EX-99.11 11 clns12312016ex9911.htm AUDITED FINANCIAL STATEMENTS OF COLONY Exhibit

Exhibit 99.11

AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF COLONY CAPITAL, INC.

Index to Consolidated Financial Statements

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Colony NorthStar, Inc.

We have audited the accompanying consolidated balance sheets of Colony Capital, Inc. (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Colony Capital, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Los Angeles, California
February 28, 2017


2


COLONY CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) 

 
 
December 31,
 
 
2016
 
2015
ASSETS
 
 
 
 
Cash
 
$
376,005

 
$
185,854

Loans receivable, net
 
 
 
 
     Held for investment
 
3,432,992

 
4,048,477

     Held for sale
 
29,353

 
75,002

Real estate assets, net
 
 
 
 
Held for investment
 
3,243,631

 
3,132,218

Held for sale
 
223,954

 
297,887

Equity method investments
 
953,259

 
824,597

Other investments (including $23,446 and $0 at fair value)
 
123,182

 
99,868

Goodwill
 
680,127

 
678,267

Deferred leasing costs and intangible assets, net (including $21,239 and $9,872 related to real estate held for sale)
 
299,980

 
325,513

Due from affiliates
 
9,971

 
11,713

Other assets (including $16,045 and $3,704 related to assets held for sale)
 
388,538

 
359,914

Total assets
 
$
9,760,992

 
$
10,039,310

LIABILITIES AND EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Accrued and other liabilities (including $14,296 and $9,101 related to assets held for sale)
 
$
321,225

 
$
325,589

Due to affiliatescontingent consideration
 
41,250

 
52,990

Dividends and distributions payable
 
65,972

 
65,688

Debt, net (including $108,758 and $8,769 related to assets held for sale)
 
3,122,792

 
3,587,724

Convertible senior notes, net
 
592,826

 
591,079

Total liabilities
 
4,144,065

 
4,623,070

Commitments and contingencies (Note 21)
 

 

Equity:
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value per share; $625,750 and $625,750 liquidation preference; 50,000 shares authorized; 25,030 and 25,030 shares issued and outstanding
 
250

 
250

Common stock, $0.01 par value per share
 
 
 
 
Class A, 449,000 shares authorized; 113,510 and 111,694 shares issued and outstanding
 
1,135

 
1,118

Class B, 1,000 shares authorized; 525 and 546 shares issued and outstanding
 
5

 
5

Additional paid-in capital
 
3,050,582

 
2,995,243

Distributions in excess of earnings
 
(246,064
)
 
(131,278
)
Accumulated other comprehensive loss
 
(32,109
)
 
(18,422
)
Total stockholders’ equity
 
2,773,799

 
2,846,916

Noncontrolling interests in investment entities
 
2,453,938

 
2,138,925

Noncontrolling interests in Operating Company
 
389,190

 
430,399

Total equity
 
5,616,927

 
5,416,240

Total liabilities and equity
 
$
9,760,992

 
$
10,039,310

The accompanying notes are an integral part of these consolidated financial statements.

3


COLONY CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

The following table presents the assets and liabilities recorded in the consolidated balance sheets attributable to securitization vehicles consolidated as variable interest entities (excluding the Operating Company, as discussed in Note 4).
 
 
December 31,
 
 
2016
 
2015
Assets
 
 
 
 
Cash
 
$
4,320

 
$
2,453

Loans receivable, net
 
885,374

 
1,193,859

Real estate assets, net
 
8,873

 
9,016

Other assets
 
66,306

 
94,796

Total assets
 
$
964,873

 
$
1,300,124

Liabilities
 
 
 
 
Debt, net
 
$
494,496

 
$
806,728

Accrued and other liabilities
 
63,381

 
80,619

Total liabilities
 
$
557,877

 
$
887,347

The accompanying notes are an integral part of these consolidated financial statements.


4


COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Income
 
 
 
 
 
 
Interest income
 
$
385,851

 
$
417,305

 
$
204,361

Property operating income
 
371,082

 
299,871

 
20,962

Income from equity method investments
 
99,375

 
47,605

 
73,829

Fee income (including $67,731, $64,585 and $0 from affiliates, respectively)
 
67,731

 
65,813

 

Other income (including $4,298, $4,797 and $812 from affiliates, respectively)
 
14,193

 
11,382

 
1,497

Total income
 
938,232

 
841,976

 
300,649

Expenses
 
 
 
 
 
 
Management fees (including $0, $5,897, and $10,384 of share-based payments, respectively)
 

 
15,062

 
43,133

Investment and servicing expenses (including $0, $366 and $2,846 reimbursed to affiliates, respectively)
 
23,666

 
23,369

 
5,811

Transaction and merger integration costs
 
40,605

 
38,888

 
21,096

Interest expense
 
170,083

 
133,094

 
48,168

Property operating expenses
 
118,461

 
117,713

 
5,563

Depreciation and amortization
 
171,682

 
140,977

 
9,177

Provision for loan losses
 
35,005

 
37,475

 
197

Impairment loss
 
11,717

 
11,192

 

Compensation expense (including $0, $450 and $1,778 reimbursed to affiliates, respectively)
 
111,838

 
84,506

 
2,468

Administrative expenses (including $0, $1,922 and $3,301 reimbursed to affiliates, respectively)
 
51,699

 
38,238

 
8,940

Total expenses
 
734,756

 
640,514

 
144,553

Gain on sale of real estate assets, net
 
73,616

 
8,962

 

Gain on remeasurement of consolidated investment entities, net
 

 
41,486

 

Other gain (loss), net
 
18,416

 
(5,170
)
 
1,216

Income before income taxes
 
295,508

 
246,740

 
157,312

Income tax (expense) benefit
 
(4,782
)
 
9,296

 
2,399

Net income
 
290,726

 
256,036

 
159,711

Net income attributable to noncontrolling interests:
 
 
 
 
 
 
Investment entities
 
163,084

 
86,123

 
36,562

Operating Company
 
12,324

 
19,933

 

Net income attributable to Colony Capital, Inc.
 
115,318

 
149,980

 
123,149

Preferred dividends
 
48,159

 
42,569

 
24,870

Net income attributable to common stockholders
 
$
67,159

 
$
107,411

 
$
98,279

Net income per common share:
 
 
 
 
 
 
Basic
 
$
0.58

 
$
0.96

 
$
1.01

Diluted
 
$
0.58

 
$
0.96

 
$
1.01

Weighted average number of common shares outstanding:
 
 
 
 
 
 
Basic
 
112,235

 
110,931

 
96,694

Diluted
 
112,235

 
110,931

 
96,699

The accompanying notes are an integral part of these consolidated financial statements.

5


COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Net income
 
$
290,726

 
$
256,036

 
$
159,711

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Equity in other comprehensive income (loss) of unconsolidated joint ventures, net
 
101

 
(451
)
 
(3,170
)
Unrealized loss on beneficial interests in debt securities
 
(659
)
 

 
(327
)
Net change in fair value of cash flow hedges
 
389

 
(236
)
 
(127
)
Foreign currency translation adjustments:
 
 
 
 
 
 
Foreign currency translation adjustment (loss) gain
 
(97,681
)
 
25,287

 
(58,792
)
Change in fair value of net investment hedges
 
35,833

 
(5,604
)
 
26,985

Net foreign currency translation adjustments
 
(61,848
)
 
19,683

 
(31,807
)
Other comprehensive (loss) income
 
(62,017
)
 
18,996

 
(35,431
)
Comprehensive income
 
228,709

 
275,032

 
124,280

Comprehensive income attributable to noncontrolling interests:
 
 
 
 
 
 
Investment entities
 
117,241

 
89,693

 
32,215

Operating Company
 
9,837

 
25,290

 

Comprehensive income attributable to stockholders
 
$
101,631

 
$
160,049

 
$
92,065

The accompanying notes are an integral part of these consolidated financial statements.

6


COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)

 
 
Preferred 
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions in Excess of
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests in Investment Entities
 
Noncontrolling
Interests in Operating Company
 
Total Equity
 
 
 
 
Balance at December 31, 2013
 
$
101

 
$
765

 
$
1,701,274

 
$
(20,423
)
 
$
2,593

 
$
1,684,310

 
$
269,917

 
$

 
$
1,954,227

Net income
 

 

 

 
123,149

 

 
123,149

 
36,562

 

 
159,711

Other comprehensive loss
 

 

 

 

 
(31,084
)
 
(31,084
)
 
(4,347
)
 

 
(35,431
)
Issuance of 7.5% Series B Cumulative Redeemable Perpetual Preferred Stock
 
34

 

 
86,216

 

 

 
86,250

 

 

 
86,250

Class A common stock offerings
 

 
326

 
717,544

 

 

 
717,870

 

 

 
717,870

Underwriter discount and offering costs
 

 

 
(3,551
)
 

 

 
(3,551
)
 

 

 
(3,551
)
Issuance of common stock for incentive fees
 

 

 
464

 

 

 
464

 

 

 
464

Share-based payments
 

 
5

 
10,796

 

 

 
10,801

 

 

 
10,801

Contributions from noncontrolling interests
 

 

 

 

 

 

 
344,506

 

 
344,506

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(128,325
)
 

 
(128,325
)
Preferred stock dividends
 

 

 

 
(25,122
)
 

 
(25,122
)
 

 

 
(25,122
)
Common stock dividends declared ($1.44 per share)
 

 

 

 
(145,607
)
 

 
(145,607
)
 

 

 
(145,607
)
Balance at December 31, 2014
 
135

 
1,096

 
2,512,743

 
(68,003
)
 
(28,491
)
 
2,417,480

 
518,313

 

 
2,935,793

Net income
 

 

 

 
149,980

 

 
149,980

 
86,123

 
19,933

 
256,036

Other comprehensive income
 

 

 

 

 
10,069

 
10,069

 
3,570

 
5,357

 
18,996

Issuance of 7.125% Series C Cumulative Redeemable Perpetual Preferred Stock
 
115

 

 
287,385

 

 

 
287,500

 

 

 
287,500

Issuance of Class A common stock
 

 
14

 
37,375

 

 

 
37,389

 

 

 
37,389

Issuance of Class B common stock
 

 
6

 
14,765

 

 

 
14,771

 

 

 
14,771

Issuance of units in Operating Company
 

 

 

 

 
 
 

 

 
568,794

 
568,794

Offering costs
 

 

 
(9,406
)
 

 

 
(9,406
)
 

 

 
(9,406
)
Share-based payments
 

 
7

 
13,707

 

 

 
13,714

 

 

 
13,714

Consolidation of investment entities (Note 7)
 

 

 

 

 

 

 
1,700,114

 

 
1,700,114

Contributions from noncontrolling interests
 

 

 

 

 

 

 
486,152

 

 
486,152

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(655,347
)
 
