NorthStar Real Estate Income II, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - NorthStar Real Estate Income II, Inc.	nreiii-06302016exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - NorthStar Real Estate Income II, Inc.	nreiii-06302016exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - NorthStar Real Estate Income II, Inc.	nreiii-06302016exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - NorthStar Real Estate Income II, Inc.	nreiii-06302016exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - NorthStar Real Estate Income II, Inc.	nreiii-06302016exhibit101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

Commission File Number: 000-55189

NORTHSTAR REAL ESTATE INCOME II, INC.

(Exact Name of Registrant as Specified in its Charter)



Maryland	90-0916682
(State or Other Jurisdiction of	(IRS Employer
Incorporation or Organization)	Identification No.)

399 Park Avenue, 18th Floor, New York, NY 10022

(Address of Principal Executive Offices, Including Zip Code)

(212) 547-2600

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

The Company has 93,895,386 shares of Class A common stock, $0.01 par value per share, and 12,473,996 shares of Class T common stock, $0.01 par value per share, outstanding as of August 10, 2016.

NORTHSTAR REAL ESTATE INCOME II, INC.

FORM 10-Q

TABLE OF CONTENTS



Index		Page
Part I.	Financial Information	5
Item 1.	Financial Statements	5
	Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015	5
	Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2016 and 2015	6
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2016 and 2015	7
	Consolidated Statements of Equity for the six months ended June 30, 2016 (unaudited) and for the year ended December 31, 2015	8
	Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2016 and 2015	9
	Notes to Consolidated Financial Statements (unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 4.	Controls and Procedures	66
Part II.	Other Information	67
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 6.	Exhibits	70
Signatures		71

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue,” “future” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to our ability to successfully complete our continuous, public offering, whether we will commence or successfully complete a follow-on offering, our ability to pay distributions to our stockholders, our reliance on our advisor and our sponsor, the operating performance of our investments, our financing needs, the effects of our current strategies and investment activities and our ability to effectively deploy capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the economic environment. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements. These factors include, but are not limited to:


•	adverse economic conditions and the impact on the commercial real estate industry;


•	our ability to successfully complete a continuous, public offering, including our ability to commence or complete a follow-on public offering in the amount proposed or at all;


•	our ability to deploy capital quickly and successfully and achieve a diversified portfolio consistent with our target asset classes;


•	our dependence on the resources and personnel of our advisor, our sponsor and their affiliates, including our advisor’s ability to source and close on attractive investment opportunities on our behalf;


•	the performance of our advisor, our sponsor and their affiliates;


•	our liquidity and access to capital;


•	our use of leverage;


•	our ability to make distributions to our stockholders;


•	the lack of a public trading market for our shares;


•	the effect of economic conditions on the valuation of our investments;


•	the effect of paying distributions to our stockholders from sources other than cash flow provided by operations;


•	the impact of our sponsor’s recently announced merger agreement with NorthStar Realty Finance Corp. and Colony Capital, Inc., including the ability to consummate the merger on the terms contemplated or at all;


•	our advisor’s and its affiliates’ ability to attract and retain qualified personnel to support our growth and operations and potential changes to key personnel providing management services to us;

•

our reliance on our advisor and its affiliates and sub-advisors/co-venturers in providing management services to us, the payment of substantial fees to our advisor, the allocation of investments by our advisor and its affiliates among us and the other sponsored or managed companies and strategic vehicles of our sponsor and its affiliates, and various potential conflicts of interest in our relationship with our sponsor;


•	a change in the ownership or management of our sponsor;


•	the impact of market and other conditions influencing the availability of equity versus debt investments and performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments;


•	changes in our business or investment strategy;


•	the impact of economic conditions on borrowers of the debt we originate and acquire and the mortgage loans underlying the commercial mortgage backed securities in which we invest, as well as on the tenants of the real property that we own;

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•	changes in the value of our portfolio;


•	the impact of fluctuations in interest rates;


•	our ability to realize current and expected returns over the life of our investments;


•	any failure in our advisor’s and its affiliates’ due diligence to identify relevant facts during our underwriting process or otherwise;


•	illiquidity of debt investments, equity investments or properties in our portfolio;


•	our ability to finance our assets on terms that are acceptable to us, if at all, including our ability to complete securitization financing transactions;


•	environmental compliance costs and liabilities;


•	risks associated with our joint ventures and unconsolidated entities, including our lack of sole decision making authority and the financial condition of our joint venture partners;


•	increased rates of loss or default and decreased recovery on our investments;


•	the degree and nature of our competition;


•	the effectiveness of our risk and portfolio management systems;


•	the potential failure to maintain effective internal controls, disclosure and procedures;


•	regulatory requirements with respect to our business generally, as well as the related cost of compliance;


•	legislative and regulatory changes, including changes to laws governing the taxation of real estate investment trusts, or REITs, and changes to laws affecting non-traded REITs and alternative investments generally;


•	our ability to maintain our qualification as a REIT for federal income tax purposes and limitations imposed on our business by our status as a REIT;


•	the loss of our exemption from registration under the Investment Company Act of 1940, as amended;


•	general volatility in capital markets;


•	the adequacy of our cash reserves and working capital;


•	our ability to raise capital in light of certain regulatory changes, including amended Rules 2340 and 2310 of the Financial Industry Regulatory Authority, Inc., or FINRA, and the U.S. Department of Labor’s recent rule on a fiduciary standard for retirement accounts; and


•	other risks associated with investing in our targeted investments, including changes in our industry, interest rates, the securities markets, the general economy or the capital markets and real estate markets specifically.

The foregoing list of factors is not exhaustive. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

Factors that could have a material adverse effect on our operations and future prospects are set forth in our filings with the U.S. Securities and Exchange Commission, or the SEC, including Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.” The risk factors set forth in our filings with the SEC could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.

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PART I. Financial Information

Item 1. Financial Statements

NORTHSTAR REAL ESTATE INCOME II, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Per Share Data)



	June 30, 2016 (Unaudited)			December 31, 2015
Assets
Cash	$	391,688		$	179,870
Restricted cash	42,266			58,406
Real estate debt investments, net	672,138			864,840
Operating real estate, net	401,132			401,408
Investments in private equity funds, at fair value	42,559			54,865
Real estate securities, available for sale	72,944			17,943
Receivables, net	5,622			7,707
Deferred costs and other assets, net	35,204			37,599
Total assets⁽¹⁾	$	1,663,553		$	1,622,638

Liabilities
Credit facilities	$	380,833		$	461,768
Mortgage and other notes payable, net	375,562			369,878
Due to related party	4,840			553
Accounts payable and accrued expenses	4,923			5,035
Escrow deposits payable	29,865			45,609
Distribution payable	5,796			5,003
Other liabilities	19,536			19,710
Total liabilities⁽¹⁾	821,355			907,556
Commitments and contingencies
Equity
NorthStar Real Estate Income II, Inc. Stockholders’ Equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding as of June 30, 2016 and December 31, 2015	—			—
Class A common stock, $0.01 par value, 320,000,000 shares authorized, 92,824,701 and 84,516,788 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively	928			845
Class T common stock, $0.01 par value, 80,000,000 shares authorized, 10,841,173 and 1,792,960 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively	108			18
Additional paid-in capital	921,366			768,494
Retained earnings (accumulated deficit)	(81,899		)	(56,159		)
Accumulated other comprehensive income (loss)	(561		)	(443		)
Total NorthStar Real Estate Income II, Inc. stockholders’ equity	839,942			712,755
Non-controlling interests	2,256			2,327
Total equity	842,198			715,082
Total liabilities and equity	$	1,663,553		$	1,622,638

_________________________________________________________________________

(1)

Represents the consolidated assets and liabilities of NorthStar Real Estate Income Operating Partnership II, LP (the “Operating Partnership”). The Operating Partnership is a consolidated variable interest entity (“VIE”), of which the Company is the sole general partner and owns approximately 99.98%. As of June 30, 2016, the assets and liabilities of the Operating Partnership include $135.2 million and $90.1 million of assets and liabilities, respectively, of certain VIEs that are consolidated by the Operating Partnership. Refer to Note 2, “Summary of Significant Accounting Policies”.

Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REAL ESTATE INCOME II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars and Shares in Thousands, Except Per Share Data)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net interest income
Interest income	$	11,676		$	7,602		$	30,907		$	15,067
Interest expense	2,928			1,950			7,429			3,923
Net interest income	8,748			5,652			23,478			11,144

Property and other revenues
Rental and other income	10,843			943			21,256			943
Total property and other revenues	10,843			943			21,256			943

Expenses
Asset management and other fees - related party	6,086			5,223			10,718			7,330
Mortgage notes interest expense	3,400			362			6,767			362
Transaction costs	1,223			4,759			1,346			5,106
Property operating expenses	3,658			225			6,986			225
General and administrative expenses (refer to Note 8)	316			1,862			3,243			3,122
Depreciation and amortization	5,438			212			10,770			212
Total expenses	20,121			12,643			39,830			16,357
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	(530		)	(6,048		)	4,904			(4,270		)
Equity in earnings (losses) of unconsolidated ventures	1,262			1,559			2,555			1,692
Income tax benefit (expense)	(118		)	(163		)	(222		)	(169		)
Net income (loss)	614			(4,652		)	7,237			(2,747		)
Net (income) loss attributable to non-controlling interests	(43		)	—			(44		)	—
Net income (loss) attributable to NorthStar Real Estate Income II, Inc. common stockholders	$	571		$	(4,652	)	$	7,193		$	(2,747	)
Net income (loss) per share of common stock, basic/diluted	$	0.01		$	(0.08	)	$	0.08		$	(0.06	)
Weighted average number of shares of common stock outstanding, basic/diluted	99,962			57,542			95,586			47,870
Distributions declared per share of common stock	$	0.18		$	0.18		$	0.35		$	0.35

Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REAL ESTATE INCOME II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in Thousands)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net income (loss)	$	614		$	(4,652	)	$	7,237		$	(2,747	)
Other comprehensive income (loss)
Unrealized gain (loss) on real estate securities, available for sale	(2,364		)	—			(118		)	—
Total other comprehensive income (loss)	(2,364		)	—			(118		)	—
Comprehensive income (loss)	(1,750		)	(4,652		)	7,119			(2,747		)
Comprehensive (income) loss attributable to non-controlling interests	(43		)	—			(44		)	—
Comprehensive income (loss) attributable to NorthStar Real Estate Income II, Inc.	$	(1,793	)	$	(4,652	)	$	7,075		$	(2,747	)

Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REAL ESTATE INCOME II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars and Shares in Thousands)



	Common Stock								Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Company’s Stockholders’ Equity			Non-controlling Interests			Total Equity
	Class A					Class T
	Shares		Amount			Shares	Amount
Balance as of December 31, 2014	30,965		$	310		—	$	—	$	273,151		$	(7,321	)	$	—		$	266,140		$	2		$	266,142
Net proceeds from issuance of common stock	51,752		517			1,793	18		478,289			—			—			478,824			—			478,824
Issuance and amortization of equity-based compensation	11		—			—	—		89			—			—			89			—			89
Non-controlling interests - contributions	—		—			—	—		—			—			—			—			2,404			2,404
Non-controlling interests - distributions	—		—			—	—		—			—			—			—			(25		)	(25		)
Other comprehensive income (loss)	—		—			—	—		—			—			(443		)	(443		)	—			(443		)
Distributions declared	—		—			—	—		—			(43,501		)	—			(43,501		)	—			(43,501		)
Proceeds from distribution reinvestment plan	2,011		20			—	—		19,152			—			—			19,172			—			19,172
Shares redeemed for cash	(222	)	(2		)	—	—		(2,187		)	—			—			(2,189		)	—			(2,189		)
Net income (loss)	—		—			—	—		—			(5,337		)	—			(5,337		)	(54		)	(5,391		)
Balance as of December 31, 2015	84,517		$	845		1,793	$	18	$	768,494		$	(56,159	)	$	(443	)	$	712,755		$	2,327		$	715,082
Net proceeds from issuance of common stock	7,069		70			8,965	89		140,047			—			—			140,206			—			140,206
Issuance and amortization of equity-based compensation	19		—			—	—		62			—			—			62			—			62
Non-controlling interests - distributions	—		—			—	—		—			—			—			—			(115		)	(115		)
Other comprehensive income (loss)	—		—			—	—		—			—			(118		)	(118		)	—			(118		)
Distributions declared	—		—			—	—		—			(32,933		)	—			(32,933		)	—			(32,933		)
Proceeds from distribution reinvestment plan	1,460		15			83	1		15,040			—			—			15,056			—			15,056
Shares redeemed for cash	(240	)	(2		)	—	—		(2,277		)	—			—			(2,279		)	—			(2,279		)
Net income (loss)	—		—			—	—		—			7,193			—			7,193			44			7,237
Balance as of June 30, 2016 (unaudited)	92,825		$	928		10,841	$	108	$	921,366		$	(81,899	)	$	(561	)	$	839,942		$	2,256		$	842,198

Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REAL ESTATE INCOME II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)



	Six Months Ended June 30,
	2016			2015
Cash flows from operating activities:
Net income (loss)	$	7,237		$	(2,747	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) losses of unconsolidated ventures	(2,555		)	(1,692		)
Amortization of equity-based compensation	62			35
Amortization of deferred financing costs	743			212
Amortization of fees / accretion of discount on investments	(344		)	408
Amortization of above/below market leases	246			—
Depreciation and amortization	10,770			212
Distributions from PE Investments	2,555			1,692
Straight line rental income	(488		)	(19		)
Deferred income tax expense	97			100
Other non-cash adjustments	(128		)	—
Changes in assets and liabilities:
Restricted cash	53			(644		)
Receivables, net	1,637			(185		)
Deferred costs and other assets, net	(4,036		)	(738		)
Due to related party	(553		)	(320		)
Accounts payable and accrued expenses	(503		)	2,077
Other liabilities	(135		)	376
Net cash provided by (used in) operating activities	14,658			(1,233		)
Cash flows from investing activities:
Acquisition of real estate debt investments, net	(37,912		)	—
Origination of real estate debt investments, net	(45,658		)	(166,819		)
Proceeds from sale of real estate debt investments	212,329			—
Repayment on real estate debt investments	63,250			27,527
Acquisition of operating real estate	—			(317,500		)
Improvements to operating real estate	(4,475		)	—
Investment in PE Investments	(39		)	(45,421		)
Acquisition of real estate securities, available for sale	(53,955		)	—
Distributions from PE Investments	12,511			6,136
Change in restricted cash	344			(12,188		)
Net cash provided by (used in) investing activities	146,395			(508,265		)
Cash flows from financing activities:
Borrowings from credit facilities	88,702			12,600
Repayment on credit facilities	(169,637		)	(12,900		)
Borrowings from mortgage and other notes	5,416			250,000
Net proceeds from issuance of common stock	145,839			301,181
Net proceeds from issuance of common stock, related party	143			62
Shares redeemed for cash	(2,279		)	(1,153		)
Distributions paid on common stock	(32,140		)	(14,634		)
Proceeds from distribution reinvestment plan	15,056			6,878
Payment of deferred financing costs	(220		)	(1,393		)
Distributions to non-controlling interests	(115		)	—
Net cash provided by (used in) financing activities	50,765			540,641
Net increase (decrease) in cash	211,818			31,143
Cash - beginning of period	179,870			41,640
Cash - end of period	$	391,688		$	72,783
Supplemental disclosure of non-cash investing and financing activities:
Accrued cost of capital	$	4,871		$	869
Subscriptions receivable, gross	634			2,669
Distribution payable	5,796			3,603
Escrow deposits payable	15,743			3,940
Accrued acquisition fees	—			840
Non-cash related to PE Investments	166			—
Amounts payable relating to improvements of operating real estate	391			—

Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REAL ESTATE INCOME II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Business and Organization

NorthStar Real Estate Income II, Inc. (the “Company”) was formed to originate, acquire and asset manage a diversified portfolio of commercial real estate (“CRE”) debt, equity and securities investments predominantly in the United States. CRE debt investments may include first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests. Real estate equity investments include the Company’s direct ownership in properties, which may be structurally senior to a third-party partner’s equity, as well as indirect interests in real estate through real estate private equity funds (“PE Investments”). CRE securities primarily consist of commercial mortgage-backed securities (“CMBS”) and may include unsecured real estate investment trust (“REIT”) debt, collateralized debt obligation (“CDO”) notes and other securities. The Company may also invest internationally. In addition, the Company may own investments through joint ventures. The Company was formed in December 2012 as a Maryland corporation and commenced operations in September 2013. The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2013. The Company conducts its operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.

The Company is externally managed and has no employees. Prior to June 30, 2014, the Company was managed by an affiliate of NorthStar Realty Finance Corp. (NYSE: NRF) (“NorthStar Realty”). Effective June 30, 2014, NorthStar Realty spun-off its asset management business into a separate publicly traded company, NorthStar Asset Management Group Inc. (NYSE: NSAM) (the “Sponsor”). The Sponsor and its affiliates provide asset management and other services to the Company, NorthStar Realty, NorthStar Realty Europe Corp. (NYSE: NRE), other sponsored public retail-focused companies and any other companies the Sponsor and its affiliates may manage in the future (collectively, the “NSAM Managed Companies”), both in the United States and internationally. Concurrent with the spin-off, affiliates of the Sponsor entered into a new advisory agreement with the Company and each of the other NSAM Managed Companies. Pursuant to the Company’s advisory agreement, NSAM J-NSII Ltd, an affiliate of the Sponsor (the “Advisor”), agreed to manage the day-to-day operations of the Company on terms substantially similar to those set forth in the Company’s prior advisory agreement with NS Real Estate Income Advisor II, LLC (the “Prior Advisor”). References to the “Prior Advisor” herein refer to the services performed by and fees paid and accrued to the Prior Advisor during the period prior to June 30, 2014. The spin-off of NorthStar Realty’s asset management business had no impact on the Company’s operations.

In June 2016, the Sponsor announced that it entered into a definitive merger agreement with NorthStar Realty and Colony Capital, Inc. (“Colony”), providing for the combination of the Sponsor, NorthStar Realty and Colony into a wholly-owned subsidiary of the Sponsor, as the surviving publicly-traded company for the combined organization that, upon and following the effective time of the mergers, will be named Colony NorthStar, Inc. (“Colony NorthStar”). As a result of the mergers, Colony NorthStar will be an internally-managed equity REIT, with a diversified real estate and investment management platform. In addition, following the mergers, the Advisor and NorthStar Securities, LLC (the “Dealer Manager”) will be subsidiaries of Colony NorthStar. This transaction is expected to close in January 2017, subject to customary closing conditions, including regulatory approvals, and approval by the Sponsor’s, NorthStar Realty’s and Colony’s respective shareholders. There is no guarantee this transaction will close on the contemplated terms or within the anticipated timeframe, or at all. The Company does not expect that this transaction will have a material impact on its operations.

Substantially all of the Company’s business is conducted through NorthStar Real Estate Income Operating Partnership II, LP (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The limited partners of the Operating Partnership are the Prior Advisor and NorthStar OP Holdings II, LLC (the “Special Unit Holder”), each an affiliate of the Sponsor. The Prior Advisor invested $1,000 in the Operating Partnership in exchange for common units and the Special Unit Holder invested $1,000 in the Operating Partnership and was issued a separate class of limited partnership units (the “Special Units”), which are collectively recorded as non-controlling interests on the consolidated balance sheets as of June 30, 2016 and December 31, 2015. As the Company accepts subscriptions for shares, it contributes substantially all of the net proceeds from its continuous, public offering to the Operating Partnership as a capital contribution. As of June 30, 2016, the Company’s limited partnership interest in the Operating Partnership was 99.98%.

The Company’s charter authorizes the issuance of up to 400,000,000 shares of common stock with a par value of $0.01 per share and up to 50,000,000 shares of preferred stock with a par value of $0.01 per share. The shares of common stock may be offered in any combination of the two classes of shares of common stock: Class A shares and Class T shares. The board of directors of the Company is authorized to amend its charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue.

