, may have an adverse effect on our interest rate hedging activities” for a discussion of how the Dodd-Frank Wall Street Reform Act, or the Dodd-Frank Act, may affect the use of hedging instruments.

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Risks Related to Our Company
We may be subject to the actions of activist stockholders.
We may be the subject of increased activity by activist stockholders and stockholder activism generally is increasing. Responding to stockholder activism can be costly and time-consuming, create conflicts with our manager, disrupt our operations and divert the attention of our manager from executing our business plan. Activist campaigns can create perceived uncertainties as to our future direction, strategy or leadership and may result in the loss of potential business opportunities, harm our ability to attract new investors, tenants/operators/managers and joint venture partners and cause our stock price to experience periods of volatility or stagnation. Moreover, if individuals are elected to our board of directors with a specific agenda, even though less than a majority, our ability to effectively and timely implement our current initiatives and execute on our long-term strategy may be adversely affected.
Failure of NorthStar Realty to effectively perform its obligations to us could have an adverse effect on our business and performance.
In connection with the Spin-off, we entered into a separation agreement and various other agreements with NorthStar Realty. These agreements govern our relationship with NorthStar Realty and generally provide that all liabilities and obligations attributable to periods prior to the Spin-off. We and NorthStar Realty agreed to provide each other with indemnities with respect to liabilities arising out of the period after the Spin-off. We rely on NorthStar Realty to perform its obligations under these agreements. Following the Mergers, NorthStar Realty is a subsidiary of our Manager. Any such failure could lead to a decline or other adverse effects to our operating results and could harm our ability to execute our business plan.
If our ability to issue equity awards is limited, we may be in breach of our management agreement with our Manager and it could impact our Manager’s ability to retain key employees.
We are required to issue equity awards to our Manager employees at our Manager’s request under the terms of our management agreement. We may at times have limited availability under our incentive plan to issue equity awards to these employees. We may seek stockholder approval for additional equity awards and there is no assurance stockholders would grant such approval. To the extent we do not have sufficient equity awards available, we may have to compensate these employees using cash. Because CAD excludes equity-based compensation expense, payment of higher levels of cash relative to equity awards will have a negative impact on CAD and reduce our liquidity position.
We are highly dependent on information systems and systems failures could significantly disrupt our business.
As a European commercial real estate company, our business is highly dependent on information technology systems, including systems provided by our Manager and third parties over which we have no control. Various measures have been implemented to manage our risks related to the information technology systems, but any failure or interruption of our systems could cause delays or other problems in our activities, which could have a material adverse effect on our financial performance. Potential sources for disruption, damage or failure of our information technology systems include, without limitation, computer viruses, security breaches, human error, cyber attacks, natural disasters and defects in design.
Failure to implement effective information and cyber security policies, procedures and capabilities could disrupt our business and harm our results of operations.
We are dependent on the effectiveness of our information and cyber security policies, procedures and capabilities to protect our computer and telecommunications systems and the data that resides on or is transmitted through them. An externally caused information security incident, such as a hacker attack, virus or worm, or an internally caused issue, such as failure to control access to sensitive systems, could materially interrupt business operations or cause disclosure or modification of sensitive or confidential information and could result in material financial loss, loss of competitive position, regulatory actions, breach of contracts, reputational harm or legal liability.
We may continue to grow our business through acquisitions, which entails substantial risk.
We may continue growing our business through acquisitions. Such acquisitions entail substantial risk. During our due diligence of such acquisitions, we may not uncover all relevant liabilities and we may have limited, if any, recourse against the sellers. We may also incur significant transaction and integration costs in connection with such acquisitions. Further, we may not successfully integrate the investments that we acquire into our business and operations, which could have a material adverse effect on our financial results and condition.
We believe CAD and net operating income, or NOI, each a non-GAAP measure, provide meaningful indicators of our operating performance, however, CAD and NOI should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP as indicators of operating performance.
Management uses CAD and NOI, each a non-GAAP measure, to evaluate our profitability and our board of directors considers CAD and NOI in determining our quarterly cash distributions.

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We believe that CAD is useful because it adjusts net income (loss) for a variety of non-cash items. We calculate CAD by subtracting from or adding to net income (loss) attributable to common stockholders, non-controlling interests and the following items: depreciation and amortization items, including straight-line rental income or expense (excluding amortization of rent free periods), amortization of above/below market leases, amortization of deferred financing costs, amortization of discount on financings and other and equity-based compensation; unrealized gain (loss) from the change in fair value; realized gain (loss) on investments and other (excluding accelerated amortization related to sales of investments); impairment on depreciable property; non-recurring bad debt expense; acquisition gains or losses; transaction costs; foreign currency gains (losses); impairment on goodwill and other intangible assets; and one-time events pursuant to changes in U.S. GAAP and certain other non-recurring items. These items, if applicable, include any adjustments for unconsolidated ventures. The definition of CAD may be adjusted from time to time for our reporting purposes in our discretion, acting through our audit committee or otherwise.
We believe NOI is a useful metric of the operating performance of our real estate portfolio in the aggregate. Portfolio results and performance metrics represent 100% for all consolidated investments and represent our ownership percentage for unconsolidated joint ventures. Net operating income represents total property and related revenues, adjusted for: (i) amortization of above/below market rent; (ii) straight line rent (except with respect to rent free period); (iii) other items such as adjustments related to joint ventures and non-recurring bad debt expense and (iv) less property operating expenses.
However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, transaction costs, depreciation and amortization expense, realized gains (losses) from the sale of properties and other items under U.S. GAAP and capital expenditures and leasing costs necessary to maintain the operating performance of properties, all of which may be significant economic costs. NOI may fail to capture significant trends in these components of U.S. GAAP net income (loss) which further limits its usefulness.
CAD and NOI should not be considered as an alternative to net income (loss), determined in accordance with U.S. GAAP, as indicators of operating performance. In addition, our methodology for calculating CAD and NOI involves subjective judgment and discretion and may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies. For example, our calculation of CAD per share will not take into account any potential dilution from any Senior Notes or restricted stock units subject to performance metrics not yet achieved.
We believe that disclosing EPRA NAV, a non-GAAP measure used by other European real estate companies, helps investors compare our balance sheet to other European real estate companies; however, EPRA NAV should not be considered as an alternative to net assets determined in accordance with U.S. GAAP as a measure of our asset values.
As our entire portfolio is based in Europe, our management calculates European Public Real Estate Association net asset value, or EPRA NAV, a non-GAAP measure, to compare our balance sheet to other European real estate companies and believes that disclosing EPRA NAV provides investors with a meaningful measure of our net asset value. We calculate EPRA NAV based on the EPRA best practices recommendations which may be different from how other European real estate companies calculate EPRA NAV. EPRA NAV makes adjustments to net assets as determined in accordance with U.S. GAAP in order to provide our stockholders a measure of fair value of our assets and liabilities with a long-term investment strategy. This performance measure excludes assets and liabilities that are not expected to materialize in normal circumstances. EPRA NAV includes the revaluation of investment properties and excludes the fair value of financial instruments that we intend to hold to maturity, deferred tax and goodwill that resulted from deferred tax. All other assets, including real property and investments reported at cost are adjusted to fair value based upon an independent third party valuation conducted in December and June of each year. This measure should not be considered as an alternative to measuring our net assets in accordance with U.S. GAAP.
We believe that disclosing EPRA Net Initial Yield, or EPRA NIY, a non-GAAP measure used by other European real estate companies, helps investors compare annualized rental income yield to other European real estate companies; however, EPRA NIY should not be considered as an alternative to EBITDA determined in accordance with U.S. GAAP as a measure of our asset’s operating performance.
As our entire portfolio is based in Europe, our management calculates EPRA NIY, a non-GAAP measure, to compare our annualized rental income yield to other European real estate companies and believes that disclosing EPRA NIY provides investors with a meaningful measure of our asset’s operating performance. We calculate EPRA NIY based on the EPRA best practices recommendations. EPRA NIY makes is calculated as the annualized rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the gross market value of the property. This measure should not be considered as an alternative to measuring our asset’s operating performance in accordance with U.S. GAAP.
The use of estimates and valuations may be different from actual results, which could have a material effect on our consolidated financial statements.
We make various estimates that affect reported amounts and disclosures. Broadly, those estimates are used in measuring the fair value of certain financial instruments, establishing provision for loan losses and potential litigation liability. Market volatility