(25,011
)
 
(680,358
)
Preferred stock dividends
 

 

 

 
(43,365
)
 

 
(43,365
)
 

 

 
(43,365
)
Common stock dividends declared ($1.52 per share)
 

 

 

 
(169,890
)
 

 
(169,890
)
 

 

 
(169,890
)
Reallocation of equity of Operating Company (Note 2)
 

 

 
138,674

 

 

 
138,674

 

 
(138,674
)
 

Balance at December 31, 2015
 
$
250


$
1,123


$
2,995,243


$
(131,278
)

$
(18,422
)

$
2,846,916


$
2,138,925

 
$
430,399


$
5,416,240


7


COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(In thousands)
 
 
Preferred  Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Distributions in Excess of
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests in Investment Entities
 
Noncontrolling
Interests in Operating Company
 
Total Equity
 
 
 
 
Balance at December 31, 2015
 
$
250

 
$
1,123

 
$
2,995,243

 
$
(131,278
)
 
$
(18,422
)
 
$
2,846,916

 
$
2,138,925

 
$
430,399

 
$
5,416,240

Net income
 

 

 

 
115,318

 

 
115,318

 
163,084

 
12,324

 
290,726

Other comprehensive loss
 

 

 

 

 
(13,687
)
 
(13,687
)
 
(45,843
)
 
(2,487
)
 
(62,017
)
Repurchase of preferred stock
 
(10
)
 

 
(19,988
)
 

 

 
(19,998
)
 

 

 
(19,998
)
Reissuance of preferred stock to an equity method investee
 
10

 

 
19,988

 

 

 
19,998

 

 

 
19,998

Redemption of units in Operating Company for cash and Class A common stock
 

 
9

 
18,562

 

 

 
18,571

 

 
(21,128
)
 
(2,557
)
Share-based compensation
 

 
10

 
13,628

 

 

 
13,638

 

 

 
13,638

Shares canceled for tax withholding on vested stock awards
 

 
(2
)
 
(2,860
)
 

 

 
(2,862
)
 

 

 
(2,862
)
Contributions from noncontrolling interests
 

 

 

 

 

 

 
819,033

 

 
819,033

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(587,539
)
 
(33,668
)
 
(621,207
)
Acquisition of noncontrolling interests (Note 16)
 

 

 
725

 

 

 
725

 
(4,688
)
 

 
(3,963
)
Preferred stock dividends
 

 

 

 
(48,159
)
 

 
(48,159
)
 

 

 
(48,159
)
Common stock dividends declared ($1.60 per share)
 

 

 

 
(181,945
)
 

 
(181,945
)
 

 

 
(181,945
)
Reallocation of equity (Notes 2 and 16)
 

 

 
25,284

 

 

 
25,284

 
(29,034
)
 
3,750

 

Balance at December 31, 2016
 
$
250

 
$
1,140

 
$
3,050,582

 
$
(246,064
)
 
$
(32,109
)
 
$
2,773,799

 
$
2,453,938

 
$
389,190

 
$
5,616,927

The accompanying notes are an integral part of these consolidated financial statements.

8


COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Cash Flows from Operating Activities
 
 
 
 
 
 
Net income
 
$
290,726

 
$
256,036

 
$
159,711

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Amortization of discount and net origination fees on purchased and originated loans
 
(27,038
)
 
(21,109
)
 
(46,053
)
Accretion in excess of cash receipts on purchased credit-impaired loan
 
(8,515
)
 
(39,886
)
 
(23,390
)
Paid-in-kind interest added to loan principal, net of paid-in-kind interest collected
 
(29,844
)
 
(30,211
)
 
(2,796
)
Straight-line rents
 
(12,617
)
 
(11,929
)
 
(1,032
)
Amortization of above- and below-market lease values, net
 
2,045

 
3,240

 
179

Amortization of deferred financing costs
 
28,936

 
21,222

 
6,590

Income from equity method investments
 
(99,375
)
 
(47,605
)
 
(73,829
)
Distributions of income from equity method investments
 
79,361

 
66,418

 
74,948

Provision for loan losses
 
35,005

 
37,475

 

Impairment of real estate and intangible assets
 
11,717

 
11,192

 

Depreciation and amortization
 
171,682

 
140,977

 
9,177

Share-based compensation
 
13,638

 
13,714

 
11,265

Net gain on remeasurement of net assets of consolidated investment entities
 

 
(41,486
)
 

Change in fair value of contingent consideration
 
(11,740
)
 
(16,510
)
 

Gain on sales of real estate assets, net
 
(73,616
)
 
(8,962
)
 

Foreign currency loss recognized on repayment of loans receivable
 

 
31,268

 

Changes in operating assets and liabilities:
 
 
 
 
 
 
Decrease (increase) in due from affiliates
 
(521
)
 
7,828

 

Decrease (increase) in other assets
 
5,174

 
(4,372
)
 
(12,431
)
Increase in accrued and other liabilities
 
38,336

 
23,929

 
25,635

Increase (decrease) in due to affiliates
 

 
(12,236
)
 
4,250

Other adjustments, net
 
(4,993
)
 
(5,867
)
 
535

Net cash provided by operating activities
 
408,361


373,126

 
132,759

Cash Flows from Investing Activities
 
 
 
 
 
 
Contributions to equity method and cost method investments
 
(226,665
)
 
(356,051
)
 
(458,881
)
Distributions of capital from equity method and cost method investments
 
113,491

 
357,307

 
150,788

Investments in purchased loans receivable, net of seller financing
 
(176,314
)
 
(135,194
)
 
(412,152
)
Net disbursements on originated loans
 
(385,702
)
 
(984,840
)
 
(1,241,046
)
Repayments of loans receivable
 
732,393

 
335,446

 
673,815

Proceeds from sales of loans receivable
 
220,900

 

 

Cash receipts in excess of accretion on purchased credit-impaired loans
 
140,057

 
399,783

 

Disbursements on acquisition of real estate assets, related intangibles and leasing commissions
 
(501,221
)
 
(1,377,344
)
 
(1,618,069
)
Investment deposits
 
(67,693
)
 
(1,380
)
 
(1,496
)
Proceeds from repayment of beneficial interests in debt securities
 

 

 
28,000

Proceeds from sales of real estate assets
 
390,943

 
323,430

 

Investments in marketable securities
 
(23,324
)
 

 

Acquisition of investment management business, net of cash acquired (Note 3)
 

 
(56,335
)
 

Proceeds from settlement of derivative instruments
 
34,471

 
45,024

 
8,824

Other investing activities, net
 
476

 
(8,660
)
 
(4,554
)
Net cash provided by (used in) investing activities
 
$
251,812


$
(1,458,814
)
 
$
(2,874,771
)

9


COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Cash Flows from Financing Activities
 
 
 
 
 
 
Proceeds from issuance of preferred stock, net
 
$

 
$
277,945

 
$
83,533

Proceeds from issuance of common stock, net
 

 

 
717,870

Dividends paid to preferred stockholders
 
(48,372
)
 
(38,244
)
 
(23,504
)
Dividends paid to common stockholders
 
(181,172
)
 
(165,559
)
 
(131,815
)
Line of credit borrowings
 
694,000

 
1,345,900

 
1,130,800

Line of credit repayments
 
(586,400
)
 
(1,194,900
)
 
(1,105,300
)
Proceeds from secured financing
 
1,072,556

 
1,936,043

 
1,808,505

Secured financing repayments
 
(1,601,423
)
 
(871,788
)
 
(198,775
)
Increase (decrease) in escrow deposits for financing arrangements
 
12,724

 

 
(11,153
)
Net proceeds from issuance of convertible senior notes
 

 

 
394,593

Payment of deferred financing costs
 
(22,464
)
 
(27,670
)
 
(36,355
)
Contributions from noncontrolling interests
 
819,033

 
486,152

 
344,506

Distributions to noncontrolling interests
 
(615,059
)
 
(671,659
)
 
(128,325
)
Acquisition of noncontrolling interests
 
(3,963
)
 

 

Repurchase of preferred stock
 
(19,998
)
 

 

Reissuance of preferred stock to an equity method investee
 
19,998

 

 

Other financing activities, net
 
(5,417
)
 
(15,546
)
 
(2,816
)
Net cash provided by (used in) financing activities
 
(465,957
)
 
1,060,674

 
2,841,764

Cash held by investment entities consolidated (Note 7)
 

 
75,412

 

Effect of exchange rates on cash
 
(4,065
)
 
(6,480
)
 
(983
)
Net increase in cash
 
190,151

 
43,918

 
98,769

Cash, beginning of period
 
185,854

 
141,936

 
43,167

Cash, end of period
 
$
376,005

 
$
185,854

 
$
141,936

 
 

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
 
 
Cash paid for interest
 
$
118,365

 
$
105,608

 
$
33,470

Cash paid for income taxes
 
$
7,190

 
$
2,078

 
$
2,188

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
 
 
Dividends payable
 
$
65,972

 
$
65,688

 
$
47,537

Foreclosures on collateral assets from originated or acquired debt
 
$
128,124

 
$

 
$

Net settlement of redemption in equity method investee
 
$
117,241

 
$

 
$

Release of restricted cash in lieu of cash distribution upon buyout of noncontrolling interests
 
$
6,564

 
$

 
$

Deferred tax liability assumed in a real estate acquisition
 
$

 
$
27,978

 
$

Settlement of debt through issuance of units in Operating Company
 
$

 
$
10,000

 
$

Issuance of common stock for acquisition of investment management business
 
$

 
$
52,160

 
$

Issuance of units in Operating Company for acquisition of investment management business
 
$

 
$
558,794

 
$

Net assets of investment entities consolidated, net of cash assumed (Note 7)
 
$

 
$
2,637,278

 
$

Loan payoff proceeds held in escrow
 
$

 
$
11,300

 
$

Accrued and other liabilities assumed in connection with acquisitions, net of cash assumed
 
$

 
$
407

 
$
10,781

Seller-provided secured financing on purchased loans
 
$

 
$

 
$
82,328

Deferred financing costs deducted from convertible debt issuance proceeds
 
$

 
$

 
$
10,063

Unsecured note issued in connection with acquisition
 
$

 
$

 
$
10,000

Interest reserve for seller financing returned to borrower upon resolution of underlying collateral loan
 
$

 
$

 
$
2,670

The accompanying notes are an integral part of these consolidated financial statements.