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On December 18, 2012, as part of its formation, the Company issued 22,223 shares of Class A common stock to NorthStar Realty for $0.2 million. On May 6, 2013, the Company’s registration statement on Form S-11 with the U.S. Securities and Exchange Commission (the “SEC”) was declared effective. The Company is offering a maximum of $1,650,000,000 in any combination of Class A and Class T shares of common stock, excluding the initial shares, in a continuous, public offering, of which up to $1,500,000,000 in shares are being offered pursuant to its primary offering (the “Primary Offering”) to the public and up to $150,000,000 in shares are being offered pursuant to its distribution reinvestment plan (the “DRP”), which are herein collectively referred to as the Offering. The Company reserves the right to reallocate shares of its common stock being offered between the Primary Offering and the DRP. The Company has retained the Dealer Manager, formerly a subsidiary of NorthStar Realty that became a subsidiary of the Sponsor upon completion of the spin-off, to serve as the dealer manager for the Primary Offering. The Dealer Manager is responsible for marketing the shares being offered pursuant to the Primary Offering.

On September 18, 2013, the Company commenced operations by satisfying the minimum offering requirement in its Primary Offering as a result of NorthStar Realty purchasing 222,223 Class A shares of common stock for $2.0 million. From inception through August 10, 2016, the Company raised total gross proceeds of $1.1 billion.

On April 28, 2016, the Company filed a registration statement on Form S-11 with the SEC for a follow-on public offering of up to $200.0 million in shares of the Company’s common stock, of which $150.0 million are to be offered pursuant to a primary offering and $50.0 million are to be offered pursuant to a distribution reinvestment plan. In accordance with SEC rules and upon the filing of the follow-on registration statement, the Offering was extended into November 2016, or for such longer period as permitted under applicable laws and regulations unless terminated earlier by the Company’s board of directors. The follow-on registration statement has not yet been declared effective by the SEC and there can be no assurance that the Company will commence the follow-on offering or successfully sell the full number of shares registered. The Company will not commence sales of its shares to the public pursuant to the follow-on offering until the earlier of (1) the maximum amount has been sold pursuant to the Offering or (2) the Offering has been terminated.


2.	Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the SEC.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“VIEs”), if any, where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.

Variable Interest Entities

A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

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to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.

The Company evaluates its investments and financings, including investments in unconsolidated ventures and securitization financing transactions, if any, to determine whether each investment or financing is a VIE. The Company analyzes new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.

The Company adopted the new consolidation guidance (refer to Recent Accounting Pronouncements) on January 1, 2016 which resulted in the identification of several VIEs. Prior to the adoption of the standard, these entities were consolidated under the voting interest model. The most significant consolidated VIEs are the Operating Partnership and certain properties that have non-controlling interests. These entities are VIEs because the non-controlling interests do not have substantive kick-out or participating rights. The Company consolidates these entities because it controls all significant business activities.

The Operating Partnership consolidates certain properties that have non-controlling interests. Included in operating real estate, net on the Company’s consolidated balance sheet as of June 30, 2016 is $118.1 million related to such consolidated VIEs. Included in mortgage and other notes payable, net on the Company’s consolidated balance sheet as of June 30, 2016 is $86.9 million, collateralized by the real estate assets of the related consolidated VIEs.

As of June 30, 2016, the Company identified unconsolidated VIEs related to its CRE debt investments, PE Investments and CRE securities. Assets of each of the VIEs may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.

The following table presents the Company’s classification, carrying value and maximum exposure of unconsolidated VIEs as of June 30, 2016 (dollars in thousands):



	Carrying Value
	Real Estate Debt Investments, Net		Investments in Private Equity Funds, at Fair Value		Real Estate Securities, Available for Sale		Total		Maximum Exposure to Loss⁽¹⁾
Real estate debt investments, net	$	76,401	$	—	$	—	$	76,401	$	87,132
Investments in private equity funds, at fair value	—		42,559		—		42,559		42,559
Real estate securities, available for sale	—		—		72,944		72,944		72,944
Total assets of unconsolidated VIEs	$	76,401	$	42,559	$	72,944	$	191,904	$	202,635

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(1)	As of June 30, 2016, maximum exposure to loss includes future funding commitments of $10.7 million for real estate debt investments, net.

Based on management’s analysis, the Company determined that it is not the primary beneficiary of the VIEs. Accordingly, the VIEs are not consolidated in the Company’s financial statements as of June 30, 2016. The Company did not provide financial support to the unconsolidated VIEs during the six months ended June 30, 2016. As of June 30, 2016, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to the unconsolidated VIEs outside of the future funding commitments disclosed above and expected future contributions of $0.7 million related to PE Investments.

Voting Interest Entities

A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate

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a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party or a simple majority vote.

The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.

Investments in Unconsolidated Ventures

A non-controlling, unconsolidated ownership interest in an entity may be accounted for using the equity method, at fair value or the cost method.

Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity’s net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity as a result of preferred returns and allocation formulas, if any, as described in such governing documents. Equity method investments are recognized using a cost accumulation model in which the investment is recognized based on the cost to the investor, which includes acquisition fees. The Company records as an expense certain acquisition costs and fees associated with consolidated investments deemed to be business combinations and capitalizes these costs for investments deemed to be acquisitions of an asset, including an equity method investment.

The Company may account for an investment in an unconsolidated entity at fair value by electing the fair value option. The Company elected the fair value option for PE Investments. The Company records the change in fair value for its share of the projected future cash flow of such investments from one period to another in equity in earnings (losses) of unconsolidated ventures in the consolidated statements of operations. Any change in fair value attributed to market related assumptions is considered unrealized gain (loss).

The Company may account for an investment that does not qualify for equity method accounting or for which the fair value option was not elected using the cost method if the Company determines the investment in the unconsolidated entity is insignificant. Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment.

Non-controlling Interests

A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. A non-controlling interest is required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) and comprehensive income (loss) attributable to controlling and non-controlling interests. An allocation to a non-controlling interest may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents.

Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions.

Comprehensive Income (Loss)

The Company reports consolidated comprehensive income (loss) in separate statements following the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and other comprehensive income (loss) (“OCI”).

Fair Value Option

The fair value option provides an election that allows a company to irrevocably elect to record certain financial assets and liabilities at fair value on an instrument-by-instrument basis at initial recognition. The Company will generally not elect the fair value option for its assets and liabilities. However, the Company has elected the fair value option for PE Investments. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.

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Real Estate Debt Investments

CRE debt investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium and discount. CRE debt investments that are deemed to be impaired are carried at amortized cost less a loan loss reserve, if deemed appropriate, which approximates fair value. CRE debt investments where the Company does not have the intent to hold the loan for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or estimated value.

The Company may syndicate a portion of the CRE debt investments that it originates or sell the CRE debt investments individually. When a transaction meets the criteria for sale accounting, the Company will no longer recognize the CRE debt investment sold as an asset and will recognize gain or loss based on the difference between the sales price and the carrying value of the CRE debt investment sold. Any related unamortized deferred origination fees, original issue discounts, loan origination costs, discounts or premiums at the time of sale are recognized as an adjustment to the gain or loss on sale, which is included in interest income on the consolidated statement of operations. Any fees received at the time of sale or syndication are recognized as part of interest income.

Operating Real Estate

Operating real estate is carried at historical cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life. The Company accounts for purchases of operating real estate that qualify as business combinations using the acquisition method, where the purchase price is allocated to tangible assets such as land, building, improvements and other identified intangibles. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in the consolidated statements of operations.

Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:



Category:		Term:
Building		40 years
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

Real Estate Securities

The Company classifies its CRE securities investments as available for sale on the acquisition date, which are carried at fair value. Unrealized gains (losses) are recorded as a component of accumulated OCI in the consolidated statements of equity.

Deferred Costs

Deferred costs primarily include deferred financing costs and deferred lease costs. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. Costs related to revolving credit facilities are recorded in deferred costs and other asset, net and are amortized to interest expense using the straight-line basis over the term of the facility. Costs related to other borrowings are recorded net against the carrying value of such borrowings and are amortized to interest expense using the effective interest method. Unamortized deferred financing costs are expensed when the associated facility is repaid before maturity. Costs incurred in seeking financing transactions, which do not close, are expensed in the period in which it is determined that the financing will not occur. Deferred lease costs consist of fees incurred to initiate and renew operating leases, which are amortized on a straight-line basis over the remaining lease term and are recorded to depreciation and amortization in the consolidated statements of operations.

Identified Intangibles

The Company records acquired identified intangibles, which includes intangible assets (such as the value of the above-market leases, in-place leases, and other intangibles) and intangible liabilities (such as the value of below market leases), based on estimated fair value. The value allocated to the identified intangibles are amortized over the remaining lease term. Above/below-market leases are amortized into rental income, below-market ground leases are amortized into real estate properties-operating expense and in-place leases are amortized into depreciation and amortization expense. Identified intangible assets are recorded in deferred

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costs and other assets, net, and identified intangible liabilities are recorded in other liabilities on the accompanying consolidated balance sheets.

Deferred Costs and Other Assets, Net and Other Liabilities

The following table presents a summary of deferred costs and other assets, net and other liabilities as of June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016 (Unaudited)		December 31, 2015
	June 30, 2016 (Unaudited)		December 31, 2015
Deferred costs and other assets, net
Intangible assets, net⁽¹⁾	$	27,805	$	33,929
Deferred financing costs, net - credit facilities	1,698		1,953
Deferred commissions and leasing costs	2,566		961
Deposits	64		39
Prepaid expenses	3,071		711
Derivatives and interest rate caps	—		6
Total	$	35,204	$	37,599

Other liabilities:
PE Investments deferred purchase price, net	$	13,863	$	13,696
Intangible liabilities, net⁽²⁾	2,101		2,404
Tenant security deposits	1,407		1,261
Tenant prepaid rent	1,849		2,204
Deferred tax liability	234		137
Other	82		8
Total	$	19,536	$	19,710

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(1)	Represents in-place leases and above-market leases, net.


(2)	Represents below-market leases, net.

Acquisition Fees and Expenses

The total of all acquisition fees and expenses for an investment, including acquisition fees to the Advisor, cannot exceed, in the aggregate, 6.0% of the contract purchase price of such investment unless such excess is approved by a majority of the directors, including independent directors. For the six months ended June 30, 2016, total acquisition fees and expenses did not exceed the allowed limit for any investment. An acquisition fee incurred related to an equity investment will generally be expensed as incurred. An acquisition fee paid to the Advisor related to the acquisition of an equity or debt investment in an unconsolidated joint venture is included in investments in unconsolidated ventures on the consolidated balance sheets. An acquisition fee paid to the Advisor related to the origination or acquisition of debt investments is included in debt investments, net on the consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method. The Company records as an expense certain acquisition costs and fees associated with transactions deemed to be business combinations in which it consolidates the asset and capitalizes these costs for transactions deemed to be acquisitions of an asset, including an equity investment.

Revenue Recognition

Real Estate Debt Investments

Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such loan is reclassified to held for sale.

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Operating Real Estate

Rental and other income from operating real estate is derived from the leasing of space to various types of tenants. Rental revenue recognition commences when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. The leases are for fixed terms of varying length and generally provide for annual rentals and expense reimbursements to be paid in monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rent recognized over the amount contractually due pursuant to the underlying leases is included in receivables on the consolidated balance sheets. The Company amortizes any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Other income represents revenue from tenant/operator leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by the Company on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.

In a situation in which a lease(s) associated with a significant tenant have been, or are expected to be, terminated early, the Company evaluates the remaining useful life of depreciable or amortizable assets in the asset group related to the lease that will be terminated (i.e., tenant improvements, above- and below-market lease intangibles, in-place lease value and deferred leasing costs). Based upon consideration of the facts and circumstances surrounding the termination, the Company may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within depreciation and amortization in the consolidated statements of operations.

Real Estate Securities

Interest income is recognized using the effective interest method with any premium or discount amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expected cash flow may result in a change to the yield which is then applied retrospectively for high-credit quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment or prospectively for all other securities to recognize interest income.

Credit Losses and Impairment on Investments

Real Estate Debt Investments

Loans are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis or more frequently as necessary. Significant judgment of the Company is required in this analysis. The Company considers the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each loan is maintained at a level that is determined to be adequate by management to absorb probable losses.

Income recognition is suspended for a loan at the earlier of the date at which payments become 90-days past due or when, in the opinion of the Company, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged. As of June 30, 2016, the Company did not have any impaired CRE debt investments.

Operating Real Estate

The Company’s real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate expected future undiscounted cash flow generated by the property is less than the carrying value. In conducting this review, the Company considers U.S. macroeconomic factors, real estate sector conditions and asset specific and other factors. To the extent an impairment has occurred, the loss is

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measured as the excess of the carrying value of the property over the estimated fair value and recorded in impairment on operating real estate in the consolidated statements of operations.

An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due. Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts.

As of June 30, 2016, the Company did not have any impaired operating real estate.

Real Estate Securities

CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment (“OTTI”) as any change in fair value is recorded in the consolidated statements of operations. Realized losses on such securities are reclassified to realized gain (loss) on investments and other as losses occur.

CRE securities for which the fair value option is not elected are evaluated for OTTI quarterly. Impairment of a security is considered to be other-than-temporary when: (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. When a CRE security has been deemed to be other-than-temporarily impaired due to (i) or (ii), the security is written down to its fair value and an OTTI is recognized in the consolidated statements of operations. In the case of (iii), the security is written down to its fair value and the amount of OTTI is then bifurcated into: (a) the amount related to expected credit losses; and (b) the amount related to fair value adjustments in excess of expected credit losses. The portion of OTTI related to expected credit losses is recognized in the consolidated statements of operations. The remaining OTTI related to the valuation adjustment is recognized as a component of accumulated OCI in the consolidated statements of equity. The portion of OTTI recognized through earnings is accreted back to the amortized cost basis of the security through interest income, while amounts recognized through OCI are amortized over the life of the security with no impact on earnings. CRE securities which are not high-credit quality are considered to have an OTTI if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of OTTI is then bifurcated as discussed above. As of June 30, 2016, the Company did not have any OTTI recorded on its CRE securities.

Organization and Offering Costs

The Advisor, or its affiliates, is entitled to receive reimbursement for costs paid on behalf of the Company in connection with the Offering. The Company is obligated to reimburse the Advisor for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs do not exceed 15.0% of gross offering proceeds from the Offering. The Advisor does not expect reimbursable organization and offering costs to exceed $15.0 million, or 1.0% of the total proceeds available to be raised from the Primary Offering. The Company records organization and offering costs each period based upon an allocation determined by the expectation of total organization and offering costs to be reimbursed. Organization costs are recorded as an expense in general and administrative expenses in the consolidated statements of operations and offering costs are recorded as a reduction to equity.

Income Taxes

The Company elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code beginning in its taxable year ended December 31, 2013. Accordingly, the Company will generally not be subject to U.S. federal income tax to the extent of its distributions to stockholders as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. The Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. The Company believes that all of the criteria to maintain the Company’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods. The Company’s accounting policy with respect to interest and penalties is to classify these amounts as interest expense.

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The Company made a joint election to treat a subsidiary as a taxable REIT subsidiary (“TRS”) which may be subject to U.S. federal, state and local income taxes. In general, a TRS of the Company may perform non-customary services for tenants, hold assets that the REIT cannot hold directly and may engage in most real estate or non-real estate-related business.

Certain subsidiaries of the Company are subject to taxation by federal, state and local authorities for the periods presented. The Company and its U.S. subsidiaries will file a consolidated federal income tax return. Income taxes are accounted for by the asset/liability approach in accordance with U.S. GAAP. Deferred taxes, if any, represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. Such amounts arise from differences between the financial reporting and tax bases of assets and liabilities and are adjusted for changes in tax laws and tax rates in the period which such changes are enacted. A provision for income tax represents the total of income taxes paid or payable for the current period, plus the change in deferred taxes. Current and deferred taxes are recorded on the portion of earnings (losses) recognized by the Company with respect to its interest in TRSs. Deferred income tax assets and liabilities are calculated based on temporary differences between the Company’s U.S. GAAP consolidated financial statements and the federal, state and local tax basis of assets and liabilities as of the consolidated balance sheet date. The Company evaluates the realizability of its deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in provision for income tax expense included in income tax benefit (expense) in the consolidated statements of operations.

For the three and six months ended June 30, 2016, the Company recorded income tax expense of $0.1 million and $0.2 million, respectively. For the three and six months ended June 30, 2015, the Company recorded income tax expense of $0.2 million.

Other

Refer to Note 2 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for further disclosure of the Company’s significant accounting policies.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers. The accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The effective date of the new revenue standard for the Company will be January 1, 2018. The Company is in the process of evaluating the impact, if any, of the update on its consolidated financial position, results of operations and financial statement disclosures.

In February 2015, the FASB issued updated guidance that changes the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this guidance in the first quarter 2016 and determined the Company’s Operating Partnership is considered a VIE. The Company is the primary beneficiary of the VIE, the VIE’s assets can be used for purposes other than the settlement of the VIE’s obligations and the Company’s partnership interest is considered a majority voting interest. As such, this standard resulted in the identification of additional VIEs, however it did not have a material impact on the Company’s consolidated financial position or results of operations.

In January 2016, the FASB issued an accounting update that addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently assessing the impact, if any, of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In February 2016, the FASB issued an accounting update that requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.

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In March 2016, the FASB issued guidance which eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The update requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment become qualified for equity method accounting. The update should be applied prospectively upon their effective date to increases in the level of ownership interests or degree of influence that results in the adoption of the equity method. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.

In March 2016, the FASB issued guidance which amends several aspects of the accounting for equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.

In June 2016, the FASB issued guidance which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Additionally, entities will have to disclose significantly more information including information used to track credit quality by year of origination for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.

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3.	Real Estate Debt Investments

The following table presents CRE debt investments as of June 30, 2016 (dollars in thousands):



								Weighted Average						Floating Rate as % of Principal Amount
Asset type:	Count	Principal Amount⁽¹⁾		Carrying Value⁽²⁾		Allocation by Investment Type⁽³⁾		Fixed Rate		Spread over LIBOR⁽⁴⁾		Total Unleveraged Current Yield		Floating Rate as % of Principal Amount
First mortgage loans	16	$	583,383	$	571,849	83.9	%	—		5.46	%	5.50	%	100.0	%
Mezzanine loans	1	20,528		20,691		3.0	%	14.00	%	—		14.00	%	—
Subordinate interests	3	91,354		79,598		13.1	%	12.81	%	12.96	%	13.01	%	31.4	%
Total/ Weighted average	20	$	695,265	$	672,138	100.0	%	13.12	%	5.72	%	6.65	%	88.0	%

___________________________________________________


(1)	Includes future funding commitments of $11.5 million for first mortgage loans and $11.7 million for subordinate interests.


(2)	Certain CRE debt investments serve as collateral for financing transactions, including carrying value of $571.8 million for Term Loan Facilities, as defined in Note 7, and other notes payable (refer to Note 7). The remainder is unleveraged.


(3)	Based on principal amount.


(4)	Includes a fixed minimum LIBOR rate (“LIBOR floor”), as applicable. As of June 30, 2016, the Company had $438.6 million principal amount of floating-rate loans subject to a LIBOR floor with the weighted average LIBOR floor of 0.26%.

The following table presents CRE debt investments as of December 31, 2015 (dollars in thousands):



								Weighted Average						Floating Rate as % of Principal Amount
Asset type:	Count	Principal Amount⁽¹⁾		Carrying Value⁽²⁾		Allocation by Investment Type⁽³⁾		Fixed Rate		Spread over LIBOR⁽⁴⁾		Total Unleveraged Current Yield		Floating Rate as % of Principal Amount
First mortgage loans	17	$	818,333	$	787,294	89.9	%	—		5.32	%	5.36	%	100.0	%
Subordinate interests	3	91,604		77,546		10.1	%	12.79	%	12.80	%	12.95	%	31.3	%
Total/Weighted average	20	$	909,937	$	864,840	100.0	%	12.79	%	5.99	%	6.04	%	93.1	%

__________________________________________________________


(1)	Includes future funding commitments of $32.8 million for first mortgage loans and $14.0 million for subordinate interests.


(2)	Certain CRE debt investments serve as collateral for financing transactions, including carrying value of $787.3 million for Term Loan Facilities (refer to Note 7). The remainder is unleveraged.


(3)	Based on principal amount.