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may make it difficult to determine the fair value for certain of our assets and liabilities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these financial instruments in future periods. In addition, at the time of any sales and settlements of these assets and liabilities, the price we ultimately realize will depend on the demand and liquidity in the market at that time for that particular type of asset and may be materially lower than our estimate of their current fair value. Estimates are based on available information and judgment. In addition, the value of the assets in our portfolio may differ from our estimates. Therefore, actual values and results could differ from our estimates and that difference could have a material adverse effect on our consolidated financial statements.
Our distribution policy is subject to change.
Our board of directors determines an appropriate distribution on our common stock based upon numerous factors, including REIT qualification requirements, the amount of cash flow generated from operations, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our investments, general economic conditions and economic conditions that more specifically impact our business or prospects. Our board of directors expects to review changes to our distribution on a quarterly basis and distribution levels are subject to adjustment based upon any one or more of the risk factors set forth in this Annual Report on Form 10-K, as well as other factors that our board of directors may, from time-to-time, deem relevant to consider when determining an appropriate distribution on our common stock.
We may not be able to make distributions in the future.
Our ability to generate income and to make distributions to our stockholders may be adversely affected by the risks described in this Annual Report on Form 10-K and any document we file with the SEC. All distributions are made at the discretion of our board of directors, subject to applicable law, and depend on our earnings, our financial condition, maintenance of our REIT qualification and such other factors as our board of directors may deem relevant from time-to-time. We may not be able to make distributions in the future or we may have to reduce our distribution rate.
There can be no assurance that we will continue to repurchase our common stock or that we will repurchase stock at favorable prices.
Our board of directors has approved a stock repurchase program and may approve additional repurchase programs in the future. The amount and timing of stock repurchases are subject to capital availability and our determination that stock repurchases are in the best interest of our stockholders and are in compliance with all respective laws and our agreements applicable to the repurchase of stock. Our ability to repurchase stock will depend upon, among other factors, our cash balances and potential future capital requirements, our results of operations, financial condition and other factors beyond our control that we may deem relevant. A reduction in, or the completion or expiration of, our stock repurchase program could have a negative effect on our stock price. We can provide no assurance that we will repurchase stock at favorable prices, if at all. Further, stock repurchases result in increased leverage, which increases the risk of loss associated with our business.
Our ability to make distributions is limited by the requirements of Maryland law.
Our ability to make distributions on our common stock is limited by the laws of Maryland. Under applicable Maryland law, a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its liabilities as the liabilities become due in the usual course of business, or generally if the corporation’s total assets would be less than the sum of its total liabilities plus, unless the corporation’s charter provides otherwise, the amount that would be needed if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the stockholders whose preferential rights are superior to those receiving the distribution. We may not make a distribution on our common stock unless permitted by Maryland law.
We may change our investment strategy without stockholder consent and make riskier investments.
We may change our investment strategy at any time without the consent of our stockholders, which could result in us making investments that are different from and possibly riskier than our existing investments. A change in our investment strategy may increase our exposure to interest rate and commercial real estate market fluctuations.
Stockholders have limited control over changes in our policies and operations, which increases the uncertainty and risks they face as stockholders.
Our board of directors determines our major policies, including our policies regarding growth, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. We may change our investment policies without stockholder notice or consent, which could result in investments that are different than, or in different proportion than, those described in this Annual Report on Form 10-K. Under the Maryland General Corporation Law, or MGCL, and our charter, stockholders have a right to vote only on limited matters. Our board of directors’ broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face.

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Certain provisions of Maryland law may limit the ability of a third-party to acquire control of us, which could depress our stock price.
Certain provisions of the MGCL may have the effect of inhibiting a third-party from acquiring us or of impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
“business combination” provisions that, subject to limitations, prohibit certain business combinations between an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation) or an affiliate of any interested stockholder and us for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority stockholder voting requirements on these combinations; and
“control share” provisions that provide that holders of “control shares” of our company (defined as voting shares of stock that, if aggregated with all other shares of stock owned or controlled by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares,” subject to certain exceptions) have no voting rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares.
Pursuant to the Maryland Business Combination Act, our board of directors will exempt any business combinations between us and any person, provided that any such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person). Additionally, our board of directors has exempted any business combinations between us and our Manager, any of its affiliates or any of their sponsored or other managed companies. Consequently, the five-year prohibition and the super-majority vote requirements do not apply to business combinations between us and any of them. As a result, such parties may be able to enter into business combinations with us that may not be in the best interest of stockholders, without compliance with the supermajority vote requirements and the other provisions in the statute. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. There can be no assurance that these resolutions or exemptions will not be amended or eliminated at any time in the future.
Our authorized but unissued common and preferred stock and other provisions of our charter and bylaws may prevent a change in our control.
Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock and authorizes a majority of our entire board of directors, without stockholder approval, to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have the authority to issue. In addition, our board of directors may classify or reclassify any unissued shares of our common stock or preferred stock and may set the preferences, conversions or other rights, voting powers and other terms of the classified or reclassified shares. Our board of directors could establish a series of common stock or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be in the best interest of stockholders.
Our charter and bylaws contains other provisions that may delay or prevent a transaction or a change in control that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.
Maryland law also allows a corporation with a class of equity securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in its charter or bylaws, to a classified board, unless its charter prohibits such an election. Our charter contains a provision prohibiting such an election to classify our board of directors under this provision of Maryland law. This may make us more vulnerable to a change in control. If stockholders voted to amend this charter provision and to classify our board of directors, the staggered terms of our directors could reduce the possibility of a tender offer or an attempt at a change in control even though a tender offer or change in control might be in the best interests of stockholders.
Risks Related to Regulatory Matters and Our REIT Tax Status
We are subject to substantial regulation, numerous contractual obligations and extensive internal policies and failure to comply with these matters could have a material adverse effect on our business, financial condition and results of operations.
We and our subsidiaries are subject to substantial regulation, numerous contractual obligations and extensive internal policies. Given our organizational structure, we are subject to regulation by the SEC, NYSE, Internal Revenue Service, or IRS, and other

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international, federal, state and local governmental bodies and agencies. These regulations are extensive, complex and require substantial management time and attention. If we fail to comply with any of the regulations that apply to our business, we could be subjected to extensive investigations as well as substantial penalties and our business and operations could be materially adversely affected. Our lack of compliance with applicable law could result in among other penalties, our ineligibility to contract with and receive revenue from the federal government or other governmental authorities and agencies. We also have numerous contractual obligations that we must adhere to on a continuous basis to operate our business, the default of which could have a material adverse effect on our business and financial condition. We established internal policies designed to ensure that we manage our business in accordance with applicable law and regulation and in accordance with our contractual obligations. While we designed policies to appropriately operate our business, these internal policies may not be effective in all regards and, further, if we fail to comply with our internal policies, we could be subjected to additional risk and liability.
The direct or indirect effects of the Dodd-Frank Act, enacted in July 2010 for the purpose of stabilizing or reforming the financial markets, may have an adverse effect on our interest rate hedging activities.
In July 2010, the Dodd-Frank Act became law in the United States. Title VII of the Dodd-Frank Act provides for significantly increased regulation of and restrictions on derivatives markets and transactions that could affect our interest rate hedging or other risk management activities, including: (i) regulatory reporting for swaps; (ii) mandated clearing through central counterparties and execution through regulated exchanges or electronic facilities for certain swaps; and (iii) margin and collateral requirements. Although the U.S. Commodity Futures Trading Commission has not yet finalized certain requirements, many other requirements have taken effect, such as swap reporting, the mandatory clearing of certain interest rate swaps and credit default swaps and the mandatory trading of certain swaps on swap execution facilities or exchanges. While the full impact of the Dodd-Frank Act on our interest rate hedging activities cannot be assessed until implementing rules and regulations are adopted and market practice develops, the requirements of Title VII may affect our ability to enter into hedging or other risk management transactions, may increase our costs in entering into such transactions and may result in us entering into such transactions on less favorable terms than prior to effectiveness of the Dodd-Frank Act and the rules promulgated thereunder. The occurrence of any of the foregoing events may have an adverse effect on our business.
If we are deemed an investment company under the Investment Company Act, our business would be subject to applicable restrictions under the Investment Company Act, which could make it impracticable for us to continue our business as contemplated and would have a material adverse impact on the market price of our common stock.
We do not believe that we are an “investment company” under the Investment Company Act because we are not, and we do not hold ourselves out, as being engaged primarily in the business of investing, reinvesting or trading in securities, and thus we do not fall within the definition of investment company provided in Section 3(a)(1)(A) of the Investment Company Act. Instead, we are in the business of commercial real estate. In addition, we satisfy the 40% test provided in Section 3(a)(1)(C) of the Investment Company Act. This test, described in more detail under “Business-Regulation-Policies Related to the Investment Company Act” below, provides that issuers that own or propose to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets are investment companies. Because of the nature of our assets, we do not expect to own investment securities. Instead, we own commercial real estate through our wholly-owned and majority-owned subsidiaries. Thus, we seek to conduct our operations so that we will not be deemed an investment company under the Investment Company Act. If we were to be deemed an investment company, however, either because of SEC interpretation changes or otherwise, we could, among other things, be required either: (i) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company; or (ii) to register as an investment company, either of which could have an adverse effect on us and the market price of our common stock. If we are required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration and other matters.
Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.
We believe that our organization and method of operation have enabled us to meet the requirements for qualification and taxation as a REIT commencing with our taxable year ended December 31, 2015, and we intend to continue to operate in a manner so as to continue to qualify as a REIT. However, we cannot assure you that we will remain qualified as a REIT. Our qualification and taxation as a REIT will depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the U.S. federal tax laws. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements.
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;