10


COLONY CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
1. Organization
As of December 31, 2016, Colony Capital, Inc. (the “Company”) is a leading global real estate and investment management firm that targets attractive risk-adjusted returns for its investors by investing primarily in real estate and real estate-related assets. The Company manages capital on behalf of both its shareholders and limited partners in private investment funds under its management where the Company may earn management fees and carried interests. The Company's portfolio is primarily composed of: (i) real estate equity; (ii) real estate and real estate-related debt; and (iii) investment management of Company-sponsored private equity funds and vehicles. The Company was organized on June 23, 2009 as a Maryland corporation and has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code, for U.S. federal income tax purposes.
Prior to April 2, 2015, the Company was externally managed and advised by Colony Financial Manager, LLC (the "Manager"), which was a wholly-owned subsidiary of Colony Capital, LLC ("CCLLC"), a privately held global real estate investment firm. On April 2, 2015, Colony Capital Operating Company, LLC ("Operating Company" or “OP”), an operating subsidiary of the Company, acquired substantially all of the real estate investment management business and operations of CCLLC (the "Combination") and the Company became a self-managed REIT. As a result of the Combination, the Company is able to sponsor new investment vehicles as general partner under the Colony name. Details of the Combination are described more fully in Note 3.
In connection with the Combination, the Company reorganized into an umbrella partnership real estate investment trust ("UPREIT"). As part of the restructuring, the Company contributed to OP and its subsidiaries substantially all of the Company's other subsidiaries, assets and liabilities, other than certain indebtedness, in exchange for membership interests in OP ("OP Units"). Following the Combination, OP conducts all of the activities and owns substantially all of the assets and liabilities of the combined business.
Merger
On June 2, 2016, the Company entered into a definitive Agreement and Plans of Merger (the “Merger Agreement”) with NorthStar Asset Management Group Inc. ("NSAM") and NorthStar Realty Finance Corp. (“NRF”) under which the companies agreed to combine in an all-stock merger transaction (the "Merger") to form Colony NorthStar, Inc. ("Colony NorthStar"), the publicly-traded company of the combined organization.
On December 20, 2016, the Merger was approved by the shareholders of the Company, NSAM and NRF. The Merger closed on January 10, 2017 (the "Closing Date"), after remaining customary conditions were satisfied and all relevant regulatory approvals were received.
See additional information in Note 23.
2. Significant Accounting Policies
The significant accounting policies of the Company are described below. The accounting policies of the Company's unconsolidated joint ventures are substantially similar to those of the Company.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries and consolidated variable interest entities. All significant intercompany accounts and transactions have been eliminated. The portions of the equity, net income and other comprehensive income of consolidated subsidiaries that are not attributable to the parent are presented separately as amounts attributable to noncontrolling interests in the consolidated financial statements. A substantial portion of noncontrolling interests represent interests held by private investment funds or other investment vehicles managed by the Company and which invest alongside the Company ("Co-Investment Funds") and membership interests in OP held by affiliates and senior executives.
Principles of Consolidation
The Company consolidates entities in which it has a controlling financial interest, by first considering if an entity meets the definition of a variable interest entity ("VIE") for which the Company is deemed to be the primary beneficiary, or if the Company has the power to control an entity through a majority of voting interest or through other arrangements.

11


Variable Interest Entities—A VIE is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose equity holders lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Company also considers interests held by its related parties, including de facto agents. The Company assesses whether it is a member of a related party group that collectively meets the power and benefits criteria and, if so, whether the Company is most closely associated with the VIE. In performing this analysis, the Company considers both qualitative and quantitative factors, including, but not limited to: the amount and characteristics of its investment relative to the related party; the Company’s and the related party's ability to control or significantly influence key decisions of the VIE including consideration of involvement by de facto agents; the obligation or likelihood for the Company or the related party to fund operating losses of the VIE; and the similarity and significance of the VIE’s business activities to those of the Company and the related party. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, involves significant judgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fair values and performance of assets held by the VIE.
Voting Interest Entities—Unlike VIEs, voting interest entities have sufficient equity to finance its activities and equity investors exhibit the characteristics of a controlling financial interest through their voting rights. The Company consolidates such entities when it has the power to control these entities through ownership of a majority of the entities' voting interests or through other arrangements.
At each reporting period, the Company reassesses whether changes in facts and circumstances causes a change in the status of an entity as a VIE or voting interest entity, and/or a change in the Company's consolidation assessment. Changes in consolidation status are applied prospectively. An entity may be consolidated as a result of this reassessment, in which case, the assets, liabilities and noncontrolling interest in the entity are recorded at fair value upon initial consolidation. Any existing equity interest held by the Company in the entity prior to the Company obtaining control will be remeasured at fair value, which may result in a gain or loss recognized upon initial consolidation. However, if the consolidation represents an asset acquisition of a voting interest entity, the Company's existing interest in the acquired assets, if any, is not remeasured to fair value but continues to be carried at historical cost. The Company may also deconsolidate a subsidiary as a result of this reassessment, which may result in a gain or loss recognized upon deconsolidation depending on the carrying values of deconsolidated assets and liabilities compared to the fair value of any retained interests.
Noncontrolling Interests
Noncontrolling Interests in Investment Entities—This represents interests in consolidated real estate investment entities held primarily by Co-Investment Funds, which, prior to the Combination, were managed by CCLLC or its affiliates, and to a lesser extent, held by unaffiliated third parties. Allocation of net income or loss is generally based upon relative ownership interests held by equity owners in each investment entity, or based upon contractual arrangements that may provide for disproportionate allocation of economic returns among equity interests, including using a hypothetical liquidation at book value, where applicable and substantive.
Noncontrolling Interests in Operating Company—This represents membership interests in OP held primarily by affiliates and senior executives. A majority of the OP Units held by noncontrolling interests were issued as part of the consideration for the Combination. Noncontrolling interests in OP are allocated a share of net income or loss in OP based on their weighted average ownership interest in OP during the period. At the end of each period, noncontrolling interests in OP is adjusted to reflect their ownership percentage in OP at the end of the period, through a reallocation between controlling and noncontrolling interests in OP, as applicable.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the exchange rate in effect at balance sheet date and the corresponding results of operations for such entities are translated using the average exchange rate in effect during the period. The resulting foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income or loss in stockholders’ equity. Upon sale, complete or substantially complete liquidation of a foreign subsidiary, or upon partial sale of a foreign equity method investment, the

12


translation adjustment associated with the investment, or a proportionate share related to the portion of equity method investment sold, is reclassified from accumulated other comprehensive income or loss into earnings.
Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the exchange rate in effect at balance sheet date and the corresponding results of operations for such entities are remeasured using the average exchange rate in effect during the period. The resulting foreign currency remeasurement adjustments are recorded in other gain (loss), net.
Disclosures of non-US dollar amounts to be recorded in the future are translated using exchange rates in effect at balance sheet date.
Fair Value Measurement
Fair value is based on an exit price, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Where appropriate, the Company makes adjustments to estimated fair values to appropriately reflect counterparty credit risk as well as the Company's own credit-worthiness.
The estimated fair value of financial assets and financial liabilities are categorized into a three-tier hierarchy, prioritized based on the level of transparency in inputs used in the valuation techniques, as follows:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in non-active markets, or valuation techniques utilizing inputs that are derived principally from or corroborated by observable data directly or indirectly for substantially the full term of the financial instrument.
Level 3—At least one assumption or input is unobservable and it is significant to the fair value measurement, requiring significant management judgment or estimate.
Where the inputs used to measure the fair value of a financial instrument falls into different levels of the fair value hierarchy, the financial instrument is categorized within the hierarchy based on the lowest level of input that is significant to its fair value measurement.
The Company has not elected fair value option for any financial instruments.
Business Combinations
The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. If substantially all of the fair value of gross assets acquired is concentrated in a single asset or a group of similar assets, then the set of transferred assets and activities is not a business. If not, for an acquisition to be considered a business, it would have to include an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., there is a continuation of revenue before and after the transaction). A substantive process is not ancillary or minor, cannot be replaced without significant cost, effort or delay or is otherwise considered unique or scarce. To qualify as a business without outputs would require an organized workforce with the necessary skills, knowledge and experience that performs a substantive process.
Net cash paid to acquire a business or assets is classified as investing activities on the accompanying statements of cash flows.
The Company accounts for business combinations by applying the acquisition method. Transaction and integration costs related to acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred. The identifiable assets acquired, liabilities assumed and noncontrolling interests in acquired entity are recognized and measured at their estimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and noncontrolling interests in an acquired entity, net of fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and liabilities.
For acquisitions that are not deemed to be businesses, the assets acquired are recognized based on their cost to the Company as the acquirer and no gain or loss is recognized unless the fair value of non-cash assets given as consideration differs from the carrying amount of the assets acquired. The cost of assets acquired in a group is allocated to individual assets within the group based on their relative fair values and does not give rise to goodwill. Transaction and integration costs related to acquisition of assets are included in the cost basis of the assets acquired.
Contingent consideration is classified as a liability or equity, as applicable. Contingent consideration in connection with the acquisition of a business is measured at fair value on acquisition date, and unless classified as equity, is remeasured at fair value each reporting period thereafter until the consideration is settled, with changes in fair value included in net income. For