(4)	Includes a fixed minimum LIBOR floor, as applicable. As of December 31, 2015, the Company had $697.2 million principal amount of floating-rate loans subject to a LIBOR floor with the weighted average LIBOR floor of 0.24%.

The following table presents maturities of CRE debt investments based on principal amount, which includes future funding commitments, as of June 30, 2016 (dollars in thousands):



	Initial Maturity		Maturity Including Extensions⁽¹⁾
July 1 to December 31, 2016	$	—	$	—
Years Ending December 31:
2017	282,841		—
2018	287,811		20,528
2019	86,763		276,074
2020	37,850		329,900
Thereafter	—		68,763
Total	$	695,265	$	695,265

____________________________________________________________


(1)	Assumes that all debt with extension options will qualify for extension at such maturity according to the conditions set forth in the governing documents.

As of June 30, 2016, the weighted average maturity, including extensions, of CRE debt investments was 3.7 years.

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Credit Quality Monitoring

CRE debt investments are typically loans secured by direct senior priority liens on real estate properties or by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its debt investments at least quarterly and differentiates the relative credit quality principally based on: (i) whether the borrower is currently paying contractual debt service in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity. The Company categorizes a debt investment for which it expects to receive full payment of contractual principal and interest payments as “performing.” The Company will categorize a weaker credit quality debt investment that is currently performing, but for which it believes future collection of all or some portion of principal and interest is in doubt, into a category called “performing with a loan loss reserve.” The Company will categorize a weaker credit quality debt investment that is not performing, which the Company defines as a loan in maturity default and/or past due at least 90 days on its contractual debt service payments, as a non-performing loan (“NPL”). The Company’s definition of an NPL may differ from that of other companies that track NPLs.

As of June 30, 2016, all CRE debt investments were performing in accordance with the contractual terms of their governing documents and were categorized as performing loans. There were no real estate debt investments with contractual payments past due as of June 30, 2016 and December 31, 2015. For the six months ended June 30, 2016, one debt investment contributed more than 10% of interest income, which was attributable to a non-recurring minimum interest payment upon early repayment of the debt investment. Excluding the non-recurring interest income, no debt investments contributed more than 10% of interest income.

Debt Investments Sales

In April 2016, the Company completed a sale of two first mortgage loans with an aggregate outstanding principal of $173.0 million, in conjunction with loan sales of a related party, to an unaffiliated third party. In addition, in April 2016, the Company completed a sale of a first mortgage loan with an outstanding principal amount of $39.2 million to an unaffiliated third party. In total, the three first mortgage loans were sold for an aggregate purchase price of $212.3 million, representing approximately 100.1% of the combined outstanding principal amount for the three loans. In connection with the transactions, the Company is no longer obligated to fund an aggregate of $4.2 million in future funding commitments. Using proceeds from the sale, the Company repaid $126.3 million on its Term Loan Facilities, increasing the borrowing capacity by such amount and resulting in net proceeds, before closing expenses, of $86.1 million.


4.	Operating Real Estate

The following table presents operating real estate, net as of June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016 (Unaudited)			December 31, 2015
Land and improvements	$	93,666		$	93,666
Buildings and improvements	317,852			312,986
Subtotal	411,518			406,652
Less: Accumulated depreciation	(10,386		)	(5,244		)
Operating real estate, net	$	401,132		$	401,408


5.	Investments in Private Equity Funds

The following is a description of investments in private equity funds that own PE Investments through direct investments, or “PE Investment I” and “PE Investment II”, which are recorded as an investment in private equity funds at fair value on the consolidated balance sheets. PE Investments are cost method investments for which the Company has elected the fair value option. As a result, the Company records equity in earnings (losses) based on the change in fair value for its share of the projected future cash flow from one period to another.

The following tables summarize the Company’s PE Investments as of June 30, 2016 (dollars in thousands):

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PE Investment	Initial Closing Date	NAV Reference Date⁽¹⁾	Number of Funds	Purchase Price		Expected Future Contributions⁽²⁾
PE Investment I	March 20, 2015	September 30, 2014	6	$	45,045	$	687
PE Investment II⁽³⁾	August 4, 2015	December 31, 2014	3	27,788		—
Total			9	$	72,833	$	687

________________________________________________________


(1)	Represents the net asset value (“NAV”) date on which the Company agreed to acquire the PE Investment.


(2)	Represents the estimated amount of expected future contributions to funds as of June 30, 2016.

(3)

At the time of closing, the Company paid $9.4 million to acquire PE Investment II, or 50% of the purchase price, adjusted for subsequent contributions and distributions, and will pay the remaining $13.9 million (the “Deferred Amount”) on the one year anniversary of the closing date. Subsequent to June 30, 2016, the Deferred Amount was paid. Refer to Note 14, “Subsequent Events”, for additional information.



	Carrying Value				Three Months Ended June 30, 2016						Three Months Ended June 30, 2015⁽¹⁾
PE Investment	June 30, 2016 (Unaudited)		December 31, 2015		Equity in Earnings		Distributions		Contributions⁽²⁾		Equity in Earnings		Distributions		Contributions⁽²⁾
PE Investment I	$	30,648	$	39,646	$	957	$	6,325	$	39	$	1,559	$	1,041	$	51
PE Investment II	11,911		15,219		305		4,017		—		—		—		—
Total	$	42,559	$	54,865	$	1,262	$	10,342	$	39	$	1,559	$	1,041	$	51

_________________________________________________________


(1)	The initial closing date for PE Investment I and PE Investment II was March 20, 2015 and August 4, 2015, respectively.


(2)	Includes initial investments and subsequent contributions.



	Six Months Ended June 30, 2016						Six Months Ended June 30, 2015⁽¹⁾
PE Investment	Equity in Earnings		Distributions		Contributions⁽²⁾		Equity in Earnings		Distributions		Contributions⁽²⁾
PE Investment I	$	2,012	$	11,049	$	39	$	1,692	$	7,828	$	45,421
PE Investment II	543		4,017		—		—		—		—
Total	$	2,555	$	15,066	$	39	$	1,692	$	7,828	$	45,421

_________________________________________________________


(1)	The initial closing date for PE Investment I and PE Investment II was March 20, 2015 and August 4, 2015, respectively.


(2)	Includes initial investments and subsequent contributions.


6.	Real Estate Securities, Available for Sale

CRE securities are comprised of CMBS backed by a pool of CRE loans which are typically well-diversified by type and geography. The following table presents CMBS investments (dollars in thousands):



						Cumulative Unrealized on Investments							Weighted Average
		Principal Amount⁽¹⁾		Amortized Cost							Fair Value				Unleveraged Current Yield
As of Date:	Count	Principal Amount⁽¹⁾		Amortized Cost		Gain		(Loss)			Fair Value		Coupon		Unleveraged Current Yield
June 30, 2016 (Unaudited)⁽²⁾	8	$	114,566	$	73,505	$	—	$	(561	)	$	72,944	3.44	%	10.12	%
December 31, 2015	3	25,500		18,386		—		(443		)	17,943		3.29	%	7.40	%

___________________________________________________


(1)	As of June 30, 2016, certain CRE securities serve as collateral for financing transactions including carrying value of $44.4 million for the CMBS Facilities (refer to Note 7). The remainder is unleveraged.


(2)	Includes a CRE security with an underlying loan that was non-performing at acquisition. The CRE security was purchased for $26.9 million, net of a $21.3 million discount. As of June 30, 2016, the non-accretable amount of total cash flows was $5.8 million.

The Company recorded an unrealized loss in OCI for the three and six months ended June 30, 2016 of $2.4 million and $0.1 million. As of June 30, 2015, the Company was not invested in real estate securities. As of June 30, 2016, the Company did not hold any securities which were in an unrealized loss position for a period of greater than 12 months. Based on management’s quarterly evaluation, no OTTI was identified related to these securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of its amortized cost basis, which may be at maturity.

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As of June 30, 2016, the weighted average contractual maturity of CRE securities was 31.1 years with an expected maturity of 7.7 years.


7.	Borrowings

The following table presents borrowings as of June 30, 2016 and December 31, 2015 (dollars in thousands):



									June 30, 2016 (Unaudited)				December 31, 2015
	Capacity			Recourse vs. Non-Recourse	Final Maturity		Contractual Interest Rate		Principal Amount⁽¹⁾		Carrying Value⁽¹⁾		Principal Amount⁽¹⁾		Carrying Value⁽¹⁾
Mortgage and other notes payable, net⁽²⁾
Industrial				Non-recourse	Jul-25		4.31%		$	250,000	$	249,169	$	250,000	$	249,123
Multi-tenant office				Non-recourse	Aug-20	⁽³⁾	LIBOR + 1.90%		87,916		86,932		82,500		81,369
Other notes payable⁽⁴⁾				Limited Recourse⁽⁵⁾	Dec-20	⁽⁴⁾	LIBOR + 2.65%		39,868		39,461		39,868		39,386
Subtotal mortgage and other notes payable, net									377,784		375,562		372,368		369,878

Term Loan Facilities
Loan Facility 1	$	100,000		Limited Recourse⁽⁶⁾	Oct-17	⁽⁷⁾	2.99%	⁽⁸⁾	78,620		78,620		84,250		84,250
Loan Facility 2	200,000			Limited Recourse⁽⁹⁾	Jul-19	⁽¹⁰⁾	2.94%	⁽⁸⁾	92,947		92,947		178,061		178,061
Loan Facility 3	200,000		⁽¹¹⁾	Limited Recourse⁽⁵⁾	Jun-18	⁽¹¹⁾	2.86%	⁽⁸⁾	178,003		178,003		199,457		199,457
Subtotal term loan facilities	$	500,000							349,570		349,570		461,768		461,768

CMBS Facilities
CMBS Facility 2				Recourse	Various	⁽¹²⁾	2.11%	⁽⁸⁾	3,117		3,117		—		—
CMBS Facility 3				Recourse	Various	⁽¹²⁾	2.14%	⁽⁸⁾	28,146		28,146		—		—
Subtotal CMBS facilities									31,263		31,263		—		—
Subtotal									380,833		380,833		461,768		461,768
Total⁽¹³⁾									$	758,617	$	756,395	$	834,136	$	831,646

_______________________________________________


(1)	Difference between principal amount and carrying value of mortgage and other notes payable is attributable to deferred financing costs, net.


(2)	Mortgage and other notes payable are subject to customary non-recourse carveouts.


(3)	The initial maturity of the mortgage payable is August 2018, with a two-year extension available at the Company’s option, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.


(4)	Relates to financing obtained for a CRE debt investment. The initial maturity of the note payable is December 2018, with two one-year extensions available at the Company’s option, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.


(5)	Recourse solely with respect to 25.0% of the financed amount.


(6)	Recourse solely with respect to 25.0% of the financed amount for assets with a lender debt yield equal to or greater than 10.0% at the time of financing plus 100.0% of the financed amount for assets with a lender debt yield less than 10.0% at the time of financing.


(7)	The initial maturity of Loan Facility 1 is October 2016, with a one-year extension available at the Company’s option, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.


(8)	Represents the weighted average as of June 30, 2016. The contractual interest rate depends upon asset type and characteristics and ranges from one-month LIBOR plus 1.50% to 2.75%.


(9)	Recourse solely with respect to the greater of: (i) 25.0% of the financed amount of stabilized loans plus the financed amount of transitional loans, as further defined in the governing documents; or (ii) the lesser of $25.0 million or the aggregate financed amount of all loans.


(10)	In July 2015, the Company exercised the first of four, one-year extensions available at the Company’s option. These extensions may be subject to the satisfaction of certain customary conditions set forth in the governing documents. Subsequent to June 30, 2016, the Company exercised the second one year-extension option. Refer to Note 14, “Subsequent Events”, for additional information.

(11)

The initial maturity of Loan Facility 3 is June 2018, with one-year extensions available at the Company’s option, which are subject to the approval of the global financial institution. Subsequent to June 30, 2016, the Company amended the terms of Loan Facility 3, increasing the total potential borrowing capacity from $200.0 million to $300.0 million and, subject to certain conditions precedent, extending the final maturity by one year to June 2019. Refer to Note 14, “Subsequent Events”, for additional information.


(12)	The maturity dates on the CMBS Facilities are dependent upon asset type and will typically range from one to three months.


(13)	Secured by collateral comprised of certain CRE debt, securities and equity investments with a carrying value of $1.0 billion as of June 30, 2016.

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The following table presents scheduled principal on borrowings, based on final maturity as of June 30, 2016 (dollars in thousands):



	Total		Mortgage and Other Notes Payable		Credit Facilities
July 1 to December 31, 2016	$	31,263	$	—	$	31,263
Years Ending December 31:
2017	78,620		—		78,620
2018	178,003		—		178,003
2019	92,947		—		92,947
2020	127,784		127,784		—
Thereafter	250,000		250,000		—
Total	$	758,617	$	377,784	$	380,833

Term Loan Facilities

The Company, through subsidiaries, has entered into credit facility agreements with multiple global financial institutions to provide an aggregate principal amount of up to $500.0 million to finance the origination of first mortgage loans and senior loan participations secured by CRE (“Term Loan Facilities”). Subsequent to June 30, 2016, the Company amended the terms of Loan Facility 3, increasing the total potential borrowing capacity under Loan Facility 3 from $200.0 million to $300.0 million and increasing the total capacity of the Term Loan Facilities to $600.0 million. The Company agreed to guaranty certain obligations under the Term Loan Facilities, which contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. The Term Loan Facilities act as revolving loan facilities that can be paid down as assets are repaid or sold and re-drawn upon for new investments. As of June 30, 2016, the Company was in compliance with all of its financial covenants under the Term Loan Facilities.

As of June 30, 2016, the Company had $571.8 million carrying value of CRE debt investments financed with $349.6 million under the Term Loan Facilities.

CMBS Facilities

In October 2015, January 2016, and April 2016, the Company entered into master repurchase agreements (“CMBS Facility 1”, “CMBS Facility 2”, and “CMBS Facility 3”, respectively, and collectively the “CMBS Facilities”) to finance CMBS investments. The CMBS facilities are on a recourse basis and contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. As of June 30, 2016, the Company had $44.4 million carrying value of CRE securities financed with $31.3 million under its CMBS Facilities. As of June 30, 2016, the Company has not utilized CMBS Facility 1.

Refer to Note 14, “Subsequent Events” for additional borrowings activity.


8.	Related Party Arrangements

Advisor

Subject to certain restrictions and limitations, the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying, originating, acquiring and asset managing investments on behalf of the Company. The Advisor may delegate certain of its obligations to affiliated entities, which may be organized under the laws of the United States or foreign jurisdictions. References to the Advisor include the Advisor and any such affiliated entities. For such services, to the extent permitted by law and regulations, the Advisor receives fees and reimbursement from the Company. Below is a description and table of the fees and reimbursements incurred to the Advisor.

In June 2016, the advisory agreement was renewed for an additional one-year term commencing on June 30, 2016, with terms identical to those in effect through June 30, 2016.

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Fees to Advisor

Asset Management Fee

The Advisor receives a monthly asset management fee equal to one-twelfth of 1.25% of the sum of the amount funded or allocated for CRE investments, including expenses and any financing attributable to such investments, less any principal received on debt and securities investments (or the proportionate share thereof in the case of an investment made through a joint venture).

Incentive Fee

The Advisor is entitled to receive distributions equal to 15.0% of net cash flows of the Company, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus a 7.0% cumulative, non-compounded annual pre-tax return on such invested capital.

Acquisition Fee

The Advisor also receives fees for providing structuring, diligence, underwriting advice and related services in connection with real estate acquisitions equal to 1.0% of the amount funded or allocated by the Company to originate or acquire investments, including acquisition costs and any financing attributable to such investments (or the proportionate share thereof in the case of an investment made through a joint venture). A fee paid to the Advisor in connection with or related to the origination or acquisition of CRE debt investments is included in CRE debt investments, net on the consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method. An acquisition fee incurred related to an equity investment will generally be expensed as incurred. A fee paid to the Advisor in connection with an acquisition of an equity or debt investment in an unconsolidated joint venture is included in investments in unconsolidated ventures on the consolidated balance sheets.

Disposition Fee

For substantial assistance in connection with the sale of investments and based on the services provided, as determined by the Company’s independent directors, the Advisor receives a disposition fee up to 1.0% of the contract sales price of each CRE investment sold. The Company does not pay a disposition fee upon the maturity, prepayment, workout, modification or extension of a CRE debt investment unless there is a corresponding fee paid by the borrower, in which case the disposition fee is the lesser of: (i) 1.0% of the principal amount of the CRE debt investment prior to such transaction; or (ii) the amount of the fee paid by the borrower in connection with such transaction. If the Company takes ownership of a property as a result of a workout or foreclosure of a CRE debt investment, the Company will pay a disposition fee upon the sale of such property. A disposition fee from the sale of a CRE investment is generally expensed and included in asset management and other fees - related party in the Company’s consolidated statements of operations. A disposition fee for a CRE debt investment incurred in a transaction other than a sale is included in CRE debt investments, net on the consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method.

Reimbursements to Advisor

Operating Costs

The Advisor is entitled to receive reimbursement for direct and indirect operating costs incurred by the Advisor in connection with administrative services provided to the Company. The Advisor allocates, in good faith, indirect costs to the Company related to the Advisor’s and its affiliates’ employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the advisory agreement with the Advisor. The indirect costs include the Company’s allocable share of the Advisor’s compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing the Company’s affairs, based upon the percentage of time devoted by such personnel to the Company’s affairs. The indirect costs also include rental and occupancy, technology, office supplies, travel and entertainment and other general and administrative costs and expenses. However, there is no reimbursement for personnel costs related to executive officers (although there may be reimbursement for certain executive officers of the Advisor) and other personnel involved in activities for which the Advisor receives an acquisition fee or a disposition fee. The Advisor allocates these costs to the Company relative to its and its affiliates’ other managed companies in good faith and has reviewed the allocation with the Company’s board of directors, including its independent directors. The Advisor will update the board of directors on a quarterly basis of any material changes to the expense allocation and will provide a detailed review to the board of directors, at least annually, and as otherwise requested by the board of directors. The Company reimburses the Advisor quarterly for operating costs (including the asset management fee) based on a calculation for the four preceding fiscal quarters not to exceed the greater of: (i) 2.0% of its

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average invested assets; or (ii) 25.0% of its net income determined without reduction for any additions to reserves for depreciation, loan losses or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of this limitation if a majority of the Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. The Company calculates the expense reimbursement quarterly based upon the trailing twelve-month period.

Organization and Offering Costs

The Advisor is entitled to receive reimbursement for organization and offering costs paid on behalf of the Company in connection with the Offering. The Company is obligated to reimburse the Advisor as applicable, for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs do not exceed 15.0% of gross proceeds from the Offering. The Advisor does not expect reimbursable organization and offering costs, excluding selling commissions and dealer manager fees, to exceed $15.0 million, or 1.0% of the total proceeds available to be raised from the Primary Offering. The Company shall not reimburse the Advisor for any organization and offering costs that the Company’s independent directors determine are not fair and commercially reasonable to the Company.

Dealer Manager

Selling Commissions, Dealer Manager Fees, and Distribution Fees

Pursuant to a dealer manager agreement, the Company pays the Dealer Manager, selling commissions of up to 7.0% of gross proceeds from the sale of Class A shares and up to 2.0% of the gross proceeds from the sale of Class T shares sold in the Primary Offering, all of which are reallowed to participating broker-dealers. The Company pays the Dealer Manager a dealer manager fee of up to 3.0% of gross proceeds from the sale of Class A shares and up to 2.75% of the gross proceeds from the sale of Class T shares sold in the Primary Offering, a portion of which is typically reallowed to participating broker-dealers and paid to certain employees of the Dealer Manager.

In addition, the Company pays the Dealer Manager, a distribution fee of up to 1.0% annually of gross proceeds from the sale of Class T shares sold in the Primary Offering, all of which is available to be reallowed to participating broker-dealers. The Dealer Manager will cease receiving distribution fees with respect to each Class T share upon the earliest to occur of the following: (i) a listing of the Company’s shares of common stock on a national securities exchange; (ii) such Class T share is no longer outstanding; (iii) the Dealer Manager’s determination that total underwriting compensation, with respect to all Class A shares and Class T shares would be in excess of 10% of the gross proceeds of the Primary Offering; or (iv) the end of the month in which total underwriting compensation, with respect to the Class T shares held by a stockholder within his or her particular account would be in excess of 10% of the stockholder’s total gross investment amount at the time of purchase of the primary Class T shares held in such account.