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we could be subject to the U.S. federal alternative minimum tax and possibly increased state and local taxes; and
unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock. See “Federal Income Tax Consequences of Our Status as a REIT” for a discussion of material U.S. federal income tax consequences relating to us and our common stock.
If NorthStar Realty failed to qualify as a REIT in its 2015 taxable year, we would be prevented from electing to qualify as a REIT.
We believe that from the time of our formation until the date of our separation from NorthStar Realty, we were treated as a “qualified REIT subsidiary” of NorthStar Realty. Under applicable Treasury regulations, if NorthStar Realty failed to qualify as a REIT in its 2015 taxable year, unless NorthStar Realty’s failure was subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which NorthStar Realty failed to qualify.
Complying with REIT requirements may force us to borrow funds to make distributions to our stockholders or otherwise depend on external sources of capital to fund such distributions.
To qualify as a REIT, we are required to distribute annually at least 90% of our taxable income, subject to certain adjustments, to stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we may elect to retain and pay income tax on our net long-term capital gain. In that case, a stockholder would be taxed on its proportionate share of our undistributed long-term gain and would receive a credit or refund for its proportionate share of the tax we paid. A stockholder, including a tax-exempt or foreign stockholder, would have to file a U.S. federal income tax return to claim that credit or refund. Furthermore, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We anticipate that distributions generally will be taxable as ordinary income, although a portion of such distributions may be designated by us as long-term capital gain to the extent attributable to capital gain income recognized by us, or may constitute a return of capital to the extent that such distribution exceeds our earnings and profits as determined for tax purposes.
From time-to-time, we may generate taxable income greater than our net income (loss) for U.S. GAAP, due to among other things, amortization of capitalized purchase premiums, fair value adjustments and reserves. In addition, our taxable income may be greater than our cash flow available for distribution to stockholders as a result of, among other things, repurchases of our outstanding debt at a discount and investments in assets that generate taxable income in advance of the corresponding cash flow from the assets (for example, if a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise).
If we do not have other funds available in the situations described in the preceding paragraph, we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to distribute enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.
Because of the distribution requirement, it is unlikely that we will be able to fund all future capital needs, including capital needs in connection with investments, from cash retained from operations. As a result, to fund future capital needs, we likely will have to rely on third-party sources of capital, including both debt and equity financing, which may or may not be available on favorable terms or at all. Our access to third‑party sources of capital will depend upon a number of factors, including the market’s perception of our growth potential and our current and potential future earnings and cash distributions and the market price of our stock.
We could fail to qualify as a REIT and/or pay additional taxes if the IRS recharacterizes the structure of certain of our European investments.
We have funded our equity in certain of our European investments through the use of instruments that we believe will be treated as equity for U.S. federal income tax purposes. If the IRS disagreed with such characterization and was successful in recharacterizing the nature of our investments in European jurisdictions, we could fail to satisfy one or more of the asset and gross income tests applicable to REITs. Additionally, if the IRS recharacterized the nature of our investments and we were to take action to prevent such REIT test failures, the actions we would take could expose us to increased taxes both internationally and in the United States.

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We could be subject to increased taxes if the tax authorities in various European jurisdictions were to modify tax rules and regulations on which we have relied in structuring our European investments.
We comply with local tax rules, regulations, tax authority rulings and international tax treaties in structuring our investments. Should changes occur to these rules, regulations, rulings or treaties, the amount of taxes we pay with respect to our investments may increase.
If, in order to meet the REIT distribution requirement, we must repatriate cash from various European jurisdictions at a higher level than planned, we could be subject to additional taxes in such European jurisdictions.
As discussed above, we comply with local tax rules, regulations, tax authority rulings and international tax treaties in structuring our investments. Our tax treatment under such rules, regulations, rulings and treaties may be dependent, in part, on the timing, amount and level of ownership from which we repatriate cash from European jurisdictions. If, in order to meet the REIT distribution requirement, we must repatriate cash from those jurisdictions at certain times and in certain amounts we could be subject to additional taxes in such European jurisdictions.
Even if we qualify as a REIT, we may be subject to tax (including foreign taxes for which we will not be permitted to pass-through any foreign tax credit to our stockholders), which would reduce the amount of cash available for distribution to our stockholders.
Even if we qualify as a REIT, we may be subject to foreign, U.S. federal, state and local taxes, including alternative minimum taxes and foreign, state or local income, franchise, property and transfer taxes. For example, we intend to make investments solely in real properties located outside the United States through foreign entities. Such entities may be subject to local income and property taxes in the jurisdiction in which they are organized or where their assets are located. In addition, in certain circumstances, we may be subject to non-U.S. withholding tax on repatriation of earnings from such non-U.S. entities. To the extent we are required to pay any such taxes we will not be able to pass through to our stockholders any foreign tax credit with respect to our payment of any such taxes.
To the extent we distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed income and will incur a 4% non-deductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under the Internal Revenue Code. In addition, we could in certain circumstances be required to pay an excise or penalty tax, which could be significant in amount, in order to utilize one or more relief provisions under the Internal Revenue Code to maintain qualification for taxation as a REIT. Furthermore, we may hold some of our assets through taxable REIT subsidiaries, or TRSs. Any TRS or other taxable corporation in which we own an interest could be subject to U.S. federal, state and local income taxes at regular corporate rates if such entities are formed as domestic entities or generate income from U.S. sources or activities connected with the United States, and also will be subject to any applicable foreign taxes. Any of these taxes would decrease the amount available for distribution to our stockholders.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to stockholders and the ownership of our stock. As discussed above, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Additionally, we may be unable to pursue investments that would be otherwise attractive to us in order to satisfy the source of income requirements for qualifying as a REIT.
We must also ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and mortgage-backed securities, personal property leased in connection with the real property to the extent the rents attributable to such property are treated as “rents from real property,” and debt instruments issued by “publicly offered REITs” (i.e. REITs that are required to file annual and periodic reports with the SEC under the Exchange Act). The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets) and no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total securities can be represented by securities of one or more TRSs. Lastly, no more than 25% of the value of our total securities can be represented by debt instruments of “publicly offered REITs” to the extent such debt instruments are not secured by real property or interests in real property.
If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences, unless certain relief provisions apply. As a result, compliance with the REIT requirements may hinder our ability to operate solely on the basis of

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profit maximization and may require us to liquidate investments from our portfolio, or refrain from making, otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to stockholders.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge the risks inherent to our operations. Under current law: (i) any transaction entered into in the normal course of our trade or business primarily to manage the risk of interest rate or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets; (ii) any transaction entered into primarily to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income test (or any property which generates such income or gain); and (iii) any transaction entered into to “offset” a transaction described in clause (i) or (ii) if a portion of the hedged indebtedness is extinguished, or the related property is disposed of, will not constitute gross income for purposes of the 75% and 95% income requirements applicable to REITs. Beginning with our 2016 and subsequent taxable years, any transaction entered into in the normal course of our trade or business primarily to manage interest rate risk or price changes with respect to any previous hedging transaction with respect to which the related borrowing or obligation has been extinguished will also not constitute gross income for purposes of the 75% and 95% income requirements applicable to REITs. We are required to clearly identify any such hedging transaction before the close of the day on which it was acquired, originated or entered into and to satisfy other identification requirements in order to be treated as a qualified hedging transaction. In addition, any income from certain other qualified hedging transactions would generally not constitute gross income for purposes of both the 75% and 95% income tests. However, we may be required to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur. We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT.
Currency fluctuations could adversely impact our ability to satisfy the REIT requirements.
Substantially all of our operating income and expense is denominated in currencies where our assets are located and our Operating Partnership pays distributions in foreign currencies or U.S. dollars. Accordingly, our Operating Partnership holds various foreign currencies at any given time and may enter into foreign currency hedging transactions. The U.S. federal income tax rules regarding foreign currency transactions could adversely impact our compliance with the REIT requirements. For example, changes in the U.S. dollar value of the currencies of our operations will impact the determination of our gross income from such operations for U.S. federal income tax purposes. Variations in such currency values could therefore adversely affect our ability to satisfy the REIT gross income tests. In addition, foreign currency held by our Operating Partnership could adversely affect our ability to satisfy the REIT asset tests to the extent our Operating Partnership holds foreign currency on its balance sheet other than its functional currency or otherwise holds any foreign currency that is not held in the normal course of the activities of our Operating Partnership which give rise to qualifying income under the 95% or 75% gross income tests or are directly related to acquiring or holding qualifying assets under the 75% asset test.
If any of our activities do not comply with the applicable REIT requirements, the U.S. federal income tax rules applicable to foreign currencies could magnify the adverse impact of such activities on our REIT compliance. For example, if we receive a distribution from our Operating Partnership that is attributable to operations within a particular foreign jurisdiction, we could recognize foreign currency gain or loss based on the fluctuation in the U.S. dollar value of the local currency of such jurisdiction between the time that the underlying income was recognized and the time of such distribution. Provided that the segment of our Operating Partnership’s business to which such distribution is attributable satisfies certain of the REIT income and asset tests on a standalone basis, any foreign currency gain resulting from such distribution will be excluded for purposes of the REIT gross income tests. However, if such segment did not satisfy the applicable REIT income and asset tests on a standalone basis, any currency gain resulting from such distribution may be non-qualifying income for purposes of the REIT gross income tests, which would adversely affect our ability to satisfy such tests. As another example, foreign currency gain attributable to our holding of certain obligations, including currency hedges of such obligations, will be excluded for purposes of the 95% gross income test, but not the 75% gross income test. However, if such gains are attributable to cash awaiting distribution or reinvestment, such gains may be non-qualifying income under the 75% and 95% gross income tests. Furthermore, the impact of currency fluctuations on our compliance with the REIT requirements could be difficult to predict.
The U.S. federal income tax rules regarding foreign currency transactions are complex, in certain respects uncertain, and limited authority is available regarding the application of such rules. As a result, there can be no assurance that the IRS will not challenge the manner in which we apply such rules to our operations. Any successful challenge could increase the amount which we are required to distribute to our stockholders in order to qualify as a REIT or otherwise adversely impact our compliance with the REIT requirements.
Liquidation of assets may jeopardize our REIT qualification.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately

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jeopardizing our qualification as a REIT, or we may be subject to a 100% prohibited transaction tax on any resulting gain if we sell assets that are treated as dealer property or inventory.
Legislative or regulatory tax changes could adversely affect us or our stockholders.
At any time, the U.S. federal income tax laws and the tax laws in the various jurisdictions in which we operate can change. Laws and rules governing REITs, the taxation of our investments in various jurisdictions in which we operate or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or stockholders.
The prohibited transactions tax may limit our ability to engage in transactions, including disposition of assets, which would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than property that we took title to as a result of a default on a debt investment or lease and for which we make a foreclosure property election, but including loans, held primarily for sale to customers in the ordinary course of business. Although a safe-harbor exception to prohibited transaction treatment is available, we cannot assure stockholders that we can comply with such safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of our trade or business. Consequently, we may choose not to engage in certain sales of real property or may conduct such sales or other activities through a TRS.
We may distribute our common stock in a taxable distribution, in which case stockholders may sell shares of our common stock to pay tax on such distributions, placing downward pressure on the market price of our common stock.
We may make taxable distributions that are payable in cash and our common stock. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable distributions that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for U.S. federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. In addition, the IRS issued a revenue procedure creating a temporary safe harbor that authorized publicly traded REITs to make elective cash/stock distributions, but that temporary safe harbor has expired. Accordingly, it is unclear whether and to what extent we will be able to make taxable distributions payable in cash and our common stock. If we made a taxable distribution payable in cash and our common stock, taxable stockholders receiving such distributions will be required to include the full amount of the distribution, which is treated as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such distributions in excess of the cash distributions received. If a U.S. stockholder sells our common stock that it receives as a distribution in order to pay this tax, the sales proceeds may be less than the amount recorded in earnings with respect to the distribution, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such distributions, including in respect of all or a portion of such distribution that is payable in our common stock. If we made a taxable distribution payable in cash and our common stock and a significant number of stockholders determine to sell shares of our common stock in order to pay taxes owed on distributions, it may put downward pressure on the trading price of our common stock.
The stock ownership restrictions of the Internal Revenue Code for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in our stock and restrict our business combination opportunities.
To qualify as a REIT, five or fewer individuals, as defined in the Internal Revenue Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our stock under this requirement. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person, including entities, may own more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% in value or number (whichever is more restrictive) of the aggregate of the outstanding shares of our common stock. The board may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our common stock outstanding would result in the termination of our status as a REIT. Despite these restrictions, it is possible that there will be five or fewer individuals who own more than 50% in value of our outstanding shares, which could cause us to fail to continue to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.

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REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends paid deduction or net capital gain for this purpose) in order to continue to qualify as a REIT. We have made and intend to continue to make distributions to stockholders to comply with the REIT requirements of the Internal Revenue Code and to avoid corporate income tax and the 4% excise tax. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Distributions paid by REITs do not qualify for the reduced tax rates that apply to other corporate distributions.
The maximum tax rate for “qualified dividends” paid by corporations to individuals is 20%. Distributions paid by REITs, however, generally continue to be taxed at the normal ordinary income rate applicable to the individual recipient (subject to a maximum rate of 39.6%), rather than the preferential rate applicable to qualified dividends. The more favorable rates applicable to regular corporate distributions could cause potential investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay qualified distributions, which could adversely affect the value of the stock of REITs, including our common stock.
Non-U.S. stockholders will generally be subject to withholding tax with respect to our dividends.
Non-U.S. stockholders will generally be subject to U.S. federal withholding tax on dividends received from us at a 30% rate, subject to reduction under an applicable treaty or a statutory exemption under the Internal Revenue Code. Although such withholding taxes may be creditable in such non-U.S. stockholder’s resident jurisdiction, for many such non-U.S. stockholders, investment in a REIT that invests principally in non-U.S. real property may trigger additional tax costs compared to a direct investment in such assets which would generally not subject such non-U.S. stockholders to U.S. federal withholding taxes.
Changes to our corporate structure may result in an additional tax burden.
We may undergo changes to our corporate structure involving, among other things, the direct or indirect transfer of legal or beneficial title to real estate. These transactions may results in unforeseen adverse tax consequences that may have detrimental effects on our business, net assets, financial condition, cash flow and results of operations.
Risks Related to Ownership of Our Common Stock
The market price and trading volume of our common stock may be volatile.
The market price of our common stock could fluctuate significantly for many reasons, including in response to the risk factors listed in this Annual Report on Form 10-K or for reasons unrelated to our specific performance, such as investor perceptions, reports by industry analysts or negative developments with respect to our affiliates, as well as third parties. Our common stock could also be volatile as a result of speculation or general economic and industry conditions.
The reduced disclosure requirements applicable to us as an “emerging growth company” may make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may avail ourselves of certain exemptions from various reporting requirements of public companies that are not “emerging growth companies,” including, but not limited to, an exemption from complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and, like smaller reporting companies, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirement of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may remain an emerging growth company for up to five full fiscal years following the Spin-off. We would cease to be an emerging growth company, and, therefore, become ineligible to rely on the above exemptions, if we have more than $1 billion in annual revenue in a fiscal year, if we issue more than $1 billion of non-convertible debt over a three-year period or on the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act which would occur at the end of the fiscal year after: (i) we have filed at least one annual report; (ii) we have been an SEC-reporting company for at least 12 months; and (iii) the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
If some investors find our common stock less attractive as a result of the exemptions available to us as an emerging growth company, there may be a less active trading market for our common stock (assuming a market ever develops) and our value may be more volatile than that of an otherwise comparable company that does not avail itself of the same or similar exemptions.

40


If, we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act or our internal control over financial reporting is not effective, the reliability of our financial statements may be questioned and our stock price may suffer.
Section 404 of the Sarbanes-Oxley Act requires any company subject to the reporting requirements of the U.S. securities laws to do a comprehensive evaluation of its and its consolidated subsidiaries’ internal controls over financial reporting. To comply with this statute, we will be required, following the loss of our status as an emerging growth company to document and test our internal controls procedures. The rules governing the standards that must be met for management to assess our internal controls over financial reporting are complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. During the course of its testing, our management may identify material weaknesses or deficiencies which may not be remedied in time to meet the deadline imposed by the Sarbanes-Oxley Act. If our management cannot favorably assess the effectiveness of our internal controls over financial reporting or our auditors identify material weaknesses in our internal controls, investor confidence in our financial results may weaken and our stock price may suffer.
Our bylaws designate the Circuit Court for Baltimore City, Maryland or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to bring a claim in a judicial forum that the stockholders believe is a more favorable judicial forum for disputes with us or our directors, officers, manager or agents.
Our bylaws currently provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim for breach of a duty owed by any director, officer, manager, agent or employee of ours to us or our stockholders; (iii) any action asserting a claim against us or any director, officer, manager, agent or employee of ours arising pursuant to the Maryland General Corporation Law, our charter or bylaws brought by or on behalf of a stockholder; or (iv) any action asserting a claim against us or any director, officer, manager, agent or employee of ours that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers, manager or agents, which may discourage lawsuits against us and our directors, officers, manager or agents.



41


Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our properties are part of our real estate segment and are described under Item 1. “Business - Our Investments.” The following table presents information with respect to our real estate investments as of December 31, 2016 (dollars in thousands):

Location
 
Rentable square meters(1)
 
Percentage Leased
 
Number of Buildings
 
Lease Expiration Date(2)
 
Gross Carrying Value(3)(4)
 
Borrowings(4)
 
Germany
 
 
 
 
 
 
 
 
 
 
 
 
 
Frankfurt
 
75,356

 
87%
 
4
 
Mar-24
 
$
553,432

 
$
355,957

 
Hamburg
 
34,293

 
84%
 
2
 
Jan-21
 
101,602

 
68,423

 
Berlin
 
30,539

 
100%
 
3
 
Sep-31
 
73,131

 
42,961

 
Köln
 
10,622

 
85%
 
1
 
Aug-21
 
28,770

 
16,394

 
Other
 
16,859

 
80%
 
4
(7) 
Mar-26
 
18,178

 
8,819

 
Subtotal Germany
 
167,669

 
 
 
14
 
 
 
775,113

 
492,554

 
United Kingdom
 
 
 
 
 
 
 
 
 
 
 
 
 
London West End
 
10,447

 
100%
 
1
 
Jan-24
 
172,333

 
126,330

 
London City
 
11,312

 
99%
 
1
 
Mar-25
 
132,362

 
99,767

 
London (Other)
 
24,762

 
98%
 
3
 
Nov-22
 
64,427

 
71,716

 
Other
 
3,168

 
100%
 
1
 
Feb-21
 
8,701

 
4,512

 
Subtotal United Kingdom
 
49,689

 
 
 
6
 
 
 
377,823

 
302,325

 
France
 
 
 
 
 
 
 
 
 
 
 
 
 
Paris (Office)
 
32,075

 
100%
 
4
 
Apr-21
 
263,534

 
159,495

 
Paris (Logistics)
 