13


contingent consideration in connection with the acquisition of assets, subsequent changes to the recorded amount are adjusted against the cost of the acquisition.
Real estate acquisitions, which are likely to be considered asset acquisitions (upon adoption of ASU 2017-01 as discussed below) or otherwise, as business combinations, are recorded at the fair values of the acquired components at the time of acquisition, allocated among land, building, improvements, equipment, lease-related tangible and identifiable intangible assets and liabilities, such as tenant improvements, deferred leasing costs, in-place lease values, above- and below-market lease values. The estimated fair value of acquired land is derived from recent comparable sales of land and listings within the same local region based on available market data. The estimated fair value of acquired buildings and building improvements is derived from comparable sales, discounted cash flow analysis using market-based assumptions, or replacement cost, as appropriate. The fair value of site and tenant improvements is estimated based upon current market replacement costs and other relevant market rate information.
Cash and Cash Equivalents
Short-term, highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The Company did not have any cash equivalents at December 31, 2016 and 2015. The Company's cash is held with major financial institutions and may at times exceed federally insured limits.
Loans Receivable
The Company originates and purchases loans receivable. The accounting framework for loans receivable depends on the Company's strategy whether to hold or sell the loan, and separately, if the loan was credit-impaired at time of acquisition or if the lending arrangement is an acquisition, development and construction loan.
Loans Held for Investment (other than Purchased Credit-Impaired Loans)
Loans that the Company has the intent and ability to hold for the foreseeable future are classified as held-for-investment. Originated loans are recorded at amortized cost, or outstanding unpaid principal balance less net deferred loan fees. Net deferred loan fees include unamortized origination and other fees charged to the borrower less direct incremental loan origination costs incurred by the Company. Purchased loans are recorded at amortized cost, or unpaid principal balance plus purchase premium or less unamortized discount. Costs to purchase loans are expensed as incurred.
Interest Income—Interest income is recognized based upon contractual interest rate and unpaid principal balance of the loans. Net deferred loan fees on originated loans are deferred and amortized as adjustments to interest income over the expected life of the loans using the effective yield method. Premium or discount on purchased loans are amortized as adjustments to interest income over the expected life of the loans using the effective yield method. For revolving loans, net deferred loan fees, premium or discount are amortized to interest income using the straight-line method. When a loan is prepaid, prepayment fees and any excess of proceeds over the carrying amount of the loan are recognized as additional interest income.
Nonaccrual—Accrual of interest income is suspended on nonaccrual loans. Loans that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual status. Interest receivable is reversed against interest income when loans are placed on nonaccrual status. Interest collection on nonaccruing loans for which ultimate collectability of principal is uncertain is recognized using a cost recovery method by applying interest collected as a reduction to loan principal; otherwise, interest collected is recognized on a cash basis by crediting to income when received. Loans may be restored to accrual status when all principal and interest is current and full repayment of the remaining contractual principal and interest is reasonably assured.
Impairment and Allowance for Loan Losses—On a periodic basis, the Company analyzes the extent and effect of any credit migration from underwriting and the initial investment review associated with the performance of a loan and/or value of its underlying collateral, financial and operating capability of the borrower or sponsors as well as amount and status of any senior loan, where applicable. Specifically, operating results of collateral properties and any cash reserves are analyzed and used to assess whether cash from operations are sufficient to cover debt service requirements currently and into the future, ability of the borrower to refinance the loan, liquidation value of collateral properties, financial wherewithal of any loan guarantors, as well as the borrower’s competency in managing and operating the collateral properties. Such analysis is performed at least quarterly, or more often as needed when impairment indicators are present. The Company does not utilize a statistical credit rating system to monitor and assess the credit risk and investment quality of its acquired or originated loans. Given the diversity of the Company's portfolio, management believes there is no consistent method of assigning a numerical rating to a particular loan that captures all of the various credit metrics and their relative importance. Therefore, the Company evaluates impairment and allowance for loan losses on an individual loan basis.
Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due in accordance with contractual terms of the loans, including consideration of underlying collateral value. Allowance for loan

14


losses represents the estimated probable credit losses inherent in loans held for investment at balance sheet date. Changes in allowance for loan losses are recorded in the provision for loan losses on the consolidated statement of operations. Allowance for loan losses generally exclude interest receivable as accrued interest receivable is reversed when a loan is placed on nonaccrual status. Allowance for loan losses is generally measured as the difference between the carrying value of the loan and either the present value of cash flows expected to be collected, discounted at the original effective interest rate of the loan or an observable market price for the loan. Subsequent changes in impairment are recorded as adjustments to the provision for loan losses. Loans are charged-off against allowance for loan losses when all or a portion of the principal amount is determined to be uncollectible. A loan is considered to be collateral-dependent when repayment of the loan is expected to be provided solely by the underlying collateral. Impaired collateral-dependent loans are written down to the fair value of the collateral less disposal cost, first through a charge-off against allowance for loan losses, if any, then recorded as impairment loss.
Troubled Debt Restructuring ("TDR")—A loan with contractual terms modified in a manner that grants concession to the borrower who is experiencing financial difficulty is classified as a TDR. Concessions could include term extensions, payment deferrals, interest rate reductions, principal forgiveness, forbearance, or other actions designed to maximize the Company's collection on the loan. As a TDR is generally considered to be an impaired loan, it is measured for impairment based on the Company's allowance for loan losses methodology.
Loans Held for Sale
Loans that the Company intends to sell or liquidate in the foreseeable future are classified as held-for-sale. Loans held for sale are carried at the lower of amortized cost or fair value less disposal cost, with valuation changes recognized as impairment loss. Loans held for sale are not subject to allowance for loan losses. Net deferred loan origination fees and purchase premium or discount are deferred and capitalized as part of the carrying value of the held-for-sale loan until the loan is sold, therefore included in the periodic valuation adjustments based on lower of cost or fair value less disposal cost, and ultimately, in the gain or loss upon sale of the loan.
Purchased Credit-Impaired ("PCI") Loans
PCI loans are acquired loans with evidence of credit quality deterioration for which it is probable at acquisition that the Company will collect less than the contractually required payments. PCI loans are recorded at the initial investment in the loans and accreted to the estimated cash flows expected to be collected as measured at acquisition date. The excess of cash flows expected to be collected, measured as of acquisition date, over the estimated fair value represents the accretable yield and is recognized in interest income over the remaining life of the loan using the effective interest method. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected ("nonaccretable difference") is not recognized as an adjustment of yield, loss accrual or valuation allowance. 
The Company evaluates estimated future cash flows expected to be collected on a quarterly basis, starting with the first full quarter after acquisition, or earlier if conditions indicating impairment are present. If the cash flows expected to be collected cannot be reasonably estimated, either at acquisition or in subsequent evaluation, the Company may consider placing such PCI loans on nonaccrual, with interest income recognized using the cost recovery method or on a cash basis. Subsequent decreases in cash flows expected to be collected are evaluated to determine whether a provision for loan loss should be established. If decreases in expected cash flows result in a decrease in the estimated fair value of the loan below its amortized cost, the Company records a provision for loan losses calculated as the difference between the loan’s amortized cost and the revised cash flows, discounted at the loan’s effective yield. Subsequent increases in cash flows expected to be collected are first applied to reverse any previously recorded allowance for loan losses, with any remaining increases recognized prospectively through an adjustment to yield over its remaining life.
Factors that most significantly affect estimates of cash flows expected to be collected, and accordingly the accretable yield, include: (i) estimate of the remaining life of acquired loans which may change the amount of future interest income; (ii) changes to prepayment assumptions; (iii) changes to collateral value assumptions for loans expected to foreclose; and (iv) changes in interest rates on variable rate loans.
PCI loans may be aggregated into pools based upon common risk characteristics, such as loan performance, collateral type and/or geographic location of the collateral. A pool is accounted for as a single asset with a single composite yield and an aggregate expectation of estimated future cash flows. A PCI loan modified within a pool remains in the pool, with the effect of the modification incorporated into the expected future cash flows. A loan resolution within a loan pool, which may involve the sale of the loan or foreclosure on the underlying collateral, results in the removal of an allocated carrying amount, including an allocable portion of any existing allowance.
Acquisition, Development and Construction ("ADC") Loan Arrangements
The Company provides loans to third party developers for the acquisition, development and construction of real estate. Under an ADC arrangement, the Company participates in the expected residual profits of the project through the sale,

15


refinancing or other use of the property. The Company evaluates the characteristics of each ADC arrangement, including its risks and rewards, to determine whether they are more similar to those associated with a loan or an investment in real estate. ADC arrangements with characteristics implying loan classification are presented as loans receivable and result in the recognition of interest income. ADC arrangements with characteristics implying real estate joint ventures are presented as investments in unconsolidated joint ventures and are accounted for using the equity method. The classification of each ADC arrangement as either loan receivable or real estate joint venture involves significant judgment and relies on various factors, including market conditions, amount and timing of expected residual profits, credit enhancements in the form of guaranties, estimated fair value of the collateral, significance of borrower equity in the project, among others. The classification of ADC arrangements is performed at inception, and periodically reassessed when significant changes occur in the circumstances or conditions described above.
Real Estate Assets
Real Estate Held for Investment
Real estate held for investment is carried at cost less accumulated depreciation.
Costs Capitalized or Expensed—Expenditures for ordinary repairs and maintenance are expensed as incurred, while expenditures for significant renovations that improve or extend the useful life of the asset are capitalized and depreciated over their estimated useful lives.
Depreciation—Real estate held for investment, other than land, is depreciated on a straight-line basis over the estimated useful lives of the assets, as follows:
Real Estate Assets
 
Term
Building (fee interest)
 
15 to 40 years
Building leasehold interests
 
Lesser of 40 years or remaining term of the lease
Building improvements
 
Lesser of the useful life or remaining life of the building
Land improvements
 
10 to 30 years
Tenant improvements
 
Lesser of the useful life or remaining term of the lease
Furniture, fixtures and equipment
 
5 to 15 years
Impairment—The Company evaluates its real estate held for investment for impairment periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company evaluates cash flows and determines impairments on an individual property basis. In making this determination, the Company reviews, among other things, current and estimated future cash flows associated with each property, market information for each sub-market, including, where applicable, competition levels, foreclosure levels, leasing trends, occupancy trends, lease or room rates, and the market prices of similar properties recently sold or currently being offered for sale, and other quantitative and qualitative factors. If an impairment indicator exists, the Company evaluates whether the expected future undiscounted cash flows is less than the carrying amount of the asset, and if the Company determines that the carrying value is not recoverable, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset.
Allowance for Doubtful Accounts—The Company periodically evaluates aged receivables as well as considers the collectability of unbilled receivables for each tenant. The Company establishes an allowance when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due under existing contractual terms, and the amount can be reasonably estimated.
Real Estate Held for Sale
Classification as Held for Sale—Real estate asset is classified as held for sale in the period when (i) management approves a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, subject only to usual and customary terms, (iii) a program is initiated to locate a buyer and actively market the asset for sale at a reasonable price, and (iv) completion of the sale is probable within one year. Real estate held for sale is stated at the lower of its carrying amount or estimated fair value less disposal cost, with any write-down to fair value less disposal cost recorded as an impairment loss. For any subsequent increase in fair value less disposal cost, the impairment loss may be reversed, but only up to the amount of cumulative loss previously recognized. Depreciation is not recorded on assets classified as held for sale.
If circumstances arise that were previously considered unlikely and, as a result, the Company decides not to sell the real estate asset previously classified as held for sale, the real estate asset is reclassified as held for investment. Upon reclassification, the real estate asset is measured at the lower of (i) its carrying amount prior to classification as held for sale, adjusted for depreciation expense that would have been recognized had the real estate been continuously classified as held for investment, or (ii) its estimated fair value at the time the Company decides not to sell.