During the six months ended June 30, 2016, $4.6 million of distribution fees were recorded as a reduction to stockholders’ equity. As of June 30, 2016, the estimated liability for the present value of the expected future distribution fees payable to the Dealer Manager, which is included in due to related party on the Company’s consolidated balance sheets, with an offset to additional paid-in capital, was $4.3 million. The Company began issuing Class T shares in October 2015 and during the second quarter of 2016, recorded the estimated liability for future distribution fees payable related to all outstanding Class T shares. As of December 31, 2015, the estimated liability was immaterial.

No selling commissions, dealer manager fees, or distribution fees are paid for sales pursuant to the DRP or the Company’s distribution support agreement (“Distribution Support Agreement”).

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Summary of Fees and Reimbursements

The following table presents the fees and reimbursements incurred to the Advisor and the Dealer Manager for the three and six months ended June 30, 2016 and 2015 and the amount due to related party as of June 30, 2016 and December 31, 2015 (dollars in thousands):



		Three Months Ended June 30,				Six Months Ended June 30,				Due to Related Party as of
Type of Fee or Reimbursement	Financial Statement Location	2016		2015		2016		2015		June 30, 2016 (Unaudited)		December 31, 2015
Fees to Advisor
Asset management	Asset management and other fees - related party	$	3,963	$	2,001	$	8,595	$	3,709	$	—	$	1
Acquisition⁽¹⁾	Real estate debt investments, net / Asset management and other fees- related party	216		4,456		848		5,275		—		—
Disposition⁽¹⁾	Real estate debt investments, net / Asset management and other fees - related party	2,123		20		2,753		275		—		19
Reimbursements to Advisor
Operating costs⁽³⁾	General and administrative expenses	179		1,705		2,925		2,824		—		1
Organization	General and administrative expenses	—		49		—		106		—		—
Offering	Cost of capital⁽²⁾	1,343		927		1,963		2,010		495		524
Selling commissions / Dealer manager fees / Distribution fees	Cost of capital⁽²⁾	9,149		15,637		15,485		33,171		4,345		8
Total		$	16,973	$	24,795	$	32,569	$	47,370	$	4,840	$	553

_________________________________________________

(1)

Acquisition/disposition fees incurred to the Advisor related to CRE debt investments are generally offset by origination/exit fees paid to the Company by borrowers if such fees are required from the borrower. Acquisition fees related to equity investments are included in asset management and other fees - related party in the consolidated statements of operations. The Advisor may determine to defer fees or seek reimbursement. From inception through June 30, 2016, the Advisor deferred $0.7 million of acquisition fees related to CRE securities.


(2)	Cost of capital is included in net proceeds from issuance of common stock in the Company’s consolidated statements of equity.


(3)	As of June 30, 2016, the Advisor has incurred unreimbursed operating costs on behalf of the Company of $13.9 million, that remain eligible to allocate to the Company.

NorthStar Realty Purchase of Common Stock

Pursuant to the Distribution Support Agreement, NorthStar Realty committed to purchase up to an aggregate of $10.0 million in shares of the Company’s common stock at a current offering price for Class A shares, net of selling commissions and dealer manager fees, if cash distributions exceed modified funds from operations (as computed in accordance with the definition established by the Investment Program Association and adjusted for certain items) to provide additional funds to support distributions to stockholders. As of June 30, 2016, including the purchase of shares to satisfy the minimum offering requirement, NorthStar Realty purchased 448,485 Class A shares of the Company’s common stock for $4.0 million with $6.0 million remaining outstanding under such commitment.

In March 2015, the board of directors of the Company amended and restated the Distribution Support Agreement to, among other things, extend the term of the Distribution Support Agreement for one year to May 2016. In April 2016, the board of directors of the Company further amended and restated the Distribution Support Agreement to extend the term of the Distribution Support Agreement for the period ending upon the termination of the Offering.

Related Party Investment Activity

In February 2016, the Company purchased a 51.0% interest in a mezzanine loan for $20.5 million at par and CMBS with a face value of $48.2 million at a discount to par of $21.3 million, from NorthStar Realty, a company managed by the Sponsor. The mezzanine loan purchase was in conjunction with a third party purchase of the remaining interest and bears interest at a fixed rate of 14.0%. The loan is secured by a to-be-completed multifamily property located in Queens, NY. The bond was purchased with

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an unlevered yield of 16.5%. As of purchase date, the weighted average expected maturity of the CMBS was 5.3 years. The purchases were approved by the Company’s board of directors, including all of its independent directors.


9.	Equity-Based Compensation

The Company adopted a long-term incentive plan, as amended (the “Plan”), which it may use to attract and retain qualified officers, directors, employees and consultants, as well as an independent directors compensation plan, which is a component of the Plan. Pursuant to the Plan, as of June 30, 2016, the Company’s independent directors were granted a total of 51,686 Class A shares of restricted common stock for an aggregate $520,000, based on the share price on the date of each grant. The restricted stock granted prior to 2015 generally vests quarterly over four years and the restricted stock granted in and subsequent to 2015 generally vests quarterly over two years. However, the stock will become fully vested on the earlier occurrence of: (i) the termination of the independent director’s service as a director due to his or her death or disability; or (ii) a change in control of the Company.

The Company recognized equity-based compensation expense of $34,410 and $14,792 for three months ended June 30, 2016 and 2015, respectively, and $62,020 and $34,675 for the six months ended June 30, 2016 and 2015, respectively, related to the issuance of restricted stock to the independent directors, which was recorded in general and administrative expenses in the consolidated statements of operations. Unvested shares totaled 31,759 and 19,126 as of June 30, 2016 and December 31, 2015, respectively.


10.	Stockholders’ Equity

Common Stock from Primary Offering

For the six months ended June 30, 2016, the Company issued 16.0 million shares of common stock generating gross proceeds of $157.7 million. For the year ended December 31, 2015, the Company issued 53.5 million shares of common stock generating gross proceeds of $534.1 million. From inception through June 30, 2016, the Company issued 100.1 million shares of common stock, generating gross proceeds of $995.7 million.

Distribution Reinvestment Plan

The Company adopted a DRP through which common stockholders may elect to reinvest an amount equal to the distributions declared on their shares in additional shares of the Company’s common stock in lieu of receiving cash distributions. The initial purchase price per share pursuant to the DRP was $9.50. On November 10, 2015, the Company announced that the board of directors, including all of its independent directors, approved and established an estimated value per share of the Company’s common stock. The estimated value per share is based upon the estimated value of the Company’s assets less the estimated value of the Company’s liabilities as of September 30, 2015 (the “Valuation Date”).

Effective November 16, 2015, shares sold pursuant to the DRP are sold at $9.79 per Class A share and $9.25 per Class T share which is approximately 96.25% of the most recent public offering prices for the Class A and Class T shares. Unless the Company is required to do so earlier, the Company currently expects that the next estimated value per share will be based upon assets and liabilities as of December 31, 2016.

No selling commissions or dealer manager fees are paid on shares issued pursuant to the DRP. The board of directors of the Company may amend, suspend or terminate the DRP for any reason upon ten-days’ notice to participants, except that the Company may not amend the DRP to eliminate a participant’s ability to withdraw from the DRP.

For the six months ended June 30, 2016, the Company issued 1.5 million shares of common stock totaling $15.1 million of gross offering proceeds pursuant to the DRP. For the year ended December 31, 2015, the Company issued 2.0 million shares of common stock totaling $19.2 million of gross offering proceeds pursuant to the DRP. From inception through June 30, 2016, the Company issued 4.0 million shares of common stock totaling $38.3 million of gross offering proceeds pursuant to the DRP.

Distributions

Distributions to stockholders are declared quarterly by the board of directors of the Company and are paid monthly based on a daily amount of $0.001917808 per share of Class A common stock and $0.001917808 per share of Class T common stock less the distribution fees that are payable with respect to such Class T Shares, which is equivalent to an annualized distribution amount of $0.70 per share of the Company’s common stock, less the distribution fee on Class T Shares. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution has accrued.

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The following table presents distributions declared for the six months ended June 30, 2016 (dollars in thousands):



	Distributions⁽¹⁾
Period	Cash		DRP		Total
January	$	2,748	$	2,443	$	5,191
February	2,672		2,353		5,025
March	2,960		2,581		5,541
April	2,948		2,579		5,527
May	3,123		2,730		5,853
June	3,098		2,698		5,796
Total	$	17,549	$	15,384	$	32,933

_________________________________________________


(1)	Represents distributions declared for the period, even though such distributions are actually paid to stockholders the month following such period.

Share Repurchase Program

The Company adopted a share repurchase program that may enable stockholders to sell their shares to the Company in limited circumstances (the “Share Repurchase Program”). The Company may not repurchase shares unless a stockholder has held shares for one year. However, the Company may repurchase shares held less than one year in connection with a stockholder’s death or qualifying disability. The Company is not obligated to repurchase shares under the Share Repurchase Program. The Company may amend, suspend or terminate the Share Repurchase Program at its discretion at any time, subject to certain notice requirements. For the six months ended June 30, 2016, the Company repurchased 0.2 million shares totaling $2.3 million pursuant to the Share Repurchase Program. For the year ended December 31, 2015, the Company repurchased 0.2 million shares totaling $2.2 million pursuant to the Share Repurchase Program. The Company funds repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from its DRP. As of June 30, 2016, there were no unfulfilled repurchase requests.


11.	Non-controlling Interests

Operating Partnership

Non-controlling interests include the aggregate limited partnership interests in the Operating Partnership held by limited partners, other than the Company. Income (loss) attributable to the non-controlling interests is based on the limited partners’ ownership percentage of the Operating Partnership. Income (loss) allocated to the Operating Partnership non-controlling interests for the three and six months ended June 30, 2016 and 2015 was de minimis.

Other

Other non-controlling interests represent third-party equity interests in ventures that are consolidated with the Company’s financial statements. Net income (loss) attributable to the other non-controlling interests for the three and six months ended June 30, 2016 was $43,000 and $44,000, respectively. There were no other non-controlling interests during the three and six months ended June 30, 2015.


12.	Fair Value

Fair Value Measurement

The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:


Level 1.	Quoted prices for identical assets or liabilities in an active market.


Level 2.	Financial assets and liabilities whose values are based on the following:

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a)	Quoted prices for similar assets or liabilities in active markets.


b)	Quoted prices for identical or similar assets or liabilities in non-active markets.


c)	Pricing models whose inputs are observable for substantially the full term of the asset or liability.


d)	Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.


Level 3.	Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Determination of Fair Value

The following is a description of the valuation techniques used to measure fair value of assets accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.

PE Investments

The Company accounts for PE Investments at fair value which is determined based on a valuation model using assumptions for the timing and amount of expected future cash flow for income and realization events for the underlying assets in the funds and discount rate. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 of the fair value hierarchy. The Company is not using the NAV (practical expedient) of the underlying funds for purposes of determining fair value.

Real Estate Securities

CRE securities are generally valued using a third-party pricing service or broker quotations. These quotations are not adjusted and are based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy. Certain CRE securities may be valued based on a single broker quote or an internal price which may have less observable pricing, and as such, would be classified as Level 3 of the fair value hierarchy. Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as its knowledge of and experience in the market.

Fair Value Hierarchy

Financial assets recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table presents financial assets that were accounted for at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 by level within the fair value hierarchy (dollars in thousands):



	June 30, 2016 (Unaudited)								December 31, 2015
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
PE Investments, at fair value	$	—	$	—	$	42,559	$	42,559	$	—	$	—	$	54,865	$	54,865
Real estate securities, available for sale	—		72,944		—		72,944		—		17,943		—		17,943

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The following table presents additional information about PE Investments which are measured at fair value on a recurring basis for the six months ended June 30, 2016 and year ended December 31, 2015 for which the Company has used Level 3 inputs to determine fair value (dollars in thousands):



	Six Months Ended			Year Ended
	June 30, 2016 (unaudited)			December 31, 2015
Beginning balance	$	54,865		$	—
Purchases/contributions, net⁽¹⁾⁽²⁾	205			73,318
Distributions	(15,066		)	(24,474		)
Equity in earnings	2,555			6,021
Ending balance	$	42,559		$	54,865

________________________________


(1)	Includes deferred purchase price discount accretion of $166,000 for the six months ended June 30, 2016.


(2)	Includes a deferred purchase price of $13.7 million, net of discount for the year ended December 31, 2015.

For the six months ended June 30, 2016 and year ended December 31, 2015, the Company used a discounted cash flow model to quantify Level 3 fair value measurements on a recurring basis. For the six months ended June 30, 2016 and year ended December 31, 2015, the key unobservable inputs used in this analysis included discount rates with a weighted average of 19.2% and 13.4%, respectively, and timing and amount of expected future cash flow.

Significant increases (decreases) in any one of the inputs described above in isolation may result in a significantly different fair value for the financial assets using such Level 3 inputs.

As of June 30, 2016 and December 31, 2015, the Company had no financial assets and liabilities that were accounted for at fair value on a non-recurring basis.

Fair Value Option

The Company may elect the fair value option for certain of its financial assets or liabilities due to the nature of the instrument. In the case of PE Investments, the Company elected the fair value option because management believes it is a more useful presentation for such investments. The Company determined recording the PE Investments based on the change in fair value of projected future cash flow from one period to another better represents the underlying economics of the respective investment.

Fair Value of Financial Instruments

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

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The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016 (Unaudited)							December 31, 2015
	Principal Amount			Carrying Value		Fair Value		Principal Amount			Carrying Value		Fair Value
Financial assets:⁽¹⁾
Real estate debt investments, net	$	672,039	⁽²⁾	$	672,138	$	698,955	$	863,154	⁽²⁾	$	864,840	$	892,682
Real estate securities, available for sale	114,566			72,944		72,944		25,500			17,943		17,943
Financial liabilities:⁽¹⁾
Credit facilities	$	380,833		$	380,833	$	380,833	$	461,768		$	461,768	$	461,768
Mortgage and other notes payable, net	377,784			375,562		380,220		372,368			369,878		369,602

_____________________________


(1)	The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.


(2)	Excludes future funding commitments of $23.2 million and $46.8 million as of June 30, 2016 and December 31, 2015, respectively.

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

Real Estate Debt Investments

For CRE debt investments, fair value was approximated by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment. Fair value was determined assuming fully-extended maturities regardless of structural or economic tests required to achieve such extended maturities. The fair value of CRE debt investments held for sale is determined based on the expected sales price. These fair value measurements of CRE debt are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy.

Credit Facilities

The Company has amounts outstanding under Term Loan Facilities. The Term Loan Facilities bear floating rates of interest. As of the reporting date, the Company believes the carrying value approximates fair value. This fair value measurement is based on observable inputs, and as such, is classified as Level 2 of the fair value hierarchy.

Mortgage and Other Notes Payable, net

For mortgage and other notes payable, the Company primarily uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using comparable U.S. Treasury rates as of the end of the reporting period or market credit spreads over the rate payable on fixed rate U.S. Treasury of like maturities. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.


13.	Segment Reporting

The Company currently conducts its business through the following four segments, which are based on how management reviews and manages its business:


•	Commercial Real Estate Debt - Focused on originating, acquiring and asset managing CRE debt investments including first mortgage loans, subordinate interests and mezzanine loans and participations in such loans, as well as preferred equity interests.


•	Commercial Real Estate Equity - Focused on direct and indirect ownership in real estate and real estate assets that may be structurally senior to a third-party partner’s equity and indirect interests in real estate through PE Investments since the underlying collateral in the funds is primarily real estate.

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•	Commercial Real Estate Securities - Focused on investing in CMBS, unsecured REIT debt, CDO notes and other securities.


•	Corporate - The corporate segment includes corporate level asset management and other fees - related party and general and administrative expenses.

The Company may also invest in CRE debt investments and equity investments indirectly through joint ventures.

The Company primarily generates revenue from net interest income on its CRE debt and securities investments and rental and other income from its real estate properties. Additionally, the Company records equity in earnings of unconsolidated ventures, including from PE Investments. The Company’s income is primarily derived through the difference between revenue and the cost at which the Company is able to finance its investments. The Company may also acquire investments which generate attractive returns without any leverage.

The following tables present segment reporting for the three and six months ended June 30, 2016 and 2015 (dollars in thousands):



Three Months Ended June 30, 2016	Real Estate Debt			Real Estate Equity			Real Estate Securities			Corporate			Total
Net interest income	$	7,988		$	2		$	758		$	—		$	8,748
Rental and other income	—			10,843			—			—			10,843
Asset management and other fees - related party	—			—			—			(6,086		)	(6,086		)
Mortgage notes interest expense	—			(3,400		)	—			—			(3,400		)
Transaction costs	(1,223		)	—			—			—			(1,223		)
Property operating expenses	—			(3,658		)	—			—			(3,658		)
General and administrative expenses	(82		)	—			(7		)	(227		)	(316		)
Depreciation and amortization	—			(5,438		)	—			—			(5,438		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	6,683			(1,651		)	751			(6,313		)	(530		)
Equity in earnings (losses) of unconsolidated ventures	—			1,262			—			—			1,262
Income tax benefit (expense)	—			(118		)	—			—			(118		)
Net income (loss)	$	6,683		$	(507	)	$	751		$	(6,313	)	$	614



Three Months Ended June 30, 2015	Real Estate Debt			Real Estate Equity			Corporate			Total
Net interest income	$	5,642		$	2		$	8		$	5,652
Rental and other income	—			943			—			943
Asset management and other fees - related party	—			—			(5,223		)	(5,223		)
Mortgage notes interest expense	—			(362		)	—			(362		)
Transaction costs	—			(4,759		)	—			(4,759		)
Property operating expenses	—			(225		)	—			(225		)
General and administrative expenses	(91		)	—			(1,771		)	(1,862		)
Depreciation and amortization	—			(212		)	—			(212		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures	5,551			(4,613		)	(6,986		)	(6,048		)
Equity in earnings (losses) of unconsolidated ventures	—			1,559			—			1,559
Income tax benefit (expense)	—			(163		)	—			(163		)
Net income (loss)	$	5,551		$	(3,217	)	$	(6,986	)	$	(4,652	)

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Six Months Ended June 30, 2016	Real Estate Debt			Real Estate Equity			Real Estate Securities			Corporate			Total
Net interest income	$	22,000		$	4		$	1,474		$	—		$	23,478
Rental and other income	—			21,256			—			—			21,256
Asset management and other fees - related party	—			—			—			(10,718		)	(10,718		)
Mortgage notes interest expense	—			(6,767		)	—			—			(6,767		)
Transaction costs	(1,334		)	(12		)	—			—			(1,346		)
Property operating expenses	—			(6,986		)	—			—			(6,986		)
General and administrative expenses	(190		)	—			(13		)	(3,040		)	(3,243		)
Depreciation and amortization	—			(10,770		)	—			—			(10,770		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	20,476			(3,275		)	1,461			(13,758		)	4,904
Equity in earnings (losses) of unconsolidated ventures	—			2,555			—			—			2,555
Income tax benefit (expense)	—			(222		)	—			—			(222		)
Net income (loss)	$	20,476		$	(942	)	$	1,461		$	(13,758	)	$	7,237



Six Months Ended June 30, 2015	Real Estate Debt			Real Estate Equity			Corporate			Total
Net interest income	$	11,134		$	2		$	8		$	11,144
Rental and other income	—			943			—			943
Asset management and other fees - related party	—			—			(7,330		)	(7,330		)
Mortgage notes interest expense	—			(362		)	—			(362		)
Transaction costs	—			(5,106		)	—			(5,106		)
Property operating expenses	—			(225		)	—			(225		)
General and administrative expenses	(154		)	—			(2,968		)	(3,122		)
Depreciation and amortization	—			(212		)	—			(212		)
Income (loss) before equity in earnings (losses) of unconsolidated ventures	10,980			(4,960		)	(10,290		)	(4,270		)
Equity in earnings (losses) of unconsolidated ventures	—			1,692			—			1,692
Income tax benefit (expense)	—			(169		)	—			(169		)
Net income (loss)	$	10,980		$	(3,437	)	$	(10,290	)	$	(2,747	)

The following table presents total assets by segment as of June 30, 2016 and December 31, 2015 (dollars in thousands):



Total Assets	Real Estate Debt		Real Estate Equity		Real Estate Securities		Corporate⁽¹⁾		Total
June 30, 2016 (Unaudited)	$	722,557	$	499,280	$	73,514	$	368,202	$	1,663,553
December 31, 2015	932,836		514,792		18,015		156,995		1,622,638

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(1)	Includes cash, unallocated receivables and deferred costs and other assets, net.