59,095

 
45%
 
1
 
Mar-17
 
43,107

 
19,521

 
Subtotal France
 
91,170

 
 
 
5
 
 
 
306,641

 
179,016

 
Netherlands
 
 
 
 
 
 
 
 
 
 
 
 
 
Rotterdam
 
37,827

 
100%
 
1
 
Dec-19
 
140,435

 
75,885

 
Other
 
12,374

 
57%
 
2
(8) 
Feb-25
 
7,448

 
4,138

 
Subtotal Netherlands
 
50,201

 
 
 
3
 
 
 
147,883

 
80,023

 
Spain
 
 
 
 
 
 
 
 
 
 
 
 
 
Madrid
 
4,025

 
100%
 
1
 
Feb-20
 
6,111

 

 
Portugal
 
 
 
 
 
 
 
 
 
 
 
 
 
Lisbon
 
4,324

 
65%
 
1
 
Jan-19
 
11,122

 

 
Albufeira
 
11,150

 
100%
 
1
(5) 
Feb-27
 
12,877

 

 
Subtotal Portugal
 
15,474

 
 
 
2
 
 
 
23,999

 

 
Total
 
378,228

 
 
 
31



$
1,637,570


$
1,053,918

(6) 
______________________
(1)
Based on contractual rentable area.
(2)
Based on initial term and represents the weighted average lease term if more than one lease.
(3)
Represents operating real estate before accumulated depreciation and excludes purchase price allocations related to net intangible and other assets and liabilities as of December 31, 2016. Refer to Note 3. “Operating Real Estate” of Part II, Item 8. “Financial Statements and Supplementary Data.”
(4)
Represents the carrying value which are translated using the exchange rate as of December 31, 2016 for all properties.
(5)
Includes one asset classified as held for sale and sold in February 2017 for $23.6 million.
(6)    Excludes preferred equity certificates of $95.2 million.
(7)    Includes one asset classified as held for sale with a carrying value of $4.8 million.
(8)    Includes one asset classified as held for sale with a carrying value of $5.0 million.



42


Item 3. Legal Proceedings
We are involved in various litigation matters arising in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations. Refer to Note 11. “Commitments and Contingencies” in Part II, Item 8. “Financial Statements and Supplementary Data” for further disclosure regarding legal proceedings.
Item 4. Mine Safety Disclosures
None.

43


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information
Our common stock is listed on the NYSE under the symbol “NRE.” The following table presents the high, low and last sales prices for our common stock, as reported on the NYSE, and our dividends declared on common stock, on a per share basis with respect to the periods indicated:
Period
 
Declaration Date
 
High
 
Low
 
Close
 
Dividends Per Share
2016
 
 
 
 
 
 
 
 
 
 
Fourth Quarter(1)
 
March 8, 2017
 
$
13.04

 
$
9.39

 
$
12.57

 
$
0.15

Third Quarter
 
November 1, 2016
 
$
11.30

 
$
8.50

 
$
10.95

 
$
0.15

Second Quarter
 
August 3, 2016
 
$
12.17

 
$
8.71

 
$
9.25

 
$
0.15

First Quarter
 
May 10, 2016
 
$
11.93

 
$
7.81

 
$
11.60

 
$
0.15

2015
 
 
 
 
 
 
 
 
 
 
Fourth Quarter
 
March 15, 2016
 
$
16.00

 
$
9.50

 
$
11.81

 
$
0.15

Third Quarter(2)
 
November 23, 2015
 
$

 
$

 
$

 
$
0.15

____________________
(1)
On March 8, 2017, we declared a dividend of $0.15 per share of common stock. This dividend is expected to be paid on March 24, 2017 to stockholders of record as of the close of business on March 20, 2017.
(2)
On November 2, 2015, our common stock began trading on the NYSE under the symbol “NRE”. On November 23, 2015, we declared our first dividend of $0.15 per share on common stock for the three months ended September 30, 2015.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a discussion of our dividend policy. On March 9, 2017, the closing sales price for our common stock, as reported on the NYSE, was $11.64. As of March 9 2017, there were 3,596 record holders of our common stock and 54,903,050 shares outstanding. This figure does not reflect the beneficial ownership of shares held in nominee name.
Refer to Part III, Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance under equity compensation plans.
Equity Compensation Plan Information
Refer to Part III, Item 12. “Equity Compensation Plan Information” for information regarding securities authorized for issuance under equity compensation plans.
Recent Sales of Unregistered Securities
On June 18, 2015, we issued 100 shares of our common stock to NorthStar Realty in connection with our initial capitalization for an aggregate purchase price of $1,000. The issuance of such shares was effected in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act.
In July 2015, we issued the Senior Notes. The issuance of the Senior Notes to the underwriters was effected in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act because the issuance of such securities did not involve a “public offering” as contemplated by Section 4(a)(2) under the Securities Act. In addition, the underwriters agreed not to offer or sell the Senior Notes in any manner involving a public offering within the meaning of Section 4(a)(2) under the Securities Act.
In connection with the issuance of the Senior Notes, we issued $340 million aggregate principal amount of the notes. The net proceeds from the offering were approximately $331 million, after deducting the initial purchasers’ discount of $1.7 million and offering expenses of $6.8 million. Deutsche Bank Securities Inc., Wells Fargo Securities Inc. and Citigroup Inc. served as the initial purchasers in the offering. 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. As of December 31, 2016, there is no outstanding balance on the Senior Notes.

44


Purchases of Equity Securities by the Issuer
The following table provides the information with respect to purchases made by us of our common stock during the three months ended December 31, 2016:
Period
 
Total Number of Shares Repurchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1)
October 1-October 31
 
1,481,386

 
$
10.40

 
1,481,386

 
$
12,325,060

November 1-November 30
 
1,196,942

 
$
10.30

 
1,196,942

 
$

__________________
(1)
On November 24, 2015, we announced that our board of directors authorized the repurchase of up to $100 million of our outstanding common stock. The authorization was fulfilled on November 24, 2016.

On November 2, 2016, our board of directors authorized the repurchase of up to an additional $100 million of our outstanding common stock. The authorization expires in November 2017, unless otherwise extended by our board of directors. There were no repurchases made during November and December 2016 under the new repurchase plan.
Purchases of Equity Securities by Affiliated Purchasers
None.

45



Item 6. Selected Financial Data
The information below should be read in conjunction with “Forward-Looking Statements,” Part I, Item 1A. “Risk Factors,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included in Item 8. “Financial Statements and Supplementary Data,” included in this Annual Report on Form 10-K.
The selected historical consolidated information presented for the four years ended December 31, 2016 relates to our operations and has been derived from our audited consolidated statements of operations included in this Annual Report on Form 10-K or our Registration Statement on Form S-11/A (SEC No. 333-205440) filed with the SEC on October 9, 2015.
The consolidated financial statements for the year ended December 31, 2016 represents our results of operations following the Spin-off and the first full year of activity as a stand-alone company.
The consolidated financial statements for the year ended December 31, 2015 represents: (i) our results of operations following the Spin-off which represents two months of activity as a stand-alone company; and (ii) our 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 and an allocation of costs related to us for the period from January 1, 2015 to October 31, 2015.
The combined consolidated financial statements for the period from January 1, 2014 to September 15, 2014 represents (i) the Prior Owner Period results of operations, which represents the ownership period of a third party (refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policy”); and (ii) an allocation of costs related to the launch of the European Real Estate Business. The combined consolidated financial statements for the period from September 16, 2014 to December 31, 2014 represents: (i) our 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; and (ii) an allocation of costs related to us.
The combined consolidated financial statements for the year ended December 31, 2013 represents: (i) the Prior Owner Period results of operations, which represents the ownership period of a third party; and (ii) an allocation of costs related to the launch of the European Real Estate Business.


46


 
 
NorthStar Europe Period
 
Prior Owner Period
 
 
Year Ended December 31,
 
Year Ended 
 December 31,
 
September 16 to December 31,
 
January 1 to September 15,
 
Year Ended 
 December 31,
 
 
2016
 
2015
 
2014
 
2014
 
2013
 
 
(Dollars in thousands, except per share and dividend data)
Operating Data:
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
124,321

 
$
101,023

 
$
1,740

 
$
4,455

 
$
6,300

Escalation income
 
25,173

 
18,822

 
982

 
2,707

 
3,569

Total expenses
 
226,166

 
258,002

 
35,332

 
13,569

 
12,163

Net income (loss)
 
(62,502
)
 
(144,143
)
 
(33,906
)
 
(3,007
)
 
1,633

Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
 
(61,753
)
 
(143,136
)
 
(33,630
)
 
(3,007
)
 
1,633

Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(1.07
)
 
$
(2.30
)
 
$
(0.53
)
 
$
(0.05
)
 
$
0.03

Diluted
 
$
(1.07
)
 
$
(2.30
)
 
$
(0.53
)
 
$
(0.05
)
 
$
0.03

Dividends per share of common stock
 
$
0.60

 
$
0.30

 
N/A

 
N/A

 
N/A

 
 