16


Real Estate Sales—The Company evaluates if real estate sale transactions qualify for recognition under the full accrual method, considering whether, among other criteria, the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay, any receivable due to the Company is not subject to future subordination, the Company has transferred to the buyer the usual risks and rewards of ownership and the Company does not have a substantial continuing involvement with the sold real estate. At the time the sale is consummated, a gain or loss is recognized as the difference between the sale price less disposal cost and the carrying value of the real estate.
Real estate investments classified as held for sale or disposed may be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the Company's operations and financial results. A discontinued operation may include an asset group, a reporting unit, an operating segment, a reportable segment, a subsidiary, or a business.
Foreclosed Properties
The Company receives foreclosed properties in full or partial settlement of loans receivable by taking legal title or physical possession of the properties. Foreclosed properties are recognized, generally, at the time the real estate is received at foreclosure sale or upon execution of a deed in lieu of foreclosure. Foreclosed properties are initially measured at fair value and amounts less than the carrying value of the loan, after reversing any previously recognized loss provision on the loan, is recorded as impairment loss. The Company periodically evaluates foreclosed properties for subsequent decrease in fair value which is recorded as additional impairment loss. Fair value of foreclosed properties are generally based on third party appraisals, broker price opinions, comparable sales or a combination thereof.
Investments in Unconsolidated Ventures
Where the Company exerts significant influence over the operating and financial policies of an entity, but does not have a controlling financial interest, the Company's investment in the entity is accounted for under the equity method. Under the equity method, the Company initially records its investments at cost and subsequently recognizes the Company’s share of net earnings or losses and other comprehensive income or loss, contributions made and distributions received, and other adjustments, as appropriate. The Company's share of net income or loss may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, in accordance with the terms of its governing documents. The Company's share of net income or loss from its general partner interests in its sponsored funds reflects fair value changes in the underlying investments of the fund, which are reported at fair value in accordance with investment company guidelines. The Company records its proportionate share of income from certain equity method investments one to three months in arrears. Distributions of operating profits from equity method investments are reported as operating activities in the statement cash flows. Distributions in excess of operating profits or those related to capital transactions, such as a financing transactions or sales, are reported as investing activities.
Investments that do not qualify for equity method accounting are accounted for under the cost method. Dividends from cost-method investments, when received, are recorded as dividend income to the extent they are not considered a return of capital; otherwise such amounts are recorded as a reduction of the cost of investment.
Impairment—The Company performs an evaluation on a quarterly basis, or more frequently as necessary, of its equity method and cost method investments to assess whether the fair value of an investment is less than its carrying value. To the extent the decrease in value is considered to be other-than-temporary and an impairment has occurred, the investment is written down to its estimated fair value, recorded as an impairment loss.
Investments in Securities
Debt securities are recorded on the trade date. Securities designated as available-for-sale (“AFS”) are carried at fair value with unrealized gains or losses included as a component of other comprehensive income. Upon disposition of AFS securities, the cumulative gains or losses in other comprehensive income that are realized are recognized in other gain (loss), net, on the consolidated statement of operations using an average cost method.
Interest Income—Interest income, including accretion of purchased premiums or amortization of purchased discounts and stated coupon interest payments, is recognized using the effective interest method over the expected lives of the debt securities.
For beneficial interests in debt securities that are not of high credit quality (generally credit rating below AA) or that can be contractually settled such that the Company would not recover substantially all of its recorded investment, interest income is recognized as the accretable yield over the life of the securities using the effective yield method. The accretable yield is the excess of current expected cash flows to be collected over the net investment in the security, including the yield accreted to date. The Company evaluates estimated future cash flows expected to be collected on a quarterly basis, starting with the first full quarter after acquisition, or earlier if conditions indicating impairment are present. If the cash flows expected to be collected cannot be reasonably estimated, either at acquisition or in subsequent evaluation, the Company may consider placing the securities on nonaccrual, with interest income recognized using the cost recovery method.

17


Impairment—The Company performs an assessment, at least quarterly, to determine whether a decline in fair value below amortized cost of AFS debt securities is other than temporary. Other-than-temporary impairment ("OTTI") exists when either (i) the holder has the intent to sell the impaired security, (ii) it is more likely than not the holder will be required to sell the security, or (iii) the holder does not expect to recover the entire amortized cost of the security. For beneficial interests in debt securities that are not of high credit quality or that can be contractually settled such that the Company would not recover substantially all of its recorded investment, OTTI also exists when there has been an adverse change in cash flows expected to be collected from the last measurement date.
If the Company intends to sell the impaired security or more likely than not will be required to sell the impaired security before recovery of its amortized cost, the entire impairment amount is recognized in earnings. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost, the Company further evaluates the security for impairment due to credit losses. In determining whether a credit loss exists, an assessment is made of the cash flows expected to be collected from the security. The credit component of OTTI is recognized in earnings, while the remaining non-credit component is recognized in other comprehensive income. The amortized cost basis of the security is written down by the amount of impairment recognized in earnings and will not be adjusted for subsequent recoveries in fair value. The difference between the new amortized cost basis and the cash flows expected to be collected will be accreted as interest income.
In assessing OTTI and estimating future expected cash flows, factors considered include, but not limited to, credit rating of the security, financial condition of the issuer, defaults for similar securities, performance and value of assets underlying an asset-backed security.
Identifiable Intangibles
In a business combination or asset acquisition, the Company may recognize identifiable intangibles that meet either or both the contractual-legal criterion or the separability criterion. Indefinite-lived intangibles are not subject to amortization until such time that its useful life is determined to no longer be indefinite, at which point, it will be assessed for impairment and its adjusted carrying amount amortized over its remaining useful life. Finite-lived intangibles are amortized over their useful life in a manner that reflects the pattern in which the intangible is being consumed if readily determinable such as expected cash flows, otherwise on a straight-line basis. The useful life of all identified intangibles will be periodically reassessed and if useful life changes, the carrying amount of the intangible will be amortized prospectively over the revised useful life. Finite-lived intangibles will be periodically reviewed for impairment and an impairment loss will be recognized if the carrying amount of the intangible is not recoverable and exceeds its fair value. An impairment establishes a new basis for the identifiable intangibles and any impairment loss recognized is not subject to subsequent reversal.
Identifiable intangibles recognized in acquisitions of operating real estate properties generally include in-place leases, above- or below-market leases and deferred leasing costs.
In-place leases generate value over and above the tangible real estate because a property that is occupied with leased space is typically worth more than a vacant building without an operating lease contract in place. The estimated fair value of acquired in-place leases is derived based on management's assessment of costs avoided from having tenants in place, including lost rental income, rent concessions and tenant allowances or reimbursements, that would be incurred to lease a hypothetically vacant building to its actual existing occupancy level on the valuation date. The net amount recorded for acquired in-place leases is included in intangible assets and amortized on a straight-line basis as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If an in-place lease is terminated, the unamortized portion is charged to depreciation and amortization expense.
The estimated fair value of the above- or below-market component of acquired leases represents the present value of the difference between contractual rents of acquired leases and market rents at the time of the acquisition for the remaining lease term, discounted for tenant credit risks. Above- or below-market operating lease values are amortized on a straight-line basis as a decrease or increase to rental income, respectively, over the applicable lease terms. Above- or below-market ground lease obligations are amortized on a straight-line basis as a decrease or increase to rent expense, respectively, over the applicable lease terms. If the above- or below-market operating lease values or above- or below-market ground lease obligations are terminated, the unamortized portion of the lease intangibles are recorded in rental income or rent expense, respectively.
Deferred leasing costs represent management's estimation of the avoided leasing commissions and legal fees associated with an existing in-place lease. The net amount is included in intangible assets and amortized on a straight-line basis as an increase to depreciation and amortization expense over the remaining term of the applicable lease.
Goodwill
Goodwill is an unidentifiable intangible asset and recognized as a residual, generally measured as the excess of consideration transferred in a business combination over the identifiable assets acquired and liabilities assumed, including any

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noncontrolling interest in the acquiree. Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination.
Goodwill is tested for impairment at the reporting units to which it is assigned at least on an annual basis in the fourth quarter of each year, or more frequently if events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The assessment of goodwill for impairment may initially be performed based on qualitative factors to determine if it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying value; and if so, a two-step quantitative assessment is performed to determine if an impairment has occurred and thereafter, measure the impairment loss. In the first step, if the fair value of the reporting unit is less than its carrying value (including goodwill), then the goodwill is considered to be impaired. In the second step, the implied fair value of the goodwill is determined by comparing the fair value of the reporting unit (in step one) to the fair value of the net assets of the reporting unit as if the reporting unit is being acquired in a business combination. If the carrying value of goodwill exceeds the resulting implied fair value of goodwill, then an impairment charge is recognized for the excess. An impairment establishes a new basis for the goodwill and any impairment loss recognized is not subject to subsequent reversal. Goodwill impairment tests require judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.
Fixed Assets
Fixed assets of the Company are presented within other assets and carried at cost less accumulated depreciation and amortization. Ordinary repairs and maintenance are expensed as incurred. Major replacements and betterments which improve or extend the life of assets are capitalized and depreciated over their useful life. Depreciation and amortization is recognized on a straight-line basis over the estimated useful life of the assets, which range between 3 to 5 years for furniture, fixtures, equipment and capitalized software, 15 years for aircraft and over the shorter of the lease term or useful life for leasehold improvements.
Transfers of Financial Assets
Sale accounting for transfers of financial assets is limited to the transfer of an entire financial asset, a group of financial assets in their entirety, or if a component of the financial asset is transferred, when the component meets the definition of a participating interest.
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. If the Company has any continuing involvement, rights or obligations with the transferred financial asset (outside of standard representations and warranties), sale accounting would require that the transfer meets the following sale conditions: (1) the transferred asset has been legally isolated; (2) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred asset; and (3) the Company does not maintain effective control over the transferred asset through an agreement that provides for (a) both an entitlement and an obligation by the Company to repurchase or redeem the asset before its maturity, (b) the unilateral ability by the Company to reclaim the asset and a more than trivial benefit attributable to that ability, or (c) the transferee requiring the Company to repurchase the asset at a price so favorable to the transferee that it is probable the repurchase will occur.
If the criteria for sale accounting are met, the transferred financial asset is removed from the balance sheet and a net gain or loss is recognized upon sale, taking into account any retained interests. Transfers of financial assets that do not meet the criteria for sale are accounted for as financing transactions.
Derivative Instruments and Hedging Activities
The Company uses derivative instruments to manage its foreign currency risk and interest rate risk. The Company does not use derivative instruments for speculative or trading purposes. All derivative instruments are recorded at fair value and included in other assets or other liabilities on a gross basis on the consolidated balance sheets. The accounting for changes in fair value of derivatives depends upon whether or not the Company has elected to designate the derivative in a hedging relationship and the derivative qualifies for hedge accounting. The Company has economic hedges that have not been designated for hedge accounting.
Changes in fair value of derivatives not designated as accounting hedges are recorded in the income statement in other gain (loss), net.
For designated accounting hedges, the relationships between hedging instruments and hedged items, risk management objectives and strategies for undertaking the accounting hedges as well as the methods to assess the effectiveness of the derivative prospectively and retrospectively, are formally documented at inception. Hedge effectiveness relates to the amount by which the gain or loss on the designated derivative instrument exactly offsets the change in the hedged item attributable to
the hedged risk. If it is determined that a derivative is not expected to be or has ceased to be highly effective at hedging the designated exposure, hedge accounting is discontinued.