14.	Subsequent Events

Common Stock from Primary Offering

For the period from July 1, 2016 through August 10, 2016, the Company issued 2.4 million shares of common stock pursuant to its Primary Offering generating gross proceeds of $24.0 million. From inception through August 10, 2016, the Company issued 102.5 million shares of common stock pursuant to its Primary Offering generating gross proceeds of $1.0 billion.

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NORTHSTAR REAL ESTATE INCOME II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Distribution Reinvestment Plan

For the period from July 1, 2016 through August 10, 2016, the Company issued 0.6 million shares of common stock pursuant to the DRP raising proceeds of $5.5 million. As of August 10, 2016, $106.2 million in shares was available to be issued pursuant to the DRP.

Distributions

On August 10, 2016, the board of directors of the Company approved a daily cash distribution of $0.001912568 per share of Class A common stock and $0.001912568 per share of Class T common stock less the distribution fees that are payable with respect to such Class T common stock, for each of the three months ended December 31, 2016. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution was accrued.

NorthStar Realty Purchase of Common Stock

On August 10, 2016, the Company’s board of directors approved the sale of 193,801 shares of the Company’s Class A common stock for $1.8 million to NorthStar Realty, pursuant to the Distribution Support Agreement.

Share Repurchases

From July 1, 2016 through August 10, 2016, the Company repurchased 315,456 shares for a total of $2.9 million or a weighted average price of $9.34 per share under the Share Repurchase Program that enables stockholders to sell their shares to the Company in certain circumstances, including death or a qualifying disability. The Company funds repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from its DRP.

Investment Activity

In July 2016, the Company originated a $39.3 million first mortgage loan, including an unfunded commitment of $5.0 million, secured by a retail property located in Reno, NV. The loan bears interest at 5.30% plus LIBOR, but at no point shall LIBOR be less than 0.45%, resulting in a minimum interest rate of 5.75%. The loan was financed with Loan Facility 3 with $25.7 million drawn on the facility related to the investment.

In August 2016, the Company entered into an agreement with NorthStar Realty, a company managed by the Sponsor, to acquire fund interests in 41 private equity funds for an approximate purchase price of $287.9 million, inclusive of deferred purchase price components expected to be assumed as part of the transaction, and subject to certain adjustments for distributions and contributions from the underlying funds. The Company expects the transaction to close in the third quarter of 2016; however, there is no assurance the Company will consummate the transaction on the contemplated terms, if at all.

In August 2016, the Company paid the Deferred Amount related to PE Investment II of $13.9 million.

The Company has executed a term sheet regarding an approximate $100.0 million preferred equity investment in a $450.3 million net lease industrial real estate portfolio. The Company expects the transaction to close in the third quarter of 2016; however, there is no assurance the Company will enter into a definitive agreement for the transaction on the contemplated terms, if at all.

Credit Facilities

In July 2016, the Company exercised the second of four, one year-extensions available at the Company’s option for Loan Facility 2. All other terms governing the Loan Facility 2 remain substantially the same.

In July 2016, the Company amended the terms of Loan Facility 3, increasing the total potential borrowing capacity under the Loan Facility 3 from $200.0 million to $300.0 million and, subject to certain conditions precedent, extending the maturity of Loan Facility 3 by one year to June 2019. All other terms governing the Loan Facility 3 remain substantially the same.

As of August 10, 2016, the Company had up to $96.3 million of available borrowings under Loan Facility 3.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in Item 1. “Financial Statements” of this report. References to “we,” “us,” or “our’’ refer to NorthStar Real Estate Income II, Inc. and its subsidiaries unless the context specifically requires otherwise.

Introduction

We were formed to originate, acquire and asset manage a diversified portfolio of commercial real estate, or CRE, debt, equity and securities investments predominantly in the United States. CRE debt investments may include first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests. Real estate equity investments include direct ownership in properties, which may be structurally senior to a third-party partner’s equity, as well as indirect interests in real estate through real estate private equity funds, or PE Investments. CRE securities primarily consist of commercial mortgage-backed securities, or CMBS, and may include unsecured real estate investment trust, or REIT, debt, collateralized debt obligation, or CDO, notes and other securities. We may also invest internationally. In addition, we may own investments through joint ventures. We were formed in December 2012 as a Maryland corporation and commenced operations in September 2013. We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with the taxable year ended December 31, 2013. We conduct our operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.

We are externally managed and have no employees. Prior to June 30, 2014, we were managed by an affiliate of NorthStar Realty Finance Corp. (NYSE: NRF), or NorthStar Realty. Effective June 30, 2014, NorthStar Realty spun-off its asset management business into a separate publicly traded company, NorthStar Asset Management Group Inc. (NYSE: NSAM), our Sponsor. Our Sponsor and its affiliates provide asset management and other services to us, NorthStar Realty, NorthStar Realty Europe Corp. (NYSE: NRE), other sponsored public retail-focused companies and any other companies our Sponsor and its affiliates may manage in the future, or collectively the NSAM Managed Companies, both in the United States and internationally. As of June 30, 2016, NSAM has an aggregate of $40.0 billion of assets under management, adjusted for commitments to acquire or sell certain investments by NSAM and the NSAM Managed Companies. Concurrent with the spin-off, affiliates of our Sponsor entered into a new advisory agreement with us and each of the other NSAM Managed Companies. Pursuant to our advisory agreement, NSAM J-NSII Ltd, an affiliate of our Sponsor, or our Advisor, agreed to manage our day-to-day operations on terms substantially similar to those set forth in our prior advisory agreement with NS Real Estate Income Advisor II, LLC, or our Prior Advisor. References to our Prior Advisor herein refer to the services performed by and fees paid and accrued to our Prior Advisor during the period prior to June 30, 2014. The spin-off of NorthStar Realty’s asset management business had no impact on our operations.

In June 2016, our Sponsor announced that it entered into a definitive merger agreement with NorthStar Realty and Colony Capital, Inc. or Colony, providing for the combination of the Sponsor, NorthStar Realty and Colony into a wholly-owned subsidiary of the Sponsor, as the surviving publicly-traded company for the combined organization that, upon and following the effective time of the mergers, will be named Colony NorthStar, Inc. or Colony NorthStar. As a result of the mergers, Colony NorthStar will be an internally-managed equity REIT, with a diversified real estate and investment management platform. In addition, following the mergers, our Advisor and NorthStar Securities, LLC, or our Dealer Manager, will be subsidiaries of Colony NorthStar. This transaction is expected to close in January 2017, subject to customary closing conditions, including regulatory approvals, and approval by our Sponsor’s, NorthStar Realty’s and Colony’s respective shareholders. There is no guarantee this transaction will close on the contemplated terms or within the anticipated timeframe, or at all. We do not expect that this transaction will have a material impact on our operations.

Our primary investment types are as follows:


•	Commercial Real Estate Debt - Our CRE debt investments include first mortgage loans, subordinate interests and mezzanine loans and participations in such loans, as well as preferred equity interests.


•	Commercial Real Estate Equity - Our CRE equity investments include direct and indirect ownership in real estate and real estate assets that may be structurally senior to a third-party partner’s equity and indirect interests in real estate through PE Investments since the underlying collateral in the funds is primarily real estate.


•	Commercial Real Estate Securities - Our CRE securities investments include CMBS and may include unsecured REIT debt, CDO notes and other securities.

We believe that our targeted investment types are complementary to each other due to their overlapping sources of investment opportunities, common reliance on real estate fundamentals and application of similar portfolio management and servicing skills to maximize value and to protect shareholder capital. We believe our Advisor’s platform and experience provide us the flexibility to invest across the real estate capital structure.

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We are offering up to $1,500,000,000 in shares pursuant to our primary offering, or our Primary Offering, to the public. Our shares of common stock may be offered in any combination of the two classes of shares of our common stock: Class A shares and Class T shares. The offering price for the shares in our Primary Offering is $10.1672 per Class A share and $9.6068 per Class T share. We are also offering up to $150,000,000 in any combination of Class A shares and Class T shares pursuant to our distribution reinvestment plan, or DRP, at a purchase price of $9.79 per Class A share and $9.25 per Class T share. Our Primary Offering and our DRP are herein collectively referred to as our Offering.

Our Dealer Manager is responsible for marketing our shares being offered pursuant to our Primary Offering. From inception through August 10, 2016, we raised total gross proceeds of $1.1 billion.

In March 2015, our board of directors determined to extend our Offering for one year to May 2016. In addition, on April 28, 2016, we filed a registration statement on Form S-11 with the U.S. Securities and Exchange Commission, or SEC for a follow-on public offering of up to $200.0 million in shares of our common stock, of which $150.0 million are to be offered pursuant to a primary offering and $50.0 million are to be offered pursuant to a distribution reinvestment plan. In accordance with SEC rules and upon the filing of the follow-on registration statement, our Offering was extended into November 2016, or for such longer period as permitted under applicable laws and regulations unless terminated earlier by our board of directors. The follow-on registration statement has not yet been declared effective by the SEC and there can be no assurance that we will commence the follow-on offering or successfully sell the full number of shares registered. We will not commence sales of our shares to the public pursuant to the follow-on offering until the earlier of (1) the maximum amount has been sold pursuant to our Offering or (2) our Offering has been terminated.

Our Investments

The following table presents our investments as of June 30, 2016, adjusted for acquisitions and commitments to purchase and sell through August 10, 2016 (dollars in thousands):



Investment Type:	Count	Principal Amount / Cost⁽¹⁾		% of Total

Real estate debt investments	Loans
First mortgage loans⁽²⁾	17	$	622,683	35.6	%
Mezzanine loans	1	20,528		1.2	%
Subordinate interests⁽²⁾	4	191,354		10.9	%
Total real estate debt	22	834,565		47.7	%
Real estate equity
Operating real estate	Properties
Industrial	22	335,111		19.2	%
Multi-tenant office	2	137,320		7.8	%
Subtotal	24	472,431		27.0	%
Investments in private equity funds
PE Investment I	1	30,648		1.7	%
PE Investment II⁽³⁾	1	11,911		0.7	%
PE Investment III⁽⁴⁾	1	287,913		16.4	%
Subtotal	3	330,472		18.8	%
Total real estate equity	27	802,903		45.8	%
Real estate securities
CMBS	8	114,566		6.5	%
Total real estate securities	8	114,566		6.5	%
Total	57	$	1,752,034	100.0	%

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(1)	Based on principal amount for real estate debt investments and securities, fair value for our PE Investments and cost for real estate equity, which includes purchase price allocations related to net intangibles, deferred costs and other assets.

(2)

Includes future funding commitments of $16.5 million for first mortgage loans and $11.2 million for subordinate interests. We have executed a term sheet regarding an approximate $100.0 million preferred equity investment in a $450.3 million net lease industrial real estate portfolio. There is no assurance we will enter into a definitive agreement for the transaction on the contemplated terms, if at all.


(3)	Includes a deferred purchase price of $13.9 million, net of discount, which was paid in August 2016.


(4)	In August 2016, we entered into an agreement with NorthStar Realty, a company managed by our Sponsor, to acquire fund interests in 41 private equity funds. There is no assurance we will consummate the transaction on the contemplated terms, if at all.

For financial information regarding our reportable segments, refer to Note 13, “Segment Reporting” in our accompanying consolidated financial statements included in Part I Item I. “Financial Statements.”

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Underwriting Process

We use a rigorous investment and underwriting process that has been developed and utilized by our Advisor’s and its affiliates’ senior management team leveraging their extensive commercial real estate expertise over many years and real estate cycles which focuses on some or all of the following factors designed to ensure each investment is evaluated appropriately: (i) macroeconomic conditions that may influence operating performance; (ii) fundamental analysis of underlying real estate, including tenant rosters, lease terms, zoning, necessary licensing, operating costs and the asset’s overall competitive position in its market; (iii) real estate market factors that may influence the economic performance of the investment, including leasing conditions and overall competition; (iv) the operating expertise and financial strength and reputation of a tenant, operator, partner or borrower; (v) the cash flow in place and projected to be in place over the term of the investment and potential return; (vi) the appropriateness of the business plan and estimated costs associated with tenant buildout, repositioning or capital improvements; (vii) an internal and third-party valuation of a property, investment basis relative to the competitive set and the ability to liquidate an investment through a sale or refinancing; (viii) review of third-party reports including appraisals, engineering and environmental reports; (ix) physical inspections of properties and markets; (x) the overall legal structure of the investment, contractual implications and the lenders’ rights; and (xi) the tax and accounting impact.

The following section describes the major CRE asset classes in which we may invest and actively manage to maximize value and to protect capital.

Commercial Real Estate Debt

Overview

Our CRE debt investment strategy focuses on originating, acquiring and asset managing CRE debt investments, including first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests.

We emphasize direct origination of our debt investments as this allows us a greater degree of control over how they are underwritten and structured and it provides us the opportunity to syndicate some or all of the loans (including senior or subordinate interests), if desired. Further, we believe it facilitates a more direct relationship with our borrowers which helps us maintain a robust pipeline and provides an opportunity for us to earn origination and other fees.

Our Portfolio

As of June 30, 2016, adjusted for acquisitions and commitments to purchase and sell through August 10, 2016, 47.7% of our assets were invested in CRE debt, consisting of 22 loans with an average investment size of $37.9 million. These loans are collateralized by a total of 73 properties. The weighted average extended maturity of our CRE debt portfolio is 4.6 years. Although our current portfolio is predominantly comprised of first mortgage loans, we expect our concentration of mezzanine loans and subordinate interests to increase over time.

The following table presents a summary of our CRE debt investments as of June 30, 2016, adjusted for acquisitions and commitments to purchase and sell through August 10, 2016 (refer to the below and “Recent Developments”) (dollars in thousands):



								Weighted Average						Floating Rate as % of Principal Amount
Investment Type:	Count	Principal Amount⁽¹⁾		Carrying Value⁽²⁾		Allocation by Investment Type⁽³⁾		Fixed Rate		Spread over LIBOR⁽⁴⁾		Total Unleveraged Current Yield		Floating Rate as % of Principal Amount
First mortgage loans	17	$	622,683	$	605,854	74.6	%	—		5.48	%	5.52	%	100.0	%
Mezzanine loans	1	20,528		20,691		2.5	%	14.00	%	—		14.00	%	—
Subordinate interests⁽⁵⁾	4	191,354		179,598		22.9	%	12.62	%	12.96	%	12.73	%	15.9	%
Total/Weighted average	22	$	834,565	$	806,143	100.0	%	12.77	%	5.73	%	7.35	%	78.3	%

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(1)	Includes future funding commitments of $16.5 million for first mortgage loans and $11.2 million for subordinate interests.


(2)	Certain CRE debt investments serve as collateral for financing transactions, including carrying value of $605.9 million for Term Loan Facilities and other notes payable (refer to Note 7, “Borrowings”). The remainder is unleveraged.


(3)	Based on principal amount.


(4)	Includes a fixed minimum LIBOR rate (“LIBOR floor”), as applicable. As of August 10, 2016, we had $472.9 million principal amount of floating-rate loans subject to a LIBOR floor with the weighted average LIBOR floor of 0.27%.


(5)	We have executed a term sheet regarding an approximate $100.0 million preferred equity investment in a $450.3 million net lease industrial real estate portfolio. There is no assurance we will enter into a definitive agreement for the transaction on the contemplated terms, if at all.

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The following charts present our CRE debt portfolio’s diversity across investment type, property type and geographic location based on principal amount:

Real Estate Debt by Investment Type



Real Estate Debt by Property Type		Real Estate Debt by Geographic Location

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(1)	Debt investments collateralized by lodging properties represent 19.5% of our total investment portfolio.

Real Estate Equity

Our real estate equity investment strategy focuses on direct ownership in commercial real estate with an emphasis on properties with stable cash flow, which may be structurally senior to a third-party partner’s equity, and PE Investments, both of which have the potential to appreciate in value and therefore help overcome our upfront fees and expenses. In addition, we may own investments through joint ventures with one or more partners.

Operating Real Estate

Our operating real estate investments are comprised of an industrial and a multi-tenant office portfolio, respectively.

Our industrial portfolio includes net lease properties, which are typically leased to a single tenant. We may also invest in properties that are leased to tenants with us retaining responsibility for certain operating and capital costs. At the end of the lease term, the tenant typically has a right to renew the lease at market rates or to vacate the property with no further ongoing obligation.

Our multi-tenant office portfolio consists of commercial office properties that are well located with strong operating partners which we believe offer both attractive cash flow and returns.

As of June 30, 2016, adjusted for acquisitions and commitments to purchase and sell through August 10, 2016, $472.4 million, or 27.0% of our assets were invested in real estate properties and our portfolio was 94% occupied with a weighted average lease term of 3.6 years.

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The following table presents our real estate property investments as of June 30, 2016, (dollars in thousands):



Property Type	Number of Portfolios	Number of Properties	Amount⁽¹⁾		% of Total		Capacity		Primary Locations
Industrial	1	22	$	335,111	70.9	%	6,697,324	square feet	IN, KY, TN
Multi-tenant Office	1	2	137,320		29.1	%	717,702	square feet	WA
Total	2	24	$	472,431	100.0	%

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(1)	Based on cost which includes purchase price allocations related to deferred costs and other assets.

The following charts present our real estate portfolio’s diversity across property type and geographic location based on cost:



Real Estate by Property Type		Real Estate by Geographic Location

Investments in Private Equity Funds

Our CRE equity investment strategy also includes PE Investments. Our PE Investments own limited partnership interests in real estate private equity funds acquired in the secondary market and are managed by institutional-quality sponsors, which we refer to as fund interests. We classify our PE Investments as equity investments since the underlying collateral in the funds is primarily real estate. We believe the investments provide diversity and have the potential to appreciate in value and therefore help overcome our upfront fees and expenses.

As of June 30, 2016, adjusted for acquisitions and commitments to purchase and sell through August 10, 2016, 18.8% of our assets were invested in PE Investments, totaling $330.5 million.

The following tables present a summary of our PE Investments (dollars in thousands):



							Underlying Fund Interests⁽¹⁾
PE Investment	Number of Funds	Number of General Partners	Initial NAV		Fair Value		Assets, at Cost		Implied Underlying Leverage⁽²⁾	Expected Future Contributions⁽³⁾
PE Investment I	6	4	$	50,233	$	30,648	$	2,684,018	51.7%	$	687
PE Investments II⁽⁴⁾	3	2	29,250		11,911		1,552,310		74.2%	—
PE Investments III⁽⁵⁾	41	20	344,271		287,913		28,113,214		34.2%	—
Total/Weighted Average	50	26	$	423,754	$	330,472	$	32,349,542		$	687

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(1)	Based on financial data reported by the underlying funds as of March 31, 2016, which is the most recent financial information available from the underlying funds, except as otherwise noted.


(2)	Represents implied leverage for funds with investment-level financing, calculated as the underlying borrowing divided by assets at fair value.


(3)	Represents the estimated amount of expected future contributions to funds as of June 30, 2016.


(4)	In August 2015, we paid an initial amount of $9.4 million and in August 2016 we paid the remaining $13.9 million, or 50% of the purchase price, adjusted for subsequent contributions and distributions, or the Deferred Amount.


(5)	In August 2016, we entered into an agreement with NorthStar Realty, a company managed by our Sponsor, to acquire fund interests in 41 private equity funds. There is no assurance we will consummate the transaction on the contemplated terms, if at all.