NorthStar Europe Period
 
Prior Owner Period
 
 
December 31,
 
December 31,
 
 
2016
 
2015
 
2014
 
2013
 
 
(Dollars in thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
66,308

 
$
283,844

 
$
2,100

 
$
1,350

Operating real estate, net
 
1,550,847

 
2,085,157

 
54,896

 
59,201

Total assets
 
1,845,392

 
2,683,050

 
160,271

 
90,951

Total borrowings
 
1,149,119

 
1,758,408

 
75,910

 
47,895

Total liabilities
 
1,243,875

 
1,885,739

 
80,197

 
67,367

Redeemable non-controlling interest
 
1,610

 
1,569

 

 

Total equity
 
599,907

 
795,742

 
80,074

 
23,584

 
 
NorthStar Europe Period
 
Prior Owner Period
 
 
Year Ended December 31,
 
Year Ended 
 December 31,
 
September 16 to December 31,
 
January 1 to September 15,
 
Year Ended 
 December 31,
 
 
2016
 
2015
 
2014
 
2014
 
2013
 
 
(Dollars in thousands)
Other Data:
 
 
 
 
 
 
 
 
 
 
Cash flow provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
28,130

 
$
(50,180
)
 
$
(34,222
)
 
$
(2,681
)
 
$
7,245

Investing activities
 
391,624

 
(1,900,532
)
 
(149,403
)
 
(2,307
)
 
(7,263
)
Financing activities
 
(630,856
)
 
2,231,566

 
188,408

 
(46
)
 
(656
)
Effect of foreign currency translation on cash and cash equivalents
 
(6,434
)
 
890

 
(2,683
)
 
3,722

 
545

CAD for the three months and year ended December 31, 2016 was $9.9 million and $52.1 million, respectively. NOI for the three months and year ended December 31, 2016 was $23.9 million and $119.1 million, respectively. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures” for details on the calculation of CAD and NOI including a reconciliation of CAD to net income (loss) attributable to common stockholders calculated in accordance with U.S. GAAP.


47


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8. “Financial Statements and Supplementary Data” and risk factors in Part I. Item 1A “Risk Factors” of this report. References to “NorthStar Europe,” “we,” “us” or “our” refer to NorthStar Realty Europe Corp. and its subsidiaries unless the context specifically requires otherwise. References to “our Manager” refer to NorthStar Asset Management Group Inc. for the period prior to the Mergers (refer below) and Colony NorthStar, Inc., for the period subsequent to the Mergers. As part of the Merger, NSAM changed its name to Colony NorthStar, Inc.
Introduction
NorthStar Realty Europe Corp., a publicly-traded REIT, is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France. Our objective is to provide our stockholders with stable and recurring cash flow supplemented by capital growth over time. We commenced operations on November 1, 2015 following the spin-off by NorthStar Realty of its European real estate business (excluding its European healthcare properties) into a separate publicly-traded company, NorthStar Europe, a Maryland corporation, or the Spin-off.
Upon completion of the Spin-off, NorthStar Realty contributed: (i) its business activities related to the U.K. Complex, acquired on September 16, 2014; (ii) 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, our common stock began trading on the NYSE under the symbol “NRE.” We are externally managed and advised by an affiliate of our Manager. Substantially all of our assets, directly or indirectly, are held by, and we conduct our operations, directly or indirectly, through our Operating Partnership. We have elected to be taxed and will continue to conduct our operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.
Significant Developments
Sales Initiatives
In 2016, we announced a strategy to focus on prime office properties located in key cities within Germany, the United Kingdom and France. As a result, we undertook a sales initiative, selling 22 properties as of March 1, 2017 and realizing $380 million of net proceeds. Consequently, we no longer operate in Belgium, Italy or Sweden. In 2017, we expect to continue executing on our sales initiatives primarily with the goal of maximizing long-term stockholder value.
Senior Notes
In 2016, we repurchased approximately $272.3 million of the Senior Notes and settled the remaining Senior Notes in cash at maturity.
Mergers Agreement among NSAM, NorthStar Realty and Colony Capital, Inc.
On January 10, 2017, our external manager, NSAM completed a tri-party merger with NorthStar Realty and Colony under which the companies combined in an all-stock merger of equals transaction to create a diversified real estate and investment management company. Under the terms of the merger agreement, NSAM, Colony and NorthStar Realty, through a series of transactions, merged with and into NSAM, which was renamed Colony NorthStar. Colony NorthStar is a leading global equity REIT with an embedded investment management platform.

48


Summary of Business
Our primary business line is European real estate. We are predominantly focused on prime office properties located in key cities within Germany, the United Kingdom and France. The following table presents a summary of assets acquired and sold for the years ended December 31, 2016, 2015 and 2014 and the period from January 1, 2017 to March 1, 2017:
    
 
 
Germany
 
United Kingdom
 
France
 
Other
 
Total
Acquired
 
 
 
 
 
 
 
 
 
 
2014(1)
 

 
1

 

 

 
1

2015
 
14

 
4

 
5

 
28

 
51

2016
 

 

 

 

 

2017
 

 

 

 

 

Subtotal
 
14

 
5

 
5

 
28

 
52

Sold
 
 
 
 
 
 
 
 
 
 
2014
 

 

 

 

 

2015
 

 

 

 
3

 
3

2016
 
3

 

 
1

 
14

 
18

2017
 

 

 

 
1

 
1

Subtotal
 
3

 

 
1

 
18

 
22

Total
 
11

 
5

 
4

 
10

 
30

__________________
(1)
We committed to acquire the majority of our properties in 2014.

Sources of Operating Revenues and Cash Flows
We primarily generate revenue from rental and other operating income generated by our properties. Our income is primarily derived through the difference between the revenue and the operating and financing costs of our investments. We may also continue to acquire investments that generate attractive returns without any leverage.
Profitability and Performance Metrics
We calculate cash available for distribution, or CAD, and net operating income, or NOI as metrics to evaluate the profitability and performance of our business (refer to “Non-GAAP Financial Measures” for a description of these metrics).
Outlook and Recent Trends
The European economy concluded another positive year of growth in 2016. Fourth quarter Gross Domestic Product, or GDP, in the European Union, or the EU, and the Euro Area grew by 1.9% and 1.7% year on year, respectively. This represented the fourteenth consecutive quarter of growth in the Eurozone which outpaced the U.S. economy in 2016. In December of 2016, the European Central Bank, or ECB, extended its quantitative easing program until the end of 2017 while reducing the average volume of asset purchases from €80 billion to €60 billion per month from April 2017. The monetary stimulus provided by the ECB appears to be having the desired effect of encouraging companies and households to borrow and increase expenditure.
In February 2017, the European Commission, or EC, revised its 2017 GDP forecast for the Euro Area up by 0.1% to 1.6% with growth expected to continue to be driven primarily by domestic demand. The 2018 Euro Area outlook has also been revised upwards to 1.8%, 0.1% above the November 2016 forecast. Inflation in the EU has begun to rise since the end of 2016 and is expected to rise from 0.3% in 2016 to 1.8% in 2017.
Unemployment in the EU continued to fall, reaching 8.1% in January 2017 (down from 8.9% a year earlier), the lowest level recorded since January 2009. The EC predicts a continued improvement in the labor market in 2017 and 2018.
The German economy strengthened further in 2016, with GDP growth of 1.9% (an increase of 0.2% compared to 2015), driven by a combination of private consumption and resilient exports fueled by a weaker Euro. The EC forecasts that Germany will maintain this momentum through 2017 and 2018, resulting in projected GDP growth of 1.6% and 1.8%, respectively. The French economy grew by 1.2% in 2016 (0.1% lower compared to 2015) and is expected to reach 1.4% and 1.7% in 2017 and 2018, respectively. The U.K. economy has performed better than generally expected since the EU referendum in June 2016, achieving 0.6% GDP growth in the fourth quarter and 2.0% growth year on year in 2016. This has likely been fueled by a combination of depreciation in the value of U.K. Pound Sterling, an increase in the Bank of England’s, or BOE’s, quantitative easing program by £70 billion and the reduction in the interest rate to 0.25%. In light of this stronger than anticipated performance, the EC recently improved its U.K. growth outlook for 2017 by 0.5% to 1.5%. However, there remains a high degree of uncertainty regarding the future of the U.K.’s relationship with the EU as well as its non-EU trading partners as the process of exiting the EU evolves.