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Cash Flow Hedges—The Company uses interest rate caps and swaps to hedge its exposure to interest rate fluctuations in forecasted interest payments on floating rate debt. The effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive income, while hedge ineffectiveness is recorded in earnings. If the derivative in a cash flow hedge is terminated or the hedge designation is removed, related amounts in accumulated other comprehensive income are reclassified into earnings.
Net Investment Hedges—The Company uses foreign currency hedges to protect the value of its net investments in foreign subsidiaries or equity method investees whose functional currencies are not U.S. dollars. Changes in the fair value of derivatives used as hedges of net investment in foreign operations, to the extent effective, are recorded in the cumulative translation adjustment account within accumulated other comprehensive income.
At the end of each quarter, the Company reassesses the effectiveness of its net investment hedges and as appropriate, dedesignates the portion of the derivative notional that is in excess of the beginning balance of its net investments as non-designated hedges.
Release of accumulated other comprehensive income related to net investment hedges occurs upon losing a controlling financial interest in an investment or obtaining control over an equity method investment. Upon sale, complete or substantially complete liquidation of an investment in a foreign subsidiary, or partial sale of an equity method investment, the gain or loss on the related net investment hedge is reclassified from accumulated other comprehensive income to earnings.
Financing Costs
Debt discounts and premiums as well as debt issuance costs (except for revolving credit arrangements) are presented net against the associated debt on the consolidated balance sheets and amortized into interest expense using the effective interest method over the term of the debt.
Costs incurred in connection with revolving credit arrangements are recorded as deferred financing costs in other assets, and amortized on a straight-line basis over the expected term of the credit facility.
Property Operating Income
Property operating income includes the following.
Rental Income—Rental income is recognized on a straight-line basis over the non-cancelable term of the related lease which includes the effects of rent steps and rent abatements under the lease. Rents received in advance are deferred. Rental income recognition commences when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. Residential leases generally have one-year terms while commercial leases generally have longer terms. 
When it is determined that the Company is the owner of tenant improvements, the cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants, is capitalized. For Company-owned tenant improvements, the amount funded by or reimbursed by the tenants are recorded as deferred revenue, which is amortized on a straight-line basis as additional rental income over the term of the related lease. When it is determined that the tenant is the owner of tenant improvements, the Company's contribution towards those improvements is recorded as a lease incentive, included in deferred leasing costs and intangible assets, net on the consolidated balance sheets, and amortized as a reduction to rental income on a straight-line basis over the term of the lease.
Tenant Reimbursements—In net lease arrangements, the tenant is generally responsible for operating expenses relating to the property, including real estate taxes, property insurance, maintenance, repairs and improvements. Costs reimbursable from tenants and other recoverable costs are recognized as revenue in the period the recoverable costs are incurred. When the Company is the primary obligor with respect to purchasing goods and services for property operations and has discretion in selecting the supplier and retains credit risk, tenant reimbursement revenue and property operating expenses are presented on a gross basis in the statements of operations. For certain triple net leases where the lessee self-manages the property, hires its own service providers and retains credit risk for routine maintenance contracts, no reimbursement revenue and expense are recognized.
Hotel Operating Income—Hotel operating income includes room revenue, food and beverage sales and other ancillary services. Revenue is recognized upon occupancy of rooms, consummation of sales and provision of services.
Fee Income
Fee income consists of the following.
Base Management Fees—The Company earns base management fees for the day-to-day operations and administration of its managed funds, generally as a percentage of the limited partners' net funded capital. Base management fees are recognized over the period in which the related services are performed in accordance with contractual terms of the underlying management

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and advisory agreements. Base management fees are generally accrued from the date of the first closing of commitments or the first investment of the fund through the last day of the term of the fund.
Asset Management Fees—The Company may receive a one-time asset management fee upon closing of each investment made by its managed funds. In accordance with contractual terms of the underlying management and advisory agreements, a portion of asset management fees is recognized upon completion of initial underwriting, with remaining fees deferred and recognized over the holding period of each investment in which the related services are performed for each investment. Asset management fees are calculated as a fixed percentage of the limited partners' net funded capital on each investment.
Servicing Fees—Certain subsidiaries of the Company (each an asset management company or "AMC") were established to service and manage loan portfolios, including foreclosed properties, held by the Company's real estate investment entities for a servicing fee equal to a percentage of the outstanding unpaid principal balance of each loan portfolio. Servicing fees earned from investment entities that are consolidated by the Company are eliminated upon consolidation.
Other Income
Other income includes the following.
Expense Recoveries from Borrowers—Expenses, primarily legal costs incurred in administering non-performing loans and foreclosed properties held by investment entities, may be subsequently recovered through payments received when these investments are resolved. The Company recognizes income when the cost recoveries are determinable and repayment is assured.
Cost Reimbursements from Affiliates—Based on an arrangement assumed from the Manager through the Combination, the Company provides administrative services to certain of its affiliates, including property management on behalf of the Company's investment entities. The Company is entitled to receive reimbursements of expenses incurred, generally based on expenses incurred that are directly attributable to the affiliates and/or a portion of overhead costs. The Company acts in the capacity of a principal under these arrangements. Accordingly, the Company records the expenses and corresponding reimbursement income on a gross basis in the period administrative services are rendered and costs are incurred.
Compensation
Compensation comprises salaries, bonus including discretionary awards and contractual amounts for certain senior executives, benefits and share-based compensation. Bonus is accrued over the employment period to which it relates.
Share-Based Compensation
Equity classified share-based awards granted to employees have a service condition only, and are measured at fair value at the date of grant and remeasured at fair value only upon a modification of the award. Share awards granted to non-employees have a service condition only and are remeasured at fair value at the end of each reporting period until the award is fully vested. Fair value is determined based on the closing price of the Company's listed Class A common stock at date of grant or remeasurement. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the awards, with the amount of compensation expense recognized at the end of a reporting period at least equal to the fair value of the portion of the award that has vested through that date. An expected forfeiture rate estimated based upon the Company's historical experience is applied against compensation expense during the year and adjusted for actual forfeitures at year end.
Gain on Remeasurement of Consolidated Investment Entities, Net
Gain on remeasurement of consolidated investment entities, net is the fair value remeasurement of the Company's proportional share of investments in joint ventures which were consolidated upon a reconsideration event in connection with the Combination (Note 7), net of cumulative translation adjustments reclassified to earnings.
Other Gain (Loss), Net
Other gain and loss include fair value changes related to derivatives not designated as accounting hedges, fair value changes on the contingent consideration arising from the Combination and gain (loss) from remeasurement of foreign currency transactions and translation of foreign currency balances.
Income Taxes
The Company elected to be taxed as a REIT, commencing with the Company’s initial taxable year ended December 31, 2009. A REIT is generally not subject to corporate-level federal and state income tax on net income it distributes to its stockholders. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of its REIT taxable income to its stockholders, as well as certain restrictions in regard to the nature of owned assets and categories of income. If the Company fails to qualify as a REIT in any taxable year,

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it will be subject to federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies as a REIT, it and its subsidiaries may be subject to certain U.S federal, state and local as well as foreign taxes on its income and property and to U.S federal income and excise taxes on its undistributed taxable income.
The Company has elected or may elect to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”). In general, a TRS may perform non-customary services for tenants of the REIT, hold assets that the REIT cannot or does not intend to hold directly and, subject to certain exceptions related to hotels and healthcare properties, may engage in any real estate or non-real estate related business. The Company uses TRS entities to conduct certain activities that cannot be conducted directly by a REIT, including investment management, property management including hotel operations as well as loan servicing and workout activities. A TRS is treated as a regular, taxable corporation for U.S income tax purposes and therefore, is subject to U.S federal corporate tax on its income and property.
Deferred Income Taxes—The provision for income taxes includes current and deferred portions. The current income tax provision differs from the amount of income tax currently payable because of temporary differences in the recognition of certain income and expense items between financial reporting and income tax reporting. The Company uses the asset and liability method to provide for income taxes, which requires that the Company's income tax expense reflects the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for financial reporting versus income tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on enacted tax rates the Company expects to be in effect when the underlying items of income and expense are realized and the differences reverse. A deferred tax asset is also recognized for net operating loss carryforwards and the income tax effect of accumulated other comprehensive income items of the TRS entities. A valuation allowance for deferred tax assets is established if the Company believes it is more likely than not that all or some portion of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent on the Company's TRS entities generating sufficient taxable income in future periods or employing certain tax planning strategies to realize such deferred tax assets.
Uncertain Tax Positions—Income tax benefits are recognized for uncertain tax positions that are more likely than not to be sustained based solely on their technical merits. Such uncertain tax positions are measured as the largest amount of benefit that is more-likely-than-not to be realized upon settlement. The difference between the benefit recognized and the tax benefit claimed on a tax return results in an unrecognized tax benefit. The Company periodically evaluates whether it is more likely than not that its uncertain tax positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations. As of December 31, 2016 and 2015, the Company has not established a liability for uncertain tax positions.
Earnings Per Share
The Company calculates basic earnings per share using the two-class method which defines unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities. The two-class method is an allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Earnings per common share is calculated by dividing earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the period.
Diluted earnings per common share is based on the weighted-average number of common shares and the effect of potentially dilutive common share equivalents outstanding during the period. Potentially dilutive common share equivalents include shares to be issued upon the assumed conversion of the Company's outstanding convertible notes, which are included under the if-converted method when dilutive. The earnings allocated to common shareholders is adjusted to add back the after-tax amount of interest expense associated with the convertible notes, except when doing so would be antidilutive.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation. Such reclassifications were immaterial and did not affect the Company's financial position, results of operations or its cash flows.
Recent Accounting Updates
The following evaluation of the effects of adoption of recently issued accounting standards is discussed in the context of the consolidated financial statements of the new combined entity, Colony NorthStar.
Revenue Recognition—In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which amends existing revenue recognition standards by establishing principles for a single comprehensive model for revenue measurement and recognition, along with enhanced