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PE Investment I	Income		Return of Capital		Distributions		Contributions⁽²⁾		Net
Three Months Ended June 30, 2016	$	957	$	5,368	$	6,325	$	39	$	6,286
March 20, 2015 to June 30, 2016⁽¹⁾	$	6,214	$	15,119	$	21,333	$	45,767	$	(24,434	)
PE Investment II
Three Months Ended June 30, 2016	$	305	$	3,712	$	4,017	$	—	$	4,017
August 4, 2015 to June 30, 2016⁽¹⁾	$	2,362	$	15,845	$	18,207	$	27,788	$	(9,581	)

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(1)	Represents activity from the initial closing date through June 30, 2016.


(2)	Includes initial investment and subsequent contributions

The following charts present the underlying fund interests in our PE Investments by investment type and geographic location based on net asset value, or NAV, as of March 31, 2016:



PE Investments by Underlying Investment Type⁽¹⁾		PE Investments by Underlying Geographic Location⁽¹⁾

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(1)	Based on individual fund financial statements as of March 31, 2016.

Real Estate Securities

Our CRE securities investment strategy may focus on investing in and asset managing a wide range of CRE securities, primarily CMBS, unsecured REIT debt or CDO notes backed primarily by CRE securities and debt. We expect our CRE securities to have explicit credit ratings assigned by at least one of the major rating agencies (Moody’s Investors Services, Standard & Poor’s, Fitch Ratings, Morningstar, DBRS and/or Kroll Bond Rating Agency).

As of June 30, 2016, adjusted for acquisitions and commitments to purchase and sell through August 10, 2016, 6.5% of our assets were invested in CRE securities and consisted of eight CMBS securities totaling $114.6 million purchased at an aggregate $42.3 million discount to par. Of the bonds that are rated, all have a rating of BBB- from Fitch Ratings and Kroll Bond Rating Agency with a weighted average credit support of 8.4%. The bonds are secured by diverse portfolios of mortgage loans with a weighted average loan-to-value, or LTV, of 59.2%. The portfolios are geographically diverse with concentrations in the Northeast, Mid-Atlantic, Southeast, and West regions of the United States and comprise office, retail, multifamily, mixed use, lodging and industrial properties. The bonds were purchased at a weighted average unlevered yield of 10.1%. We may lever the bonds with an existing or new credit facility to enhance the yield.

As of June 30, 2016, adjusted for acquisitions and commitments to purchase and sell through August 10, 2016, the weighted average expected maturity of our CMBS was 7.7 years.

Sources of Operating Revenues and Cash Flows

We primarily generate revenue from net interest income on our CRE debt and securities investments and rental and other income from our real estate properties. Additionally, we record equity in earnings of unconsolidated ventures, including from PE Investments. Our income is primarily derived through the difference between revenue and the cost at which we are able to finance our investments. We may also acquire investments which generate attractive returns without any leverage.

Profitability and Performance Metrics

We calculate Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO, (see “Non-GAAP Financial Measures-Funds from Operations and Modified Funds from Operations” for a description of these metrics), to evaluate the profitability and performance of our business.

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Outlook and Recent Trends

The U.S. economy demonstrated improvement in 2015, which prompted the Federal Reserve in December 2015 to raise the Federal Funds Rate for the first time in nine years. The U.S. economy continues to show strength through the first half of 2016 with less than 5% unemployment and improvement in the housing market. Despite this, concerns still remain regarding low inflation in the United States, a stronger U.S. dollar, oil price instability, slow global growth and increasing international market volatility. Many other global central banks have been easing monetary policy to combat low inflation and stagnant growth and it is unclear when or if the Federal Reserve will further adjust the Federal Funds Rate, especially in light of certain global events described below.

Our business and operations are dependent on the commercial real estate industry generally, which in turn is dependent upon broad economic conditions in the United States, Europe, China and elsewhere. Recently, concerns over the U.S. mortgage market and sustainability of continued growth in the real estate market in the United States have contributed to increased domestic economic uncertainty and the potential for a recessionary environment.

In June 2016, a non-binding referendum was passed in the United Kingdom supporting the exit from the European Union which in turn resulted in considerable instability to global markets and currencies, especially European markets, the U.K.’s economy and the British Pound Sterling. In addition, dramatic political change in the United Kingdom has resulted including the election of a new Prime Minister in July 2016. Much uncertainty remains as to the process for “Brexit” and the long-term impacts to the global, European and British economies. All of the major European banks have been actively easing monetary policy resulting in a very low, and in some cases negative, interest rate environment. This includes The Bank of England which remains poised for further monetary and financial policy action should the U.K.’s economy enter a downturn. Despite the unexpected result of the referendum, markets have generally continued to function properly and in some cases recovered from the initial shock (e.g., U.S. equity markets). The potential for ongoing volatility and uncertainty resulting from “Brexit” may have a significant impact on the overall global economic environment.

CRE fundamentals remain relatively healthy across U.S. property types. Investor demand in 2015 for commercial real estate increased transaction activity and prices as rent and vacancy fundamentals improved across most property sectors. Private capital investment remained aggressive throughout 2015 and, although public markets slowed at the beginning of 2016, continued to remain aggressive in the first half of 2016, leading to continued appreciation in real estate values. However, property price appreciation has slowed and there is speculation that the markets may be entering the late stage of the current real estate cycle and, in certain markets, rent growth and capitalization rate compression has started to slow. In addition, one of the factors that may contribute to periodic volatility in the commercial real estate market is the large amount of maturing commercial real estate debt that may have difficulties being refinanced. Approximately $1.4 trillion of commercial real estate debt in the United States is scheduled to mature through 2018. While there appears to be a supply of available liquidity to satisfy many of these maturities, April and June 2016 were the two lowest private-label CMBS origination months in four years and industry experts estimate a projected total origination volume of approximately $65 billion for 2016 versus volume of $95 billion in 2015. This trend is potentially one symptom that could point to difficulties in the ability of the market to refinance the large amount of maturing real estate debt and may have a negative impact on the overall real estate market.

A return to weak economic conditions in the future, such as those of the credit crisis of 2008, could reduce a tenant’s/operator’s/resident’s/guest’s ability to make payments in accordance with the contractual terms and could weaken demand for companies to lease or occupy new space. To the extent that market rental and occupancy rates weaken, property-level cash flow could be negatively affected, and therefore, reduce our ability to make distributions to stockholders.

Non-traded REIT capital raising was down year over year by 20% in 2014 (with approximately $16 billion in equity raised) and 2015 sales were down 36% year over year compared to 2014. Despite this declining industry trend, our sponsor continued to gain market share with our non-traded REITs having a 7% market share in 2014 increasing to 13% in 2015 despite the overall decline in this market. In April of 2016, the retail industry experienced the implementation of FINRA 15-02 related to disclosure on broker-dealer account statements and the final ruling of the U.S. Department of Labor’s “fiduciary” standard for retirement accounts. Although the final fiduciary rule was more favorable to both sponsors and broker-dealers in the retail industry than initial proposals, the impact of both of these events has been a sharp decline in capital raising in the retail market as evidenced by the overall non-traded REIT capital raising being down 57% through June 2016 compared to the first half of 2015. We anticipate the market improving as it adapts to these changes and we expect our capital raising to continue to gain momentum as we near the closing of our public offering.

Our Strategy

Our primary business objectives are to originate and acquire real estate-related investments, with a focus on CRE debt, that we expect will generate attractive risk-adjusted returns, stable cash flow for distributions and provide downside protection to our stockholders. Some of our CRE debt investments may be considered transitional in nature because the borrower or owner may

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have a business plan to improve the collateral and, as a result, we generally require the borrower to fund interest or other reserves, whether through loan proceeds or otherwise, to support debt service payments and capital expenditures. We, our borrower or owner, and possibly a guarantor, may be required to refill these reserves should they become deficient during the applicable period for any reason. We will seek to realize growth in the value of our real estate equity investments through appreciation and/or by opportunistic sales to maximize value. We believe that our Advisor and its affiliates have a platform that derives a potential competitive advantage from the combination of experience, proven track record of successfully managing public companies, deep industry relationships and market-leading CRE credit underwriting and capital markets expertise which enables us to manage credit risk across our investments as well as to structure and finance our assets efficiently. We believe that our targeted investment types are complementary to each other due to their overlapping sources of investment opportunities, common reliance on CRE fundamentals and ability to apply similar portfolio management and servicing skills to maximize value and to protect capital. We use the net proceeds from our Offering and other financing sources to carry out our primary business objectives of originating and acquiring real estate-related investments.

The following table presents our investment activity for the six months ended June 30, 2016 and from inception through June 30, 2016, adjusted for our acquisitions and commitments through August 10, 2016 (dollars in thousands):



	Six Months Ended				From Inception Through
	June 30, 2016				August 10, 2016
	Count	Principal Amount / Cost⁽¹⁾⁽²⁾			Count	Principal Amount / Cost⁽²⁾⁽³⁾
Real estate debt investments	4	$	85,591		27	$	1,189,594	⁽⁴⁾
Investments in private equity funds	—	—			3	360,746		⁽⁵⁾
Operating real estate	—	5,416		⁽⁶⁾	24	472,432
Real estate securities	5	89,066			8	114,566
Total	9	$	180,073		62	$	2,137,338

________________________


(1)	Includes future funding commitments of $4.2 million for first mortgage loans.


(2)	Based on principal amount for real estate debt investments and securities, fair value at acquisition for our PE Investments and cost for real estate equity, which includes purchase price allocations related to deferred costs and other assets.


(3)	Includes future funding commitments of $16.5 million for first mortgage loans and $11.2 million for subordinate interests.


(4)	We have executed a term sheet regarding an approximate $100.0 million preferred equity investment in a $450.3 million net lease industrial real estate portfolio. There is no assurance we will enter into a definitive agreement for the transaction on the contemplated terms, if at all.

(5)

Includes the Deferred Amount of $13.9 million related to PE Investment II, which was paid in August 2016. In addition, in August 2016, we entered into an agreement with NorthStar Realty, a company managed by our Sponsor, to acquire fund interests in 41 private equity funds. There is no assurance we will consummate the transaction on the contemplated terms, if at all. Excludes contributions related to future funding commitments.


(6)	Represents an additional amount invested in operating real estate.

Financing Strategy

We use asset-level financing as part of our investment strategy and we seek to match-fund our assets and liabilities by having similar maturities and like-kind interest rate benchmarks (fixed or floating) to manage refinancing and interest rate risk and utilize non-recourse liabilities whenever possible. Our Advisor is responsible for managing such financing and interest rate risk on our behalf. We intend to pursue a variety of financing arrangements such as credit facilities, securitization financing transactions, mortgage notes and other term borrowings. We continue to seek and prefer long-term, non-recourse financing, including non mark-to-market financing that may be available through securitization.

Our credit facilities currently include three secured credit facility agreements, or Term Loan Facilities, that provide for an aggregate principal amount of up to $600.0 million to finance the first mortgage loans and senior loan participations secured by commercial real estate and three master repurchase agreements, or CMBS Facilities, to finance the acquisition of CMBS. As of August 10, 2016, we had $375.3 million borrowings outstanding under our Term Loan Facilities, with up to $224.7 million of available borrowings and $32.1 million outstanding under our CMBS Facilities.

Our financing strategy for our debt and securities investments is dependent on our ability to obtain match-funded borrowings at rates that provide a positive net spread, generally using credit facilities and securitization financing transactions.

Although we have a limitation on the maximum leverage for our portfolio, which approximates 75% of the aggregate cost of our investments, including cash and excluding indirect leverage held through our unconsolidated venture investments, before deducting loan loss reserves, other non-cash reserves and depreciation, we do not have a targeted debt-to-equity ratio on an asset-by-asset basis, as we believe the appropriate leverage for the particular assets we finance depends on the specific credit characteristics of each asset. We use leverage for the sole purpose of financing our investments and diversifying our equity and we do not employ leverage to speculate on changes in interest rates. Once we have fully invested the proceeds of our Offering, we expect that our

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financing may approximate 50% of the cost of our investments, although it may exceed this level during our organization and offering stage.

Portfolio Management

Our Advisor and its affiliates maintain a comprehensive portfolio management process that generally includes day-to-day oversight by the portfolio management and servicing team, regular management meetings and an exhaustive quarterly credit review process. These processes are designed to enable management to evaluate and proactively identify asset-specific credit issues and trends on a portfolio-wide basis. For joint venture investments, we may rely on joint venture partners to provide certain asset management, property management and/or other services in managing our joint investments. Nevertheless, we cannot be certain that our Advisor’s review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from investments that are not identified during these credit reviews. The portfolio management team, under the direction of the Investment Committee, uses many methods to actively manage our asset base to preserve our income and capital. Credit risk management is the ability to manage our assets in a manner that preserves principal/cost and income and minimizes credit losses that could decrease income and portfolio value. For CRE investments, frequent re-underwriting and dialogue with borrowers/partners and regular inspections of our collateral and owned properties have proven to be an effective process for identifying issues early. During the quarterly credit review, or more frequently as necessary, investments are put on highly-monitored status and identified for possible loan loss reserves/asset impairment, as appropriate, based upon several factors, including missed or late contractual payments, significant declines in collateral performance and other data which may indicate a potential issue in our ability to recover our invested capital from an investment. Our Advisor uses an experienced portfolio management and servicing team that monitors these factors on our behalf.

Our investments are reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our investments may be impaired or that carrying value may not be recoverable. In conducting these reviews, we consider macroeconomic factors, including real estate sector conditions, together with investment and market specific circumstances among other factors. To the extent an impairment has occurred, the loss will be measured as compared to the carrying amount of the investment. An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due. Additionally, we establish, on a current basis, allowance for future tenant credit losses on unbilled rents receivable based upon an evaluation of the collectability of such amounts.

Each of our debt investments is secured by CRE collateral and requires customized portfolio management and servicing strategies for dealing with potential credit situations. The complexity of each situation depends on many factors, including the number of properties, the type of property, macro and local market conditions impacting supply/demand, cash flow and the financial condition of our collateral and our borrowers’/tenants’ ability to further support the collateral. Further, many of our investments may be considered transitional in nature because the business plan is to re-position, re-develop or otherwise lease-up the property in order to improve the collateral. At the time of origination or acquisition, the underlying property revenues may not be sufficient to support debt service, lease payments or generate positive net operating income. The business plan may necessitate an interest or lease reserve or other reserves, whether through proceeds from our loans, borrowings, offering proceeds or otherwise, to support debt service or lease payments and capital expenditures during the implementation of the business plan. There may also be a requirement for the borrower, tenant, guarantor or us, to refill these reserves should they become deficient during the applicable period for any reason.

As of June 30, 2016, all of our debt investments were performing in accordance with the contractual terms of their governing documents in all material respects. However, there can be no assurance that our investments will continue to perform in accordance with the contractual terms of the governing documents or underwriting and we may, in the future, record loan loss reserves/asset impairment, as appropriate, if required.

Critical Accounting Policies

Principles of Consolidation

Our consolidated financial statements include the accounts of us, our operating partnership, or Operating Partnership, and our consolidated subsidiaries. We consolidate variable interest entities, or VIEs, if any, where we are the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by us. All significant intercompany balances are eliminated in consolidation.

Variable Interest Entities

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an entity is a VIE includes both a qualitative and quantitative analysis. We base the qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. We reassess the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. We determine whether we are the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for us or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to our business activities and the other interests. We reassess the determination of whether we are the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.

We evaluate our investments and financings, including investments in unconsolidated ventures and securitization financing transactions, if any, to determine whether each investment or financing is a VIE. We analyze new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.

Voting Interest Entities

A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If we have a majority voting interest in a voting interest entity, the entity will generally be consolidated. We do not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party or a simple majority vote.

We perform on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.

Investments in Unconsolidated Ventures

A non-controlling, unconsolidated ownership interest in an entity may be accounted for using the equity method, at fair value or the cost method.

Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity’s net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity as a result of preferred returns and allocation formulas, if any, as described in such governing documents. Equity method investments are recognized using a cost accumulation model in which the investment is recognized based on the cost to the investor, which includes acquisition fees. We record as an expense certain acquisition costs and fees associated with consolidated investments deemed to be business combinations and capitalizes these costs for investments deemed to be acquisitions of an asset, including an equity method investment.

We may account for an investment in an unconsolidated entity at fair value by electing the fair value option. We elected the fair value option for PE Investments. We record the change in fair value for our share of the projected future cash flow of such investments from one period to another in equity in earnings (losses) of unconsolidated ventures in the consolidated statements of operations. Any change in fair value attributed to market related assumptions is considered unrealized gain (loss).

We may account for an investment that does not qualify for equity method accounting or for which the fair value option was not elected using the cost method if we determine the investment in the unconsolidated entity is insignificant. Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment.

Fair Value Option

The fair value option provides an election that allows a company to irrevocably elect to record certain financial assets and liabilities at fair value on an instrument-by-instrument basis at initial recognition. We will generally not elect the fair value option for our assets and liabilities. However, we have elected the fair value option for PE Investments. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.

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Real Estate Debt Investments

CRE debt investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium and discount. CRE debt investments that are deemed to be impaired are carried at amortized cost less a loan loss reserve, if deemed appropriate, which approximates fair value. CRE debt investments where we do not have the intent to hold the loan for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or estimated value.

We may syndicate a portion of the CRE debt investments that we originate or sell the CRE debt investments individually. When a transaction meets the criteria for sale accounting, we will no longer recognize the CRE debt investment sold as an asset and will recognize gain or loss based on the difference between the sales price and the carrying value of the CRE debt investment sold. Any related unamortized deferred origination fees, original issue discounts, loan origination costs, discounts or premiums at the time of sale are recognized as an adjustment to the gain or loss on sale, which is included in interest income on the consolidated statement of operations. Any fees received at the time of sale or syndication are recognized as part of interest income.

Operating Real Estate

Operating real estate is carried at historical cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life. We account for purchases of operating real estate that qualify as business combinations using the acquisition method, where the purchase price is allocated to tangible assets such as land, building, improvements and other identified intangibles. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in our consolidated statements of operations.

Real Estate Securities

We classify our CRE securities investments as available for sale on the acquisition date, which are carried at fair value. Unrealized gains (losses) are recorded as a component of accumulated other comprehensive income, or OCI, in our consolidated statements of equity.

Fair Value Measurement

Financial assets and liabilities recorded at fair value on our consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1. Quoted prices for identical assets or liabilities in an active market.

Level 2. Financial assets and liabilities whose values are based on the following:

a) Quoted prices for similar assets or liabilities in active markets.

b) Quoted prices for identical or similar assets or liabilities in non-active markets.

c) Pricing models whose inputs are observable for substantially the full term of the asset or liability.

d) Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.

Level 3. Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Financial assets and liabilities recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as our knowledge and experience of the market.

With respect to valuation for CRE securities, we generally obtain at least one quote from a pricing service or broker. Furthermore, we may use internal pricing models to establish arm’s length prices. Generally, the quote from the pricing service is used to

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determine fair value for the securities. The quotes are not adjusted. The pricing service uses market-based measurements based on valuation techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including prices for similar assets, benchmark yield curves and market corroborated inputs such as contractual terms, discount rates for similar securities and credit (such as credit support and delinquency rates). We believe such broker quote is generally based on a market transaction of comparable securities.

To determine the fair value of CRE securities, we maintain a comprehensive quarterly process that includes a valuation committee comprised of senior members of the investment and accounting teams that is designed to enable management to ensure the prices used are representative of fair value and the instruments are properly classified pursuant to the fair value hierarchy.

Initially, a member of the investment team on the valuation committee reviews the prices at quarter end to ensure current market conditions are fairly presented. The investment team is able to assess these values because they are actively engaged in the market, reviewing bid lists, recent sales and frequently have discussions with various banks and other financial institutions regarding the state of the market. We then perform a variety of analyses to ensure the quotes are in a range which we believe to be representative of fair value and to validate the quotes obtained and used in determining the ultimate value used in the financial statements. At the portfolio level, we evaluate the overall change in fair value versus the overall change in the market. We review significant changes in fair value for individual instruments, both positive and negative, from the prior period. We perform back testing on any securities sold to validate the quotes used for the prior quarter. Where multiple quotes are available, we evaluate any large variance between the high and low price. We obtain any available market data that provides insight into the price through recent or comparable security trades, multiple broker bids and other pertinent information. This data may be available through the pricing service or based on data directly available to us. If as part of any of these processes, we are aware of data which we believe better supports the fair value, we challenge the quote provided by either the pricing service or broker. Any discrepancy identified from our processes are reviewed and resolved. The valuation committee approves the final prices. We believe these procedures are designed to enable us to estimate fair value.