49


Beyond the U.K., upcoming elections in countries including the Netherlands, France and Germany have the potential to exacerbate the level of geopolitical uncertainty that currently exists within Europe and globally. While we continue to remain positive regarding the prospects for the region, the outcome of these events as well as the financial health of certain peripheral countries such as Greece, Italy and Portugal - including the health of their respective banking sectors and high levels of public debt - pose a potential risk to the stability of the region and its future economic growth prospects.
Despite a strong fourth quarter (€87 billion investment volume, a 5% year-on-year increase), total European commercial real estate investment volume remained 10% below its 2015 level, reaching €251 billion in 2016. However, this was driven by a sharp decline in U.K. investment volume. Overall investment volume across Europe, excluding the U.K., actually grew by 5% year on year, continuing to reflect strong demand from investors. The office sector, which accounted for approximately 43% of overall 2016 investment volume, proved relatively resilient in 2016, showing only a 5% annual decline in volume (including the U.K.).
Quarter on quarter investment activity rose by 26% in the U.K. during the fourth quarter. This was widely attributed to overseas investors seeking to take advantage of U.K. Pounds Sterling’s devaluation since the EU referendum. However, full year 2016 U.K. investment volume remained significantly below its 2015 level falling by 28% in local currency. Germany surpassed the U.K. as the most active investment market in the second half of the year. Full year 2016 investment volume reached €53 billion, only 4% below 2015. During the year, average prime office yields across the top 7 German cities fell by approximately 59 bps to 3.6% reflecting the strongest annual yield compression witnessed during the past 10 years.
Full year 2016 investment volume in France reached €26 million, 4% below its 2015 level. At the end of 2016, prime office yields in Greater Paris, which represented 75% of total French investment volume, reached an all-time low of 3.0%.
Occupational demand across the major European office markets remains robust with strong take-up and decreasing vacancy rates witnessed across most major cities. This trend is expected to continue through 2017 driven by improving macroeconomic fundamentals and a limited new supply pipeline.
Our Strategy
We seek to provide our stockholders with a stable and recurring cash flow for distribution supplemented by capital growth over time. Our business is predominantly focused on prime office properties located in key cities within our Core Markets. These are not only the largest economies in Europe, but the largest, most established, liquid and among the most stable office markets in Europe. We seek to utilize our established local networks to source suitable investment opportunities. We have a long term investment approach and expect to make equity investments, directly or indirectly through joint ventures.
Critical Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements and our related notes for the period prior to the Spin-off 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 in accordance with U.S. GAAP.
The contribution of the European Real Estate Business to us has been determined to be a combination of entities under common control which results in a change in the reporting entity and requires retrospective application to our financial statements under U.S. GAAP. Accordingly, the operations of the European Real Estate Business of NorthStar Realty transferred to us upon the Spin-off are presented as if the transferred business was our business 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. As a result, the combined consolidated balance sheet as of December 31, 2014 was updated to include items related to the New European Investments, such as cash of $0.5 million, certain deposits of $58.6 million, related foreign exchange loss of $1.1 million and transaction costs incurred of $27.5 million. The cash, deposits paid and transaction costs incurred are recorded as net transactions with NorthStar Realty through equity.
Prior to the Spin-off, our financial statements had not been prepared as we were not operated separately from NorthStar Realty. The consolidated financial statements for such prior periods reflect our revenues and direct expenses and include material assets and liabilities of NorthStar Realty that are specifically identifiable to the European Real Estate Business and contributed to us upon completion of the Spin-off. The consolidated financial statements for the period ended January 1, 2015 to October 31, 2015 and the combined consolidated financial statements for the year ended December 31, 2014 represent us prior to the Spin-off and include certain consolidated subsidiaries. Subsequent to the Spin-off, the financial statements are presented on a consolidated basis.
In addition, the combined consolidated financial statements include activity related to the ownership period prior to the Acquisition Date of the U.K. Complex, herein referred to as the Prior Owner Period. The year ended December 31, 2014 include activities of the U.K. Complex from January 1, 2014 to the Acquisition Date. Because the U.K. Complex was acquired from an unrelated third party on the Acquisition Date, a “blackline” presentation for the change in basis giving effect to purchase accounting pursuant to U.S. GAAP is presented.

50


The combined consolidated financial statements for the period from the Acquisition Date, or NorthStar Europe Period, and Prior Owner Period include an allocation of costs and expenses by NorthStar Realty related to us (primarily compensation and other general and administrative expense of $1 million) based on an estimate of expenses as if we were managed as an independent entity. This allocation method is principally based on relative headcount and management’s knowledge of our operations. The amounts allocated in the accompanying combined consolidated financial statements are not necessarily indicative of the actual amount of such indirect expenses that would have been recorded had we been a separate independent entity. We believe the assumptions underlying its allocation of indirect expenses are reasonable. In addition, an estimate of management fees to our Manager was recorded for the NorthStar Europe Period as if we were managed as an independent entity. We began paying management fees to our Manager on November 1, 2015 pursuant to the terms of our management agreement with our Manager.
Principles of Consolidation
Our consolidated financial statements include the combined accounts of NorthStar Realty Europe Corp., our Operating Partnership and their consolidated subsidiaries. We consolidate variable interest entities, or VIEs, where we are the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by us. 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. We base the qualitative analysis on our 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. We reassess the 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. We determine whether we are 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 us 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 our business activities and the other interests. We reassess the determination of whether we are 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.
We will evaluate our investments in unconsolidated ventures to determine whether they are a VIE. We analyze 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 we have a majority voting interest in a voting interest entity, the entity will generally be consolidated. We do 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.
We perform 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.
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 us. A non-controlling interest is required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) and other comprehensive income (loss), or 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.

51


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.
We account for purchases of operating real estate that qualify 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 our 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 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. We record a gain or loss on sale of real estate when title is conveyed to the buyer and we have no substantial economic involvement with the property. If the sales criteria for the full accrual method are not met, we defer 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.
Intangible Assets and Intangible Liabilities
We record 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 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. We analyze 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. We 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 consolidated statements of operations.
Events or circumstances which could indicate a potential impairment include (but are not limited to) issues with laws and regulations; on-going or projected negative operating income or cash flow; and/or a significant change in the occupancy rate and/or rising interest rates.
A market approach is performed based on an income approach whereby we look at comparable properties, current market conditions, forecasts and representative transactions to validate management’s expectations, where possible. The main assumptions used in measuring goodwill impairment, include the selection of guideline transactions, the derivation and selection of multiples and the financial metrics of the properties. The starting point for each of the reporting unit’s multiples is the detailed annual plan and rent roll. The detailed planning process takes into consideration many factors including revenue growth rate and capital spending requirements, among other items which impact the individual reporting unit projections. Fair value of the reporting unit is derived using significant unobservable inputs or Level 3 in the fair value hierarchy. These inputs are based on internal management estimates, forecasts and judgments.
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 our consolidated balance sheets. We amortize any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Escalation income represents revenue from

52


tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by us 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, we evaluate 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, we may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within depreciation and amortization in the consolidated statements of operations.
Impairment on Investments
Operating Real Estate
Our 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 our operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if our 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, we consider 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 our consolidated statements of operations.
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, we establish, 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.
Derivatives
We seek 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.
Our derivative instruments do not qualify as hedges under U.S. GAAP.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a 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 is recorded as a component of accumulated OCI.
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 consolidated statements of operations.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or 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 us will be January 1, 2018. Leases are specifically excluded from this guidance and will be governed by the applicable lease codification; however, this update may have implications in certain variable payment terms included in lease agreements and in sale and leaseback transactions. We are in the process of evaluating the impact, if any, of the update on our 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. We adopted this guidance in the first quarter 2016 and determined our Operating Partnership is considered a VIE. We are 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 our partnership interest is considered a majority voting interest. In addition, we identified each of our properties that have non-controlling interests as VIEs. These entities are VIEs because the non-controlling interests do not have substantive kick-out

53


or participating rights and we are the primary beneficiary. As such, this standard resulted in the identification of additional VIEs, however it did not have a material impact on our consolidated financial position or results of operations.
In February 2016, the FASB issued an accounting update that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The update is expected to result in the recognition of a right-to-use asset and related liability to account for the Company’s future obligations under its ground lease arrangements for which it is the lessee. As of December 31, 2016, the remaining contractual payments under the Company’s ground lease agreements are discussed in Note 11. Additionally, the new update will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Under this guidance, allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained will no longer be capitalized as initial direct costs and instead will be expensed as incurred. Lessors will continue to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. 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. We are evaluating the impact, if any, that this guidance will have on our 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. We have concluded that this guidance will not have any impact on our 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, 2016. We will adopt the new guidance prospectively on January 1, 2017 and do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and financial statement disclosures.
In June 2016, the FASB issued guidance that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments). The new guidance is effective for reporting periods, beginning after December 15, 2019 and will be applied as a cumulative adjustment to retained earnings as of the effective date. We are evaluating the impact, if any, that this guidance will have on our consolidated financial position, results of operations and financial statement disclosures.
In August 2016, the FASB issued guidance that makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. We do not expect the adoption of this standard to have a material impact on our consolidated statements of cash flows.
In November 2016, the FASB issued guidance which requires entities to show the changes in the total of cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017 and will be applied retrospectively to all periods presented. We do not expect the adoption of this standard to have a material impact on our consolidated statement of cash flows.
In January 2017, the FASB issued guidance to clarify the definition of a business under ASC 805. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance is effective for fiscal years, and

54


interim periods within those years, beginning December 15, 2017. The amendments in this update will be applied on a prospective basis. We expect that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets).
In January 2017, the FASB issued guidance which removes Step 2 from the goodwill impairment test. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact, if any, that this guidance will have on our consolidated financial position, results of operations and financial statement disclosures.