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disclosure requirements. Key provisions include, but are not limited to, determining which goods or services are capable of being distinct in a contract to be accounted for separately as a performance obligation and recognizing variable consideration only to the extent that it is probable a significant revenue reversal would not occur. The new revenue standard may be applied retrospectively to each prior period presented (full retrospective) or retrospectively to contracts not completed as of date of initial application with the cumulative effect recognized in retained earnings (modified retrospective). ASU No. 2014-09 was originally effective for fiscal years and interim periods beginning after December 15, 2016. In July 2015, the FASB deferred the effective date of the new standard by one year to fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted but not before the original effective date. The FASB has subsequently issued several amendments to the standard, including clarifying the guidance on assessing principal versus agent based on the notion of control, which affects recognition of revenue on a gross or net basis. These amendments have the same effective date and transition requirements as the new standard.
Colony NorthStar plans to adopt the standard on its required effective date of January 1, 2018 using the modified retrospective approach. The standard excludes from its scope the areas of accounting that most significantly affect revenue recognition for Colony NorthStar, including accounting for financial instruments and leases, except that the non-lease service component in a gross lease contract will be considered a separate performance obligation and be subject to the new revenue recognition standard. Additionally, any incentive income from sponsored investment vehicles is expected to be subject to the revenue recognition provisions for variable consideration. Evaluation of the impact of this guidance to Colony NorthStar is on-going.
Financial Instruments—In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which affects accounting for investments in equity securities and financial liabilities under the fair value option including presentation and disclosures, but does not affect accounting for investments in debt securities and loans. Investments in equity securities, other than equity method investments, will be measured at fair value through earnings, except for equity securities without readily determinable fair values which may be measured at cost less impairment and adjusted for observable price changes. This provision eliminates cost method accounting and recognition of unrealized holding gains (losses) on equity investments in other comprehensive income. For financial liabilities under fair value option, changes in fair value due to instrument specific credit risk will be recorded separately in other comprehensive income. Fair value disclosures of financial instruments measured at amortized cost will be based on exit price and corresponding disclosures of valuation methodology and significant inputs will no longer be required. ASU No. 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is limited to specific provisions. ASU 2016-01 is to be applied retrospectively with cumulative effect as of the beginning of the first reporting period adopted recognized in retained earnings, except for provisions related to equity investments without readily determinable fair values and exit price fair value disclosures for financial instruments measured at amortized cost, which are to be applied prospectively. Colony NorthStar plans to adopt this guidance on its required effective date of January 1, 2018. While evaluation of the impact to Colony NorthStar is on-going, adoption of this standard is not expected to have a material effect on its consolidated financial condition and results of operations.
Leases—In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends existing lease accounting standards, primarily requiring lessees to recognize most leases on balance sheet, as well as making targeted changes to lessor accounting. ASU No. 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The new leases standard requires adoption using a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, and provides for certain practical expedients. Full retrospective application is prohibited. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.
Evaluation of the impact of this guidance to Colony NorthStar is on-going. As lessor, gross leases will be subject to allocation between lease and non-lease service components, with the latter accounted for under the new revenue recognition standard. As the new lease standard requires congruous accounting treatment between lessor and lessee in a sale-leaseback transaction, if the seller/lessee does not achieve sale accounting under the new revenue recognition standard, it would be considered a financing transaction to the buyer/lessor. As lessee, the new lease standard requires the recognition of a right-of-use asset and corresponding liability for future obligations under leasing arrangements such as ground leases and office leases. Additionally, under the new lease standard, only incremental initial direct costs incurred in the execution of a lease can be capitalized by the lessor and lessee.
Derivative Novation—In March 2016, the FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the derivative counterparty does not, in and of itself, represent a termination of the original derivative or a change in critical terms of the hedging relationship. As a result, a hedging relationship would not be dedesignated as long as all of the other hedge accounting criteria are met when considering the credit worthiness of the new counterparty. ASU No. 2016-05 is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted, including interim periods. The new guidance may be adopted prospectively or

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on a modified retrospective basis to derivatives outstanding in the periods presented that were previously dedesignated due to a novation. The Company adopted the new guidance effective April 1, 2016 on a prospective basis. The adoption did not have an impact on the Company's consolidated financial statements.
Equity Method—In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates retrospective application of the equity method to prior periods that the investment was held before the investor obtained significant influence over the investee. ASU No. 2016-07 is effective for fiscal years and interim periods beginning after December 15, 2016, to be applied prospectively. Early adoption is permitted, including interim periods. The Company adopted the new guidance effective April 1, 2016. The adoption did not have an impact on the Company's consolidated financial statements.
Share-Based Compensation—In March 2016, the FASB issued ASU No. 2016-09, Improvements to Share-Based Payment Accounting, which amends certain aspects of accounting for share-based payments to employees. This includes accounting for income tax effects in the income statement, increasing the fair value of shares applied for income tax withholding without triggering liability accounting, allowing forfeitures related to service condition to be recognized upon occurrence, as well as changes in cash flow classifications. This guidance may be adopted prospectively or on a modified retrospective transition basis depending on the requirements of each provision. ASU No. 2016-09 is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted, with all provisions within the guidance to be adopted in the same period. If early adopted in an interim period, adjustments are to be reflected as of the beginning of the fiscal year of adoption. This guidance will be adopted prospectively on January 1, 2017 and is not expected to have a material effect on the consolidated financial condition, results of operations and cash flows of Colony NorthStar.
Credit Losses—In June 2016, the FASB issued ASU No. 2016-13, Financial InstrumentsCredit Losses, which amends the credit impairment model for financial instruments. The existing incurred loss model will be replaced with a lifetime current expected credit loss ("CECL") model for financial instruments carried at amortized cost and off-balance sheet credit exposures, such as loans, loan commitments, held-to-maturity ("HTM") debt securities, financial guarantees, net investment in leases, reinsurance and trade receivables, which will generally result in earlier recognition of allowance for losses. For AFS debt securities, unrealized credit losses will be recognized as allowances rather than reductions in amortized cost basis and elimination of the OTTI concept will result in more frequent estimation of credit losses. The accounting model for purchased credit-impaired loans and debt securities will be simplified, including elimination of some of the asymmetrical treatment between credit losses and credit recoveries, to be consistent with the CECL model for originated and purchased non-credit impaired assets. The existing model for beneficial interests that are not of high credit quality will be amended to conform to the new impairment models for HTM and AFS debt securities. Expanded disclosures on credit risk include credit quality indicators by vintage for financing receivables and net investment in leases. Transition will generally be on a modified retrospective basis, with prospective application for other-than-temporarily impaired debt securities and purchased credit-impaired assets. ASU No. 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. Colony NorthStar, plans to adopt this guidance on its required effective date of January 1, 2020 and expects that recognition of credit losses will generally be accelerated under the CECL model. Evaluation of the impact of this guidance to Colony NorthStar is on-going.
Cash Flow Classifications—In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, intended to reduce diversity in practice in certain classifications on the statement of cash flows. This guidance addresses eight types of cash flows, which includes clarifying how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows, as well as requiring an accounting policy election for classification of distributions received from equity method investees using either the cumulative earnings or nature of distributions approach. Transition will generally be on a retrospective basis. ASU No. 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted, provided that all amendments within the guidance are adopted in the same period. Colony NorthStar anticipates making an accounting policy election for classification of distributions from its equity method investees using the cumulative earnings approach. The adoption of this standard is not expected to have a material effect on presentation in Colony NorthStar's consolidated statements of cash flows.
Consolidation—In October 2016, the FASB issued ASU No. 2016-17, Consolidation: Interests Held Through Related Parties Under Common Control, which considers indirect interests in a VIE held by a decision maker through related parties under common control on a proportionate basis, and not in their entirety, when evaluating the economics criterion in the primary beneficiary determination. This is consistent with the treatment of indirect interests held through related parties not under common control. This ASU, however, does not change the initial assessment of whether a decision maker has a variable interest in a VIE, which considers indirect interests in related parties under common control in their entirety as the equivalent of direct interests. ASU No. 2016-17 is effective for fiscal years and interim periods beginning after December 15, 2016, with retrospective application to the beginning of the fiscal year when ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis, was adopted. Early adoption is permitted, including interim periods. The Company adopted the new guidance effective October 1, 2016. The adoption did not have an impact on the Company's consolidated financial statements.

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Restricted Cash—In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires that cash and cash equivalent balances in the statement of cash flows include restricted cash and restricted cash equivalent amounts, and therefore, changes in restricted cash and restricted cash equivalents be presented in the statement of cash flows. This will eliminate the presentation of transfers between cash and cash equivalents with restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, this ASU requires disclosure of a reconciliation between the totals in the statement of cash flows and the related captions in the balance sheet. The new guidance also requires disclosure of the nature of restricted cash and restricted cash equivalents, similar to existing requirements under Regulation S-X; however, it does not define restricted cash and restricted cash equivalents. ASU No. 2016-18 is effective for fiscal years and interim periods beginning after December 15, 2017, to be applied retrospectively, with early adoption permitted. If early adopted in an interim period, adjustments are to be reflected as of the beginning of the fiscal year of adoption. The adoption of this standard is not expected to have a material effect on presentation in Colony NorthStar's consolidated statements of cash flows.
Definition of a Business—In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition of a business and will likely result in more transactions accounted for as asset acquisitions. The new guidance introduces an initial threshold that if substantially all of the fair value of gross assets acquired is concentrated in a single asset or a group of similar assets, then the set of transferred assets and activities is not a business. If this threshold is not met, an acquisition, to be considered a business, would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. To qualify as a business without outputs would require an organized workforce that performs a substantive process. The definition of "outputs" has been narrowed to align with Topic 606, Revenue from Contracts with Customers, by focusing on revenue generating activities. ASU 2017-01 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted for transactions that occurred before the issuance date or effective date of this standard if the transactions have not been reported in issued financial statements. The Company adopted the new guidance effective October 1, 2016 and determined that real estate acquisitions transacted in the fourth quarter of 2016 met the initial threshold to qualify as asset acquisitions, resulting in the capitalization of $0.7 million of related transaction costs.
Goodwill Impairment—In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. Goodwill impairment is now measured as the excess in carrying value over fair value of the reporting unit, with the loss recognized not to exceed the amount of goodwill assigned to that reporting unit. The one-step impairment test will also be applied to goodwill at reporting units that have zero or negative carrying values, with a disclosure of the amount of goodwill at these reporting units. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, to be applied prospectively. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017. Colony NorthStar anticipates early adoption of this guidance for its goodwill impairment assessment in 2017.
3. Combination with Colony Capital
On April 2, 2015, pursuant to agreements dated December 23, 2014, OP completed its acquisition of the CCLLC trademark name and substantially all of its real estate investment management business and operations, excluding those conducted exclusively in connection with Colony American Homes, Inc. (now Colony Starwood Homes—see Note 22). The Combination was subject to approval of two-thirds of the Company’s non-affiliated shareholders, which was received at a special meeting of shareholders held on March 31, 2015.
Upon consummation of the Combination, CCLLC's personnel became employees of the Company and the Company became an internally managed REIT. As a result of the Combination, the Company is able to sponsor new investment vehicles as general partner under the Colony name. In addition, the Company changed its name from Colony Financial, Inc. to Colony Capital, Inc. and its common stock was reclassified as Class A Common Stock.
Mr. Thomas J. Barrack, Jr., Executive Chairman, and Mr. Richard B. Saltzman, Chief Executive Officer and President, have entered into 5-year employment agreements and related lock-up arrangements with the Company, which, subject to certain exceptions, will generally restrict them from transferring their respective interests in OP Units and/or shares received in connection with the Combination over the same period as their respective employment agreement terms, which restriction would be ratably reduced over such period. Messrs. Barrack and Saltzman also have entered into non-competition arrangements with the Company, each of which will provide for clawback as to a material portion of consideration in the event such individuals violate the non-compete restrictions during the same period as their respective lock-ups. The employment agreements, and related lock-ups and non-competition arrangements became effective at the closing of the Combination.