Once we determine fair value of CRE securities, we review to ensure the instrument is properly classified pursuant to the fair value hierarchy consistent with accounting principles generally accepted in the United States, or U.S. GAAP, through our understanding of the valuation methodologies used by the pricing service via discussion with representatives of the pricing service and review of any documentation describing its valuation methodology.

Generally, when fair value is based on the pricing service or multiple broker quotes, we believe, based on our analysis, such quotes are based on observable inputs and are therefore classified as Level 2. Where the price is based on either a single broker quote or an internal pricing model, we generally consider such price to be based on less observable data and therefore classify such instruments as Level 3.

Revenue Recognition

Real Estate Debt Investments

Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in our consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such loan is reclassified to held for sale.

Operating Real Estate

Rental and other income from operating real estate is derived from the leasing of space to various types of tenants. Rental revenue recognition commences when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. The leases are for fixed terms of varying length and generally provide for annual rentals and expense reimbursements to be paid in monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rent recognized over the amount contractually due pursuant to the underlying leases is included in receivables on our consolidated balance sheets. We amortize any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Other income represents revenue from tenant/operator leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by us on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.

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Real Estate Securities

Credit Losses and Impairment on Investments

Real Estate Debt Investments

Loans are considered impaired when, based on current information and events, it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis or more frequently as necessary. Significant judgment of management is required in this analysis. We consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the loan, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each loan is maintained at a level that is determined to be adequate by management to absorb probable losses.

Income recognition is suspended for a loan at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged. As of June 30, 2016, we did not have any impaired CRE debt investments.

Operating Real Estate

Our real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if management’s estimate of the aggregate expected future undiscounted cash flow generated by the property is less than the carrying value. In conducting this review, management considers U.S. macroeconomic factors, real estate sector conditions and asset specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value and recorded in impairment on operating real estate in our consolidated statements of operations.

An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due. Additionally, we establish, on a current basis, an allowance for future tenant credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts.

Real Estate Securities

CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment, or OTTI, as any change in fair value is recorded in our consolidated statements of operations. Realized losses on such securities are reclassified to realized gain (loss) on investments and other as losses occur.

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is accreted back to the amortized cost basis of the security through interest income, while amounts recognized through OCI are amortized over the life of the security with no impact on earnings. CRE securities which are not high-credit quality are considered to have an OTTI if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of OTTI is then bifurcated as discussed above.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers. The accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The effective date of the new revenue standard for us will be January 1, 2018. We are in the process of evaluating the impact, if any, of the update on our consolidated financial position, results of operations and financial statement disclosures.

In February 2015, the FASB issued updated guidance that changes the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. We adopted this guidance in the first quarter 2016 and determined our Operating Partnership is considered a VIE. We are the primary beneficiary of the VIE, the VIE’s assets can be used for purposes other than the settlement of the VIE’s obligations and our partnership interest is considered a majority voting interest. As such, this standard resulted in the identification of additional VIEs, however it did not have a material impact on our consolidated financial position or results of operations.

In January 2016, the FASB issued an accounting update that addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We are currently assessing the impact, if any, of the guidance on our consolidated financial position, results of operations and financial statement disclosures.

In February 2016, the FASB issued an accounting update that requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact, if any, that this guidance will have on our consolidated financial position, results of operations and financial statement disclosures.

In March 2016, the FASB issued guidance which eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The update requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment become qualified for equity method accounting. The update should be applied prospectively upon their effective date to increases in the level of ownership interests or degree of influence that results in the adoption of the equity method. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact, if any, that this guidance will have on our consolidated financial position, results of operations and financial statement disclosures.

In March 2016, the FASB issued guidance which amends several aspects of the accounting for equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We are evaluating the impact, if any, that this guidance will have on our consolidated financial position, results of operations and financial statement disclosures.

In June 2016, the FASB issued guidance which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Additionally, entities will have to disclose significantly more information including information used to track credit quality by year of origination for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. We are evaluating the impact, if any, that this guidance will have on our consolidated financial position, results of operations and financial statement disclosures.

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Results of Operations

Comparison of the Three Months Ended June 30, 2016 to June 30, 2015 (dollars in thousands):



	Three Months Ended June 30,						Increase (Decrease)
	2016			2015			Amount
Net interest income
Interest income	$	11,676		$	7,602		$	4,074
Interest expense	2,928			1,950			978
Net interest income	8,748			5,652			3,096

Property and other revenues
Rental and other income	10,843			943			9,900
Total property and other revenues	10,843			943			9,900

Expenses
Asset management and other fees - related party	6,086			5,223			863
Mortgage notes interest expense	3,400			362			3,038
Transaction costs	1,223			4,759			(3,536		)
Property operating expenses	3,658			225			3,433
General and administrative expenses	316			1,862			(1,546		)
Depreciation and amortization	5,438			212			5,226
Total expenses	20,121			12,643			7,478
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	(530		)	(6,048		)	5,518
Equity in earnings (losses) of unconsolidated ventures	1,262			1,559			(297		)
Income tax benefit (expense)	(118		)	(163		)	45
Net income (loss)	$	614		$	(4,652	)	$	5,266

Net Interest Income

Net interest income is interest income generated on our interest-earning assets less interest expense on our related interest-bearing liabilities.

The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the three months ended June 30, 2016 and 2015. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):



	Three Months Ended June 30,
	2016						2015
	Average Carrying Value⁽¹⁾		Interest Income/ Expense⁽²⁾		WA Yield/ Financing Cost⁽³⁾		Average Carrying Value⁽¹⁾		Interest Income/ Expense⁽²⁾		WA Yield/ Financing Cost⁽³⁾
Interest-earning assets:
CRE debt investments	$	766,727	$	10,797	5.63	%	$	600,637	$	7,592	5.06	%
CRE securities investments	60,219		877		5.83	%	—		—		—
	826,946		11,674		5.65	%	600,637		7,592		5.06	%
Interest-bearing liabilities:
Credit facilities	417,268		2,575		2.47	%	271,338		1,950		2.87	%
Other notes payable	39,868		353		3.54	%	—		—		—
	457,136		2,928		2.56	%	271,338		1,950		2.87	%
Other interest income			2						10
Net interest income			$	8,748					$	5,652

_____________________________________________


(1)	Based on amortized cost for CRE debt and securities investments and principal amount for credit facilities and other notes payable. All amounts are calculated based on quarterly averages.


(2)	Includes the effect of amortization of premium or accretion of discount and deferred fees.


(3)	Calculated as annualized interest income or expense divided by average carrying value.

Interest income increased $4.1 million primarily as a result of the origination or acquisition of 11 CRE debt investments and eight CRE securities investments subsequent to June 30, 2015. Interest expense increased $1.0 million primarily as a result of borrowings

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on our Term Loan Facilities and CMBS Facilities subsequent to June 30, 2015 and related amortization of deferred financing costs. Both the increase in interest income and expense was partially offset by the sale of debt investments during the three months ended June 30, 2016.

Property and Other Revenues

Rental and Other Income

Rental and other income increased $9.9 million as a result of two real estate investment portfolios, acquired in June 2015 and August 2015, respectively.

Expenses

Asset Management and Other Fees - Related Party

Asset management and other fees increased $0.9 million to $6.1 million for the three months ended June 30, 2016. During the three months ended June 30, 2016, we paid disposition fees to our Advisor related to the sale of CRE debt investments. In addition, management fees also increased as result of a higher level of invested assets. During the three months ended June 30, 2015, we paid non-recurring fees related to the acquisition of a real estate investment portfolio acquired in June 2015.

Mortgage Notes Interest Expense

Mortgage notes interest expense increased $3.0 million as a result of mortgage notes obtained in connection with the acquisition of two real estate investment portfolios, acquired in June 2015 and August 2015, respectively.

Transaction Costs

Transaction costs represent costs such as professional fees associated with new investments. Transaction costs for the three months ended June 30, 2016 of $1.2 million are a result of costs associated with the sale of CRE debt investments. Transaction costs for the three months ended June 30, 2015 are a result of the acquisition of a real estate investment portfolio in June 2015 and PE Investments.

Property Operating Expenses

Property operating expenses increased $3.4 million as a result of two real estate investment portfolios, acquired in June 2015 and August 2015, respectively.

General and Administrative Expenses

General and administrative expenses are incurred at the corporate level and include auditing and professional fees, director fees and other costs associated with operating our business which are primarily paid by our Advisor on our behalf in accordance with our advisory agreement. Reimbursements to our Advisor are limited in any given period based on a calculation further detailed in Related Party Arrangements. General and administrative expenses decreased $1.5 million primarily as a result of disposition fees paid to our Advisor during the three months ended June 30, 2016 related to the sale of CRE debt investments, which are included in the calculation for in determining the limit of operating expense allowed for reimbursement. Similar disposition fees were not paid during the three months ended June 30, 2015. Disposition fees are recorded in asset management and other fees - related party.

Depreciation and Amortization

Depreciation and amortization increased $5.2 million as a result of two real estate investment portfolios, acquired in June 2015 and August 2015, respectively.

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) of unconsolidated ventures decreased $0.3 million attributable to earnings from PE Investments.

Income Tax Benefit (Expense)

For the three months ended June 30, 2016 and 2015, income tax expense of $0.1 million and $0.2 million, respectively, was recorded for PE Investment I.

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Comparison of the Six Months Ended June 30, 2016 to June 30, 2015 (dollars in thousands):



	Six Months Ended June 30,						Increase (Decrease)
	2016			2015			Amount
Net interest income
Interest income	$	30,907		$	15,067		$	15,840
Interest expense	7,429			3,923			3,506
Net interest income	23,478			11,144			12,334

Property and other revenues
Rental and other income	21,256			943			20,313
Total property and other revenues	21,256			943			20,313

Expenses
Asset management and other fees - related party	10,718			7,330			3,388
Mortgage notes interest expense	6,767			362			6,405
Transaction costs	1,346			5,106			(3,760		)
Property operating expenses	6,986			225			6,761
General and administrative expenses	3,243			3,122			121
Depreciation and amortization	10,770			212			10,558
Total expenses	39,830			16,357			23,473
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)	4,904			(4,270		)	9,174
Equity in earnings (losses) of unconsolidated ventures	2,555			1,692			863
Income tax benefit (expense)	(222		)	(169		)	(53		)
Net income (loss)	$	7,237		$	(2,747	)	$	9,984

Net Interest Income

Net interest income is interest income generated on our interest-earning assets less interest expense on our related interest-bearing liabilities.

The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the six months ended June 30, 2016 and 2015. Amounts presented have been impacted by the timing of new investments and repayments during the period (dollars in thousands):



	Six Months Ended June 30,
	2016						2015
	Average Carrying Value⁽¹⁾		Interest Income/ Expense⁽²⁾		WA Yield/ Financing Cost⁽³⁾		Average Carrying Value⁽¹⁾		Interest Income/ Expense⁽²⁾		WA Yield/ Financing Cost⁽³⁾
Interest-earning assets:
CRE debt investments	$	799,431	$	29,285	7.33	%	$	567,129	$	15,057	5.31	%
CRE securities investments	46,127		1,618		7.02	%	—		—		—
	845,558		30,903		7.31	%	567,129		15,057		5.31	%
Interest-bearing liabilities:
Credit facilities	432,101		6,724		3.11	%	273,513		3,923		2.87	%
Other notes payable	39,868		705		3.54	%	—		—		—
	471,969		7,429		3.15	%	273,513		3,923		2.87	%
Other interest income			4						10
Net interest income			$	23,478					$	11,144

_____________________________________________


(1)	Based on amortized cost for CRE debt and securities investments and principal amount for credit facilities and other notes payable. All amounts are calculated based on quarterly averages.


(2)	Includes the effect of amortization of premium or accretion of discount and deferred fees.


(3)	Calculated as annualized interest income or expense divided by average carrying value.

Interest income increased $15.8 million primarily as a result of the origination or acquisition of 11 CRE debt investments and eight CRE securities investments subsequent to June 30, 2015 and a non-recurring minimum interest payment upon early repayment

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of a CRE debt investment. Interest expense increased $3.5 million primarily as a result of borrowings on our Term Loan Facilities and CMBS Facilities subsequent to June 30, 2015 and related amortization of deferred financing costs. Both the increase in interest income and expense was partially offset by the sale of debt investments during the three months ended June 30, 2016.

Property and Other Revenues

Rental and Other Income

Rental and other income increased $20.3 million as a result of two real estate investment portfolios, acquired in June 2015 and August 2015, respectively.

Expenses

Asset Management and Other Fees - Related Party

Asset management and other fees increased $3.4 million to $10.7 million for the six months ended June 30, 2016. During the three months ended June 30, 2016, we paid disposition fees to our Advisor related to the sale of CRE debt investments. In addition, management fees also increased as result of a higher level of invested assets. During the three months ended June 30, 2015 we paid non-recurring fees related to the acquisition of a real estate investment portfolio acquired in June 2015.

Mortgage Notes Interest Expense

Mortgage notes interest expense increased $6.4 million as a result of mortgage notes obtained in connection with the acquisition of two real estate investment portfolios acquired in June 2015 and August 2015, respectively.

Transaction Costs

Transaction costs represent costs such as professional fees associated with new investments. Transaction costs for the six months ended June 30, 2016 of $1.3 million are a result of costs associated with the sale of CRE debt investments and debt investment financing activity. Transaction costs for the six months ended June 30, 2015 are a result of the acquisition of a real estate investment portfolio in June 2015 and PE Investments.

Property Operating Expenses

Property operating expenses increased $6.8 million as a result of two real estate investment portfolios, acquired in June 2015 and August 2015, respectively.

General and Administrative Expenses

General and administrative expenses are incurred at the corporate level and include auditing and professional fees, director fees and other costs associated with operating our business which are primarily paid by our Advisor on our behalf in accordance with our advisory agreement. Reimbursements to our Advisor are limited in any given period based on a calculation further detailed in Related Party Arrangements. General and administrative expenses increased $0.1 million primarily as a result of disposition fees paid to our Advisor during the six months ended June 30, 2016 related to the sale of CRE debt investments, which are included in the calculation for in determining the limit of operating expense allowed for reimbursement. Similar disposition fees were not paid during the six months ended June 30, 2015. Disposition fees are recorded in asset management and other fees - related party.

Depreciation and Amortization

Depreciation and amortization increased $10.6 million as a result of two real estate investment portfolios, acquired in June 2015 and August 2015, respectively.

Equity in Earnings (Losses) of Unconsolidated Ventures

Equity in earnings (losses) of unconsolidated ventures increased $0.9 million attributable to earnings from PE Investments.

Income Tax Benefit (Expense)

For the six months ended June 30, 2016 and 2015, income tax expense of $0.2 million was recorded for PE Investment I.

Liquidity and Capital Resources

We require capital to fund our investment activities, operating expenses and to make distributions. We obtain the capital required to acquire and manage our CRE portfolio and conduct our operations from the proceeds of our Offering and any future offerings we may conduct. We may access additional capital from cash flow from operations, net proceeds from asset repayments and sales,

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securitization financing transactions, borrowings under our Credit Facilities, and mortgage notes and other term borrowings. Including commitments to acquire new investments, as of August 10, 2016, we will have deployed current investable cash.

If we are unable to raise more funds in our Offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we have certain fixed direct and indirect operating expenses, including certain expenses as a publicly offered REIT, regardless of whether we are able to raise substantial funds in our Offering. Our inability to raise more funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions.

Our charter limits us from incurring borrowings that would exceed 300% of our net assets. We cannot exceed this limit unless any excess in borrowing over such level is approved by a majority of our independent directors. We would need to disclose any such approval to our stockholders in our next quarterly report along with the justification for such excess. An approximation of this leverage calculation, excluding indirect leverage held through our unconsolidated joint venture investments, is 75% of our assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation and as of June 30, 2016, our leverage was 46%.

In addition to making investments in accordance with our investment objectives, we use our capital resources to make certain payments to our Advisor, our Prior Advisor and our Dealer Manager. During our organization and offering stage, these payments include payments to our Dealer Manager for selling commissions, dealer manager fees, and distribution fees and payments to our Advisor, Prior Advisor or their affiliates, as applicable, for reimbursement of certain organization and offering costs. However, we will not be obligated to reimburse our Advisor, or its affiliates, as applicable, to the extent that the aggregate of selling commissions, dealer manager fees and other organization and offering costs incurred by us exceed 15% of gross proceeds from our Offering. During our acquisition and development stage, we expect to make payments to our Advisor, or its affiliates, as applicable, in connection with the selection and origination or acquisition of investments, the management of our assets and costs incurred by our Advisor in providing services to us. On June 30, 2014, we entered into a new advisory agreement with our Advisor, on terms substantially similar to those set forth in our prior advisory agreement with our Prior Advisor, which has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our Advisor and our board of directors, including a majority of our independent directors. We renewed our advisory agreement with our Advisor on June 30, 2016 for additional one-year terms, with terms identical to those in effect through June 30, 2016.

In March 2015, our board of directors determined to extend our Offering for one year to May 2016. On April 28, 2016, we filed a registration statement on Form S-11 with the SEC to register a follow-on public offering of up to $200.0 million in shares of our common stock, consisting of up to $150.0 million in shares in a follow-on primary offering and up to $50.0 million in shares pursuant to a follow-on distribution reinvestment plan. In accordance with SEC rules and upon the filing of the follow-on registration statement, the Offering was extended into November 2016, or for such longer period as permitted under applicable laws and regulations unless terminated earlier by the Company’s board of directors. The registration statement for the follow-on offering has not yet been declared effective by the SEC.

Credit Facilities

Our credit facilities include three secured Term Loan Facilities and three CMBS Facilities.

Our Term Loan Facilities provide an aggregate principal amount of up to $600.0 million to finance the origination of first mortgage loans and senior loan participations secured by CRE. The interest rates and advance rates depend on asset type and characteristics. Maturity dates of our Term Loan Facilities range from July 2016 to June 2018 and have extensions available at our option with maturity dates ranging from October 2017 to July 2019, subject to the satisfaction of certain customary conditions. In July 2015 and July 2016, we exercised our first and second one-year extensions, respectively, for Loan Facility 3. In July 2016, the Company amended the terms of Loan Facility 3, increasing the total potential borrowing capacity under the Loan Facility 3 from $200.0 million to $300.0 million and, subject to certain conditions precedent, extending the maturity of Loan Facility 3 by 12 months to June 2019.

Our Term Loan Facilities contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. We are currently in compliance with all of our financial covenants under our Term Loan Facilities. As of August 10, 2016, we had up to $224.7 million of available borrowings under our Term Loan Facilities.

In October 2015, January 2016, and April 2016, we entered into master repurchase agreements, or CMBS Facility 1, CMBS Facility 2, and CMBS Facility 3, respectively, and collectively the CMBS Facilities, to finance CMBS investments. The CMBS facilities are on a recourse basis and contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. The advance rates and maturity dates of our CMBS Facilities depend on asset type.

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Cash Flows

The following table presents a summary of our consolidated statements of cash flows for the six months ended June 30, 2016 and 2015 (dollars in thousands):



	Six Months Ended June 30,
Cash flow provided by (used in):	2016		2015			Change
Operating activities	$	14,658	$	(1,233	)	$	15,891
Investing activities	146,395		(508,265		)	654,660
Financing activities	50,765		540,641			(489,876		)
Net change in cash	$	211,818	$	31,143		$	180,675

Six Months Ended June 30, 2016 Compared to June 30, 2015

Operating Activities

Our cash flows from operating activities depends on numerous factors including the changes to net interest income and net operating income generated from our investments, distributions from PE Investments, fees paid to our Advisor for the management of our investments, transaction costs on new investments, and general and administrative expenses. Our net cash provided by operating activities increased by $15.9 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily as a result of increased invested assets generating higher net interest income, net operating income, and equity in earnings.

Investing Activities

Our cash flows from investing activities is generally used to fund debt investment originations and investment acquisitions, net of proceeds received from dispositions or repayments of real estate assets. Our net cash provided by investing activities increased by $654.7 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Cash flows provided by in investing activities for the six months ended June 30, 2016 was primarily a result of CRE debt investment sales and repayments as well as distributions received from PE Investments, partially offset by new investment activity, including CRE debt and securities. Cash flows used in investing activities for the six months ended June 30, 2015 was primarily a result of acquiring and originating investments, including an operating real estate portfolio, PE Investment, and CRE debt investments, partially offset by CRE debt investment repayments.