55


Results of Operations
The following presents a summary of our activity for the years ended December 31, 2016, 2015 and 2014:
Year ended December 31, 2016 represents our results of operations following the Spin-off and the first full year of activity as a stand-alone company. During the year, we disposed of 18 assets.
Year ended December 31, 2015 represents: (i) our results of operations following the Spin-off and two months of activity as a stand-alone company; and (ii) our 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 and an allocation of costs related to us for the period from January 1, 2015 to October 31, 2015. We acquired the IVG Portfolio, Deka Portfolio, Internos Portfolio and SEB Portfolio in April 2015 and Trianon Tower in July 2015. In December 2015, we disposed of three assets.
The period from January 1, 2014 to September 15, 2014 represents: (i) the Prior Owner Period results of operations, which represents the ownership period of a third party (refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policy”); and (ii) an allocation of costs related to the launch of the European Real Estate Business. The period from September 16, 2014 to December 31, 2014 represents: (i) our 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; and (ii) an allocation of costs related to us. We acquired the U.K. Complex in September 2014.
Comparison of the Year Ended December 31, 2016 to December 31, 2015 (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
2016
 
2015
 
Amount
Revenues
 
 
 
 
 
Rental income
$
124,321

 
$
101,023

 
$
23,298

Escalation income
25,173

 
18,822

 
6,351

Other revenue
1,721

 
694

 
1,027

Total revenues
151,215

 
120,539

 
30,676

Expenses
 
 
 
 
 
Properties - operating expenses
35,892

 
26,559

 
9,333

Interest expense
41,439

 
36,129

 
5,310

Transaction costs
2,610

 
120,101

 
(117,491
)
Impairment losses
27,468

 
1,710

 
25,758

Management fee, related party
14,068

 
2,333

 
11,735

Other expenses
12,376

 
10,535

 
1,841

General and administrative expenses
8,077

 
3,502

 
4,575

Compensation expense
19,257

 
850

 
18,407

Depreciation and amortization
64,979

 
56,283

 
8,696

Total expenses
226,166

 
258,002

 
(31,836
)
Other income (loss)
 
 
 
 
 
Unrealized gain (loss) on investments and other
(11,257
)
 
(8,731
)
 
(2,526
)
Realized gain (loss) on investments and other
26,448

 
1,376

 
25,072

Income (loss) before income tax benefit (expense)
(59,760
)
 
(144,818
)
 
85,058

Income tax benefit (expense)
(2,742
)
 
675

 
(3,417
)
Net income (loss)
$
(62,502
)
 
$
(144,143
)
 
$
81,641


56


Same Store Analysis
The following table presents our same store analysis for the real estate segment which excludes properties that were acquired or sold at any time during the three months ended December 31, 2016 and 2015 which includes a reconciliation from the same store analysis for the real estate segment to income (loss) before income tax (benefit) provision (dollar in thousands):
 
Same Store Real Estate Segment
 
Increase (Decrease)
 
Corporate
 
Other(2)
 
Total
 
2016
 
2015
 
Amount
 
%
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Total Revenue
$
32,546

 
$
33,063

 
$
(517
)
 
1.6
%
 
$

 
$

 
$
(676
)
 
$
11,064

 
$
31,870

 
$
44,127

Properties - operating expenses
8,938

 
7,507

 
1,431

 
19.1
%
 

 

 
(310
)
 
2,287

 
8,628

 
9,794

Interest expense
6,823

 
7,930

 
(1,107
)
 
14.0
%
 
1,221

 
5,358

 
(89
)
 
1,450

 
7,955

 
14,738

Total expenses(1)
17,180

 
27,150

 
(9,970
)
 
36.7
%
 
12,848

 
9,478

 
(90
)
 
6,634

 
29,938

 
43,262

Unrealized gains (loss) on investments and other
3,868

 
(1,003
)
 
4,871

 
485.6
%
 
5,937

 
3,780

 
(192
)
 
(155
)
 
9,613

 
2,622

Realized gains (loss) on investments and other
(279
)
 
(4,427
)
 
4,148

 
93.7
%
 
(1,451
)
 

 
20,896

 
5,836

 
19,166

 
1,409

Income (loss) before income tax (benefit) provision
$
3,194

 
$
(14,954
)
 
$
18,148

 
121.4
%
 
$
(9,583
)
 
$
(11,056
)
 
$
20,517

 
$
6,374

 
$
14,128

 
$
(19,636
)
__________________
(1)
Includes depreciation and amortization expense, transaction costs, general and administrative expense, management fees and other expenses.
(2)
Represents impact of assets sales net of foreign currency exchange.

Same store revenue for the fourth quarter remained stable as a result of new leases signed in 2016, an increase in same store escalation income ($1.7 million, the majority of which was offset by the increase in properties operating expense) and other market rent and indexation adjustments, offset by a significant tenant vacancy in the Trianon Tower as a result of a tenant expiry at the end of the third quarter of 2016. Interest expense was approximately 14% lower in 2016 as a result of the refinancing of certain mortgage notes. Unrealized gains (loss) on investments and other increased due to the movements in foreign exchange rates on the interest rate caps. Realized gains (loss) on investments and other increased due to the write-off of the deferred financing costs related to the refinancing in 2015.
Refer to Item 8 “Financial Statements and Supplementary Data” Note 12 “Quarterly Financial Information” for more information related to the three months ended December 31, 2016.
Revenues
Rental Income
Rental income consists of rental revenue in our real estate segment. Rental income increased $23.3 million, primarily due to 2016 being the first full year of activity and leases signed in 2016, offset by the disposal of 18 properties during 2016 and the vacancy of a significant tenant in the Trianon Tower in the fourth quarter 2016. For the year ended December 31, 2016, 27,000 square meters of leases were signed and renegotiated in our real estate segment generating a revenue increase of $5 million. Occupancy in our Core Market for the three months ended December 31, 2016 was 92% compared to 94% for the three months ended December 31, 2015 mainly due to the vacancy in the Trianon Tower.
Escalation Income
Escalation income consists of tenant recoveries in our real estate segment. Escalation income increased $6.4 million, primarily due to 2016 being the first full year of activity and leases signed in 2016, offset by the disposal of 18 properties during 2016. There is a corresponding increase in properties operating expenses and a majority of these costs are recovered by us.
Other Revenue
Other revenue is principally related to lease termination fees in our real estate segment. Other revenue increased for the year ended December 31, 2016 due to the early termination of two tenants whose spaces were subsequently re-let.
Expenses
Properties - Operating Expenses
Properties - operating expenses increased $9.3 million due to 2016 being the first full year of activity and leases signed in 2016, offset by the disposal of 18 properties during 2016 and a decrease in asset management fees in the SEB Portfolio in our real estate segment. There is a corresponding increase in escalation income and a majority of these costs are recovered from our tenants.

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Real estate properties - operating expenses in 2016 represents $4.4 million relating to repairs and maintenance and $31.7 million relating to escalation expense.
Interest Expense
Interest expense increased $5.3 million due to 2016 being the first full year of activity, offset by the disposal of 18 properties during 2016 and the refinancing of certain mortgage notes in our real estate segment and the repayment of the Senior Notes in our corporate segment.
Transaction Costs
Transaction costs for the year ended December 31, 2016 primarily relate to costs associated with exploring potential transactions in our real estate segment and costs related to the Mergers in our corporate segment. Transaction costs for the year ended December 31, 2015 primarily represented expenses such as real estate transfer tax and professional fees related to the acquisition of our New European Investments in our real estate segment and the Spin-off in our corporate segment.
Impairment losses
Impairment losses for the year ended December 31, 2016 related to impairment of one of our held-for-sale assets in our real estate segment, which sold for less than the initial carrying value subsequent to quarter ended June 30, 2016. The initial carrying value was based on the initial purchase price allocation of the asset, which utilized different assumptions than the December 31, 2015 year end independent valuation, primarily being a longer holding period. The sale price of the asset was in line with the December 31, 2015 year end independent valuation. Impairment losses for the year ended December 31, 2015 relates to impairment of goodwill on one reporting unit which management deemed to be impaired in our real estate segment.
Management Fee, Related Party
Management fee, related party relates to the management fee incurred to our Manager in our corporate segment (refer to “Related Parties Arrangements” below for more information). The management contract with our Manager commenced on November 1, 2015.
Other Expenses
Other expenses primarily represent third-party service provider fees such as audit and legal fees and other compliance related fees related to portfolio management of our real estate segment. The increase for the year ended December 31, 2016 is due to the full year impact of owning and managing the New European Investments. We expect the benefit of the cost savings from the asset sales in 2017 due to timing of the unwind of the structures and the reduction in the number of entities.
General and Administrative Expenses
General and administrative expenses are principally incurred in our corporate segment. The year ended December 31, 2016 represents a full year of operating as a stand-alone company, which includes the impact of the implementation of an internal control environment and includes an allocation of general and administrative expenses from our Manager of $0.2 million. The year ended December 31, 2015 represent an allocation of certain costs and expenses related to activities for the launch of our European Real Estate Business prior to the Spin-off.
Compensation Expense
Compensation expense is comprised of time-based and performance equity-based based awards in our corporate segment. We began to incur compensation expense upon the Spin-off in November 2015. The year ended December 31, 2016 changes do not take into account the impact of the vesting as a result of the Mergers (refer to Item 8 “Compensation Expense” for more information).
Depreciation and Amortization
Depreciation and amortization expense increased due to 2016 being the first full year of activity, offset by the disposals of 18 properties during 2016 and assets being reclassified into held for sale in our real estate segment.
Other Income (Loss)
Unrealized Gain (Loss) on Investments and Other
Unrealized gain (loss) on investments and other is primarily related to the non-cash change in fair value of derivative instruments. The increase in the foreign currency forwards used to hedge projected net property level cash flows related to the strengthened U.S. dollar against the U.K. Pound Sterling and the Euro. The decrease on the interest rate caps relates to the movement in interest rate spreads within Europe.

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The following table presents a summary of unrealized gain (loss) on investments and other for the years ended December 31, 2016 and 2015 (dollars in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
 
Real Estate
 
Corporate
 
Total
 
Real Estate