25


The consideration for the Combination consisted of an upfront and a contingent portion, as follows:
Upfront consideration paid in a combination of 1.43 million shares of Class A Common Stock, 563,987 shares of newly created Class B Common Stock and 21.34 million of OP Units, measured based upon the closing price of the Company’s common stock of $26.19 on April 1, 2015, as well as $61.4 million of cash payments made for working capital, transaction and integration costs incurred on behalf of CCLLC and tax withholding on behalf of Mr. Saltzman. The aggregate upfront consideration was valued at $672.3 million.
Contingent consideration to be paid in a combination of up to approximately 1.02 million shares of Class A Common Stock, 90,991 shares of Class B Common Stock and approximately 3.47 million OP Units, subject to multi-year performance targets for achievement of certain funds from operations per share targets and capital-raising thresholds from the funds management businesses. If the minimum performance target for either of these metrics is not met or exceeded, a portion of the contingent consideration paid in respect of the other metric would not be paid out in full.
Each share of Class B Common Stock and each OP Unit is, at the holder’s option, convertible into one share of Class A Common Stock, subject, in the case of OP Units, to the terms and conditions set forth in the operating agreement of OP.
The following table summarizes the total consideration and allocation to assets acquired and liabilities assumed at April 2, 2015. In the first quarter of 2016, measurement period adjustments were identified that impacted provisional accounting, specifically adjustments to payroll accrual, valuation of investment management contract intangible asset and related impact to deferred tax liability, which increased goodwill by approximately $1.9 million, as presented in the table below.
(In thousands)
As Reported
At December 31, 2015
 
Measurement Period Adjustments (1)
 
Final Adjusted Amounts At March 31, 2016
Consideration
 
 
 
 
 
Cash
$
61,350

 
$

 
$
61,350

Class A and Class B common stock issued
52,160

 

 
52,160

OP Units issued
558,794

 

 
558,794

Estimated fair value of contingent consideration (2)
69,500

 

 
69,500

 
$
741,804

 
$

 
$
741,804

Identifiable assets acquired and liabilities assumed
 
 
 
 
 
Cash
$
5,015

 
$

 
$
5,015

Fixed assets
46,396

 

 
46,396

Other assets
23,300

 

 
23,300

Intangible asset:
 
 
 
 
 
Investment management contracts
46,000

 
(1,900
)
 
44,100

Customer relationships
46,800

 

 
46,800

Trade name
15,500

 

 
15,500

Notes payable
(44,337
)
 

 
(44,337
)
Deferred tax liability
(35,920
)
 
729

 
(35,191
)
Other liabilities
(19,217
)
 
(689
)
 
(19,906
)
 
83,537

 
(1,860
)
 
81,677

Goodwill
658,267

 
1,860

 
660,127

 
$
741,804

 
$

 
$
741,804

__________
(1) 
The estimated fair values and purchase price allocation at April 2, 2015 are subject to retrospective adjustments during the measurement period, which ended on April 1, 2016, based upon new information obtained about facts and circumstances that existed as of the date of acquisition.
(2) 
Estimated fair value of contingent consideration is subject to remeasurement each reporting period, as discussed in Note 14.
See Note 9 for further discussions related to identifiable intangible assets and goodwill, and Note 14 for fair value measurement of contingent consideration.
Total income and net income attributable to Colony Capital, Inc. from the investment management segment, as included in the consolidated statement of operations, were $65.6 million and $19.0 million, respectively, for the period from acquisition date through December 31, 2015.

26


Pro Forma Results (Unaudited)
The following table presents pro forma results of the Company for the year ended December 31, 2015 assuming the Combination had been consummated on January 1, 2015. The amounts have been calculated pursuant to the application of the Company’s accounting policies and adjusting the results of CCLLC's operations to reflect additional compensation expense, depreciation and amortization, income tax, and after eliminating intercompany transactions of the combined entities and allocation of net income to OP Units. The pro forma result for the year ended December 31, 2015 was adjusted to exclude acquisition-related expenses of approximately $15.1 million. The pro forma results are not indicative of future operating results.
(In thousands, except per share data)
 
Year Ended December 31, 2015
Pro forma:
 
 
Total income
 
$
873,075

Net income attributable to Colony Capital, Inc.
 
166,662

Net income attributable to common stockholders
 
124,093

Net income per common share:
 
 
   Basic
 
$
1.09

   Diluted
 
$
1.09


4. Variable Interest Entities
Securitizations
The Company securitizes loans receivable using VIEs as a source of financing. The securitization vehicles are structured as pass-through entities that receive principal and interest on the underlying mortgage loans and distribute those payments to the holders of the notes or certificates issued by the securitization vehicles. The loans are transferred into securitization vehicles such that these assets are restricted and legally isolated from the creditors of the Company, and therefore are not available to satisfy the Company's obligations but only the obligations of the securitization vehicles. The obligations of the securitization vehicles do not have any recourse to the general credit of any other consolidated entities, nor to the Company.
The Company retains beneficial interests in the securitization vehicles, usually equity tranches or subordinate securities. Affiliates of the Company or appointed third parties act as special servicer of the underlying collateral mortgage loans. The special servicer has the power to direct activities during the loan workout process on defaulted and delinquent loans as permitted by the underlying contractual agreements, which is subject to the consent of the Company, as the controlling class representative or directing holder who, under certain circumstances, has the right to unilaterally remove the special servicer. As the Company’s rights as the directing holder and controlling class representative provide the Company the ability to direct activities that most significantly impact the economic performance of the securitization vehicles—for example, responsibility over decisions related to loan modifications and workouts—the Company maintains effective control over the loans transferred into the securitization trusts. Considering the positions retained by the Company in the securitization vehicles together with its role as controlling class representative or directing holder, the Company is deemed to be the primary beneficiary and consolidates these securitization vehicles. Accordingly, these securitizations did not qualify as sale transactions and are accounted for as secured financing with the underlying mortgage loans pledged as collateral.
All of the underlying assets, liabilities, equity, revenues and expenses of the securitization vehicles are consolidated within the Company's consolidated financial statements. The Company’s exposure to the obligations of the securitization vehicles is generally limited to its investment in these entities, which was $407.0 million and $412.8 million at December 31, 2016 and 2015, respectively. The Company is not obligated to provide any financial support to these securitization vehicles and did not do so in the periods reported.
Operating Subsidiary
The Company's operating subsidiary under the UPREIT structure, OP, is a limited liability company that has governing provisions that are the functional equivalent of a limited partnership. The Company holds the majority of membership interest in OP, acts as the managing member of OP and exercises full responsibility, discretion and control over the day-to-day management of OP. The noncontrolling interests in OP do not have either substantive liquidation rights, or substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of noncontrolling interest members (including by such a member unilaterally). The absence of such rights, which represent voting rights in a limited partnership equivalent structure, would render OP to be a VIE. The Company, as managing member, has the power to direct the core activities of OP that most significantly affect OP's performance, and through its majority interest in OP, has both the right to receive benefits from and the obligation to absorb losses of OP. Accordingly, the Company is the primary beneficiary of OP

27


and consolidates OP. As the Company conducts its business and holds its assets and liabilities through OP, the total assets and liabilities of OP comprise substantially all of the total consolidated assets and liabilities of the Company.
Sponsored Funds
The Company sponsors funds and other similar investment vehicles as general partner ("Sponsored Funds"), for the purpose of providing investment management services in exchange for management fees and performance-based fees. Sponsored Funds are established as limited partnerships or equivalent structures. The limited partners of Sponsored Funds do not have either substantive liquidation rights, or substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of limited partners or by a single limited partner. The absence of such rights, which represent voting rights in a limited partnership, results in the sponsored fund being considered a VIE. The Company invests alongside its Sponsored Funds through joint ventures between the Company and the Sponsored Funds. These co-investment joint ventures are consolidated by the Company. As general partner, the Company has capital commitments directly to the Sponsored Funds. The Company may also have capital commitments satisfied directly through the co-investment joint ventures in its capacity as an affiliate of the general partner. The nature of the Company's involvement with the Sponsored Funds comprises fee arrangements and equity interests. The fee arrangements are commensurate with the level of management services provided by the Company, and contain terms and conditions that are customary to similar at-market fee arrangements. The Company's equity interests in the Sponsored Funds absorb insignificant variability. As the Company acts in the capacity of an agent of the Sponsored Funds, the Company is not the primary beneficiary and does not consolidate the Sponsored Funds. The Company accounts for its equity interest in the Sponsored Funds under the equity method. The Company's equity method investment in Sponsored Funds was $1.7 million and $0.3 million at December 31, 2016 and 2015, respectively.
5. Loans Receivable
Loans Held For Investment
The following table provides a summary of the Company’s loans held for investment.
 
 
December 31, 2016
 
December 31, 2015
(Amounts in thousands)
 
Unpaid Principal Balance
 
Carrying
Value
 
Weighted
Average
Coupon
 
Weighted Average Maturity in Years
 
Unpaid Principal Balance
 
Carrying
Value
 
Weighted
Average
Coupon
 
Weighted Average Maturity in Years
Non-PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
 
$
894,232

 
$
881,755

 
9.0
%
 
3.5
 
$
882,935

 
$
880,519

 
9.3
%
 
3.9
Securitized mortgage loans
 
105,586

 
107,609

 
6.4
%
 
15.4
 
135,519

 
138,366

 
6.4
%
 
16.9
Mezzanine loans
 
372,247

 
369,207

 
12.3
%
 
2.8
 
338,856

 
340,260

 
12.3
%
 
3.5
 
 
1,372,065

 
1,358,571

 
 
 
 
 
1,357,310

 
1,359,145

 
 
 
 
Variable rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
 
494,797

 
487,651

 
8.2
%
 
0.8
 
643,013

 
627,374

 
7.2
%
 
1.7
Securitized mortgage loans
 
775,963

 
776,156

 
5.7
%
 
2.7
 
1,051,822

 
1,048,522

 
5.5
%
 
3.4
Mezzanine loans
 
348,035

 
347,469

 
11.2
%
 
0.6
 
348,091

 
347,267

 
10.8
%
 
0.7
 
 
1,618,795

 
1,611,276

 
 
 
 
 
2,042,926

 
2,023,163

 
 
 
 
 
 
2,990,860

 
2,969,847

 
 
 
 
 
3,400,236

 
3,382,308

 
 
 
 
PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
 
748,930

 
521,905

 

 
 
 
1,008,839

 
693,934

 
 
 
 
Securitized mortgage loans
 
8,146

 
6,836

 

 
 
 
8,871

 
7,422

 
 
 
 
 
 
757,076