Financing Activities

Our cash flows from financing activities is principally impacted by our capital raising activities, net of distributions paid on common stock and borrowings credit facilities and mortgage notes payable. Our net cash provided by financing activities decreased by $489.9 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily as a result of lower net proceeds from the issuance of shares of our common stock through our Offering, repayments of borrowings, net of new borrowings, and an increase in distributions paid.

Off-Balance Sheet Arrangements

As of June 30, 2016, we had no off-balance sheet arrangements. We have certain arrangements which do not meet the definition of off-balance sheet arrangements, but do have some of the characteristics of off-balance sheet arrangements. We have made investments in unconsolidated ventures. Refer to “Note 5, Investments in Private Equity Funds” in Item 1. “Financial Statements” for a discussion of such unconsolidated ventures in our consolidated financial statements. In each case, our exposure to loss is limited to the carrying value of our investment.

Related Party Arrangements

Advisor

Subject to certain restrictions and limitations, our Advisor is responsible for managing our affairs on a day-to-day basis and for identifying, originating, acquiring and asset managing investments on our behalf. Our Advisor may delegate certain of its obligations to affiliated entities, which may be organized under the laws of the United States or foreign jurisdictions. References to our Advisor include our Advisor and any such affiliated entities. For such services, to the extent permitted by law and regulations, our Advisor receives fees and reimbursement from us. Below is a description and table of the fees and reimbursements incurred to our Advisor.

In June 2016, our advisory agreement was renewed for an additional one-year term commencing on June 30, 2016, with terms identical to those in effect through June 30, 2016.

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Fees to Advisor

Asset Management Fee

Our Advisor receives a monthly asset management fee equal to one-twelfth of 1.25% of the sum of the amount funded or allocated for CRE investments, including expenses and any financing attributable to such investments, less any principal received on debt and securities investments (or our proportionate share thereof in the case of an investment made through a joint venture).

Incentive Fee

Our Advisor is entitled to receive distributions equal to 15.0% of our net cash flows, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus a 7.0% cumulative, non-compounded annual pre-tax return on such invested capital.

Acquisition Fee

Our Advisor also receive fees for providing structuring, diligence, underwriting advice and related services in connection with real estate acquisitions equal to 1.0% of the amount funded or allocated by us to originate or acquire investments, including acquisition costs and any financing attributable to such investments (or our proportionate share thereof in the case of an investment made through a joint venture). A fee paid to our Advisor in connection with or related to the origination or acquisition of CRE debt investments is included in CRE debt investments, net on our consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method. An acquisition fee incurred related to an equity investment will generally be expensed as incurred. A fee paid to our Advisor in connection with an acquisition of an equity or debt investment in an unconsolidated joint venture is included in investments in unconsolidated ventures on our consolidated balance sheets.

Disposition Fee

For substantial assistance in connection with the sale of investments and based on the services provided, as determined by our independent directors, our Advisor, or its affiliates, receives a disposition fee up to 1.0% of the contract sales price of each CRE investment sold. We do not pay a disposition fee upon the maturity, prepayment, workout, modification or extension of a CRE debt investment unless there is a corresponding fee paid by our borrower, in which case the disposition fee is the lesser of: (i) 1.0% of the principal amount of the CRE debt investment prior to such transaction; or (ii) the amount of the fee paid by our borrower in connection with such transaction. If we take ownership of a property as a result of a workout or foreclosure of a CRE debt investment, we will pay a disposition fee upon the sale of such property. A disposition fee from the sale of a CRE investment is generally expensed and included in asset management and other fees - related party in our consolidated statements of operations. A disposition fee for a CRE debt investment incurred in a transaction other than a sale is included in CRE debt investments, net on our consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method.

Reimbursements to Advisor

Operating Costs

Our Advisor is entitled to receive reimbursement for direct and indirect operating costs incurred by our Advisor in connection with administrative services provided to us. Our Advisor allocates, in good faith, indirect costs to us related to our Advisor’s and its affiliates’ employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the advisory agreement with our Advisor. The indirect costs include our allocable share of our Advisor’s compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing our affairs, based upon the percentage of time devoted by such personnel to our affairs. The indirect costs also include rental and occupancy, technology, office supplies travel and entertainment and other general and administrative costs and expenses. However, there is no reimbursement for personnel costs related to executive officers (although there may be reimbursement for certain executive officers of our Advisor) and other personnel involved in activities for which our Advisor receives an acquisition fee or a disposition fee. Our Advisor allocates these costs to us relative to its and its affiliates’ other managed companies in good faith and has reviewed the allocation with our board of directors, including its independent directors. Our Advisor will update the board of directors on a quarterly basis of any material changes to the expense allocation and will provide a detailed review to the board of directors, at least annually, and as otherwise requested by the board of directors. We reimburse our Advisor quarterly for operating costs (including the asset management fee) based on a calculation for the four preceding fiscal quarters not to exceed the greater of: (i) 2.0% of our average invested assets; or (ii) 25.0% of our net income determined without reduction for any additions to reserves for depreciation, loan losses or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Notwithstanding the above, we may reimburse our Advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. We calculate the expense reimbursement quarterly based upon the trailing twelve-month period.

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Organization and Offering Costs

Our Advisor is entitled to receive reimbursement for organization and offering costs paid on behalf of us in connection with our Offering. We are obligated to reimburse our Advisor as applicable, for organization and offering costs to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs do not exceed 15.0% of gross proceeds from our Offering. Our Advisor does not expect reimbursable organization and offering costs, excluding selling commissions and dealer manager fees, to exceed $15.0 million, or 1.0% of the total proceeds available to be raised from our Primary Offering. We shall not reimburse our Advisor for any organization and offering costs that our independent directors determine are not fair and commercially reasonable to us.

Dealer Manager

Selling Commissions, Dealer Manager Fees, and Distribution Fees

Pursuant to a dealer manager agreement, we pay the Dealer Manager, selling commissions of up to 7.0% of gross proceeds from the sale of Class A shares and up to 2.0% of the gross proceeds from the sale of Class T shares sold in our Primary Offering, all of which are reallowed to participating broker-dealers. We pay the Dealer Manager a dealer manager fee of up to 3.0% of gross proceeds from the sale of Class A shares and up to 2.75% of the gross proceeds from the sale of Class T shares sold in our Primary Offering, a portion of which is typically reallowed to participating broker-dealers and paid to certain employees of the Dealer Manager.

In addition, we pay the Dealer Manager, a distribution fee of up to 1.0% annually of gross proceeds from the sale of Class T shares sold in our Primary Offering, all of which is available to be reallowed to participating broker-dealers. The Dealer Manager will cease receiving distribution fees with respect to each Class T share upon the earliest to occur of the following: (i) a listing of our shares of common stock on a national securities exchange; (ii) such Class T share is no longer outstanding; (iii) the Dealer Manager’s determination that total underwriting compensation, with respect to all Class A shares and Class T shares would be in excess of 10% of the gross proceeds of our Primary Offering; or (iv) the end of the month in which total underwriting compensation, with respect to the Class T shares held by a stockholder within his or her particular account would be in excess of 10% of the stockholder’s total gross investment amount at the time of purchase of the primary Class T shares held in such account.

During the six months ended June 30, 2016, $4.6 million of distribution fees were recorded as a reduction to stockholders’ equity. As of June 30, 2016, the estimated liability for the present value of the expected future distribution fees payable to the Dealer Manager, which is included in due to related party on our consolidated balance sheets, with an offset to additional paid-in capital, was $4.3 million. We began issuing Class T shares in October 2015 and during the second quarter of 2016, recorded the estimated liability for future distribution fees payable related to all outstanding Class T shares. As of December 31, 2015, the estimated liability was immaterial.

No selling commissions, dealer manager fees, or distribution fees are paid for sales pursuant to our DRP or our distribution support agreement, or our Distribution Support Agreement.

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Summary of Fees and Reimbursements

The following table presents the fees and reimbursements incurred to our Advisor and our Dealer Manager for the six months ended June 30, 2016 and 2015 and the amount due to related party as of June 30, 2016 and December 31, 2015 (dollars in thousands):



		Three Months Ended June 30,				Six Months Ended June 30,				Due to Related Party as of
Type of Fee or Reimbursement	Financial Statement Location	2016		2015		2016		2015		June 30, 2016		December 31, 2015
Fees to Advisor
Asset management	Asset management and other fees - related party	$	3,963	$	2,001	$	8,595	$	3,709	$	—	$	1
Acquisition⁽¹⁾	Real estate debt investments, net / Asset management and other fees- related party	216		4,456		848		5,275		—		—
Disposition⁽¹⁾	Real estate debt investments, net / Asset management and other fees - related party	2,123		20		2,753		275		—		19
Reimbursements to Advisor
Operating costs⁽³⁾	General and administrative expenses	179		1,705		2,925		2,824		—		1
Organization	General and administrative expenses	—		49		—		106		—		—
Offering	Cost of capital⁽²⁾	1,343		927		1,963		2,010		495		524
Selling commissions / Dealer manager fees / Distribution fees	Cost of capital⁽²⁾	9,149		15,637		15,485		33,171		4,345		8
Total		$	16,973	$	24,795	$	32,569	$	47,370	$	4,840	$	553

______________________________

(1)

Acquisition/disposition fees incurred to our Advisor related to CRE debt investments are generally offset by origination/exit fees paid to us by borrowers if such fees are required from the borrower. Acquisition fees related to equity investments are included in asset management and other fees - related party in our consolidated statements of operations. Our Advisor may determine to defer fees or seek reimbursement. From inception through June 30, 2016, our Advisor deferred $0.7 million of acquisition fees related to CRE securities.


(2)	Cost of capital is included in net proceeds from issuance of common stock in our consolidated statements of equity.


(3)	As of June 30, 2016, our Advisor has incurred unreimbursed operating costs on our behalf of $13.9 million, that remain eligible to allocate to us.

NorthStar Realty Purchase of Common Stock

Pursuant to our Distribution Support Agreement, NorthStar Realty committed to purchase up to an aggregate of $10.0 million in shares of our common stock at a current offering price for Class A shares, net of selling commissions and dealer manager fees, if cash distributions exceed MFFO to provide additional funds to support distributions to stockholders. As of June 30, 2016, including the purchase of shares to satisfy the minimum offering requirement, NorthStar Realty purchased 448,485 Class A shares of our common stock for $4.0 million with $6.0 million remaining outstanding under such commitment.

In March 2015, NorthStar Realty and our board of directors amended and restated our Distribution Support Agreement to, among other things, extend the term of our Distribution Support Agreement for one year to May 2016. In April 2016, our board of directors further amended and restated the Distribution Support Agreement to extend the term of the Distribution Support Agreement for the period ending upon the termination of our Offering.

Related Party Investment Activity

In February 2016, we purchased a 51.0% interest in a mezzanine loan for $20.5 million at par and CMBS with a face value of $48.2 million at a discount to par of $21.3 million, from NorthStar Realty, a company managed by our Sponsor. The mezzanine loan purchase was in conjunction with a third party purchase of the remaining interest and bears interest at a fixed rate of 14.0%. The loan is secured by a to-be-completed multifamily property located in Queens, NY. The bond was purchased with an unlevered yield of 16.5%. As of purchase date, the weighted average expected maturity of the CMBS was 5.3 years. The purchases were approved by our board of directors, including all of its independent directors.

Recent Developments

Common Stock from Primary Offering

For the period from July 1, 2016 through August 10, 2016, we issued 2.4 million shares of common stock pursuant to our Primary

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Offering generating gross proceeds of $24.0 million. From inception through August 10, 2016, we issued 102.5 million shares of common stock pursuant to our Primary Offering generating gross proceeds of $1.0 billion.

Distribution Reinvestment Plan

For the period from July 1, 2016 through August 10, 2016, we issued 0.6 million shares of common stock pursuant to the DRP raising proceeds of $5.5 million. As of August 10, 2016, $106.2 million in shares was available to be issued pursuant to the DRP.

Distributions

On August 10, 2016, our board of directors approved a daily cash distribution of $0.001912568 per share of Class A common stock and $0.001912568 per share of Class T common stock less the distribution fees that are payable with respect to such Class T common stock, for each of the three months ended December 31, 2016. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution was accrued.

NorthStar Realty Purchase of Common Stock

Share Repurchases

From July 1, 2016 through August 10, 2016, we repurchased 315,456 shares for a total of $2.9 million or a weighted average price of $9.34 per share under a share repurchase program, or our Share Repurchase Program, that enables stockholders to sell their shares to us in certain circumstances, including death or a qualifying disability. We fund repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from our DRP.

Investment Activity

In July 2016, we originated a $39.3 million first mortgage loan, including an unfunded commitment of $5.0 million, secured by a retail property located in Reno, NV. The loan bears interest at 5.30% plus LIBOR, but at no point shall LIBOR be less than 0.45%, resulting in a minimum interest rate of 5.75%. The loan was financed with Loan Facility 3 with $25.7 million drawn on the facility related to the investment.

In August 2016, we entered into an agreement with NorthStar Realty, a company managed by the Sponsor, to acquire fund interests in 41 private equity funds for an approximate purchase price of $287.9 million, inclusive of deferred purchase price components expected to be assumed as part of the transaction, and subject to certain adjustments for distributions and contributions from the underlying funds. We expect the transaction to close in the third quarter of 2016; however, there is no assurance we will consummate the transaction on the contemplated terms, if at all.

In August 2016, we paid the Deferred Amount related to PE Investment II of $13.9 million.

We have executed a term sheet regarding an approximate $100.0 million preferred equity investment in a $450.3 million net lease industrial real estate portfolio. We expect the transaction to close in the third quarter of 2016; however, there is no assurance we will enter into a definitive agreement for the transaction on the contemplated terms, if at all.

Including commitments to acquire new investments, as of August 10, 2016, we will have deployed current investable cash.

Credit Facilities

In July 2016, we exercised the second of four, one year-extensions available at our option for Loan Facility 2. All other terms governing the Loan Facility 2 remain substantially the same.

In July 2016, we amended the terms of Loan Facility 3, increasing the total potential borrowing capacity under the Loan Facility 3 from $200.0 million to $300.0 million and, subject to certain conditions precedent, extending the maturity of Loan Facility 3 by one year to June 2019. All other terms governing the Loan Facility 3 remain substantially the same.

As of August 10, 2016, we had up to $96.3 million of borrowings available under Loan Facility 3.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance significantly more than inflation does. A change in interest rates may correlate with the inflation rate.

Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for additional details.

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Non-GAAP Financial Measures

Funds from Operations and Modified Funds from Operations

We believe that FFO and MFFO, both of which are non-GAAP measures, are additional appropriate measures of the operating performance of a REIT and of us in particular. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income (loss) (computed in accordance with U.S. GAAP), excluding gains (losses) from sales of depreciable property, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, impairment on depreciable property owned directly or indirectly and after adjustments for unconsolidated ventures.

Changes in the accounting and reporting rules under U.S. GAAP that have been put into effect since the establishment of NAREIT’s definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. For instance, the accounting treatment for acquisition fees related to business combinations has changed from being capitalized to being expensed. Additionally, publicly registered, non-traded REITs are typically different from traded REITs because they generally have a limited life followed by a liquidity event or other targeted exit strategy. Non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation as compared to later years when the proceeds from their initial public offering have been fully invested and when they may seek to implement a liquidity event or other exit strategy. However, it is likely that we will make investments past the acquisition and development stage, albeit at a substantially lower pace.

Acquisition fees paid to our Advisor in connection with the origination and acquisition of debt investments are amortized over the life of the investment as an adjustment to interest income under U.S. GAAP and are therefore included in the computation of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense), both of which are performance measures under U.S. GAAP. We adjust MFFO for the amortization of acquisition fees in the period when such amortization is recognized under U.S. GAAP. Acquisition fees are paid in cash that would otherwise be available to distribute to our stockholders. In the event that proceeds from our Offering are not sufficient to fund the payment or reimbursement of acquisition fees and expenses to our Advisor, such fees would be paid from other sources, including new financing, operating cash flow, net proceeds from the sale of investments or from other cash flow. We believe that acquisition fees incurred by us negatively impact our operating performance during the period in which such investments are originated or acquired by reducing cash flow and therefore the potential distributions to our stockholders. However, in general, we earn origination fees for debt investments from our borrowers in an amount equal to the acquisition fees paid to our Advisor, and as a result, the impact of acquisition fees to our operating performance and cash flow would be minimal.

Acquisition fees and expenses paid to our Advisor and third parties in connection with the acquisition of equity investments are generally considered expenses and are included in the determination of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense), both of which are performance measures under U.S. GAAP. Such fees and expenses will not be reimbursed by our Advisor or its affiliates and third parties, and therefore, if there are no further proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operating earnings, cash flow or net proceeds from the sale of investments or properties. All paid and accrued acquisition fees and expenses will have negative effects on future distributions to stockholders and cash flow generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.

The origination and acquisition of debt investments and the corresponding acquisition fees paid to our Advisor (and any offsetting origination fees received from our borrowers) associated with such activity is a key operating feature of our business plan that results in generating income and cash flow in order to make distributions to our stockholders. Therefore, the exclusion for acquisition fees may be of limited value in calculating operating performance because acquisition fees affect our overall long-term operating performance and may be recurring in nature as part of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense) over our life.

Due to certain of the unique features of publicly-registered, non-traded REITs, the Investment Program Association, or the IPA, an industry trade group, standardized a performance measure known as MFFO and recommends the use of MFFO for such REITs. Management believes MFFO is a useful performance measure to evaluate our business and further believes it is important to disclose MFFO in order to be consistent with the IPA recommendation and other non-traded REITs. MFFO that adjusts for items such as acquisition fees would only be comparable to non-traded REITs that have completed the majority of their acquisition activity and have other similar operating characteristics as us. Neither the SEC, nor any other regulatory body has approved the acceptability of the adjustments that we use to calculate MFFO. In the future, the SEC or another regulatory body may decide to standardize permitted adjustments across the non-listed REIT industry and we may need to adjust our calculation and characterization of MFFO.

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MFFO is a metric used by management to evaluate our future operating performance once our organization and offering and acquisition and development stages are complete and is not intended to be used as a liquidity measure. Although management uses the MFFO metric to evaluate future operating performance, this metric excludes certain key operating items and other adjustments that may affect our overall operating performance. MFFO is not equivalent to net income (loss) as determined under U.S. GAAP. In addition, MFFO is not a useful measure in evaluating net asset value, or NAV, since an impairment is taken into account in determining NAV but not in determining MFFO.

We define MFFO in accordance with the concepts established by the IPA and adjust for certain items, such as accretion of a discount and amortization of a premium on borrowings and related deferred financing costs, as such adjustments are comparable to adjustments for debt investments and will be helpful in assessing our operating performance. We also adjust MFFO for the non-recurring impact of the non-cash effect of deferred income tax benefits or expenses, as applicable, as such items are not indicative of our operating performance. Similarly, we adjust for the non-cash effect of unrealized gains or losses on unconsolidated ventures. Our computation of MFFO may not be comparable to other REITs that do not calculate MFFO using the same method. MFFO is calculated using FFO. FFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company’s operating performance. The IPA’s definition of MFFO excludes from FFO the following items:


•	acquisition fees and expenses;


•	non-cash amounts related to straight-line rent and the amortization of above or below market and in-place intangible lease assets and liabilities (which are adjusted in order to reflect such payments from an accrual basis of accounting under U.S. GAAP to a cash basis of accounting);


•	amortization of a premium and accretion of a discount on debt investments;


•	non-recurring impairment of real estate-related investments that meet the specified criteria identified in the rules and regulations of the SEC;


•	realized gains (losses) from the early extinguishment of debt;


•	realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business;


•	unrealized gains (losses) from fair value adjustments on real estate securities, including CMBS and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings;


•	unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting;


•	adjustments related to contingent purchase price obligations; and


•	adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above.

Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.

MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves/impairment on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. With respect to debt investments, we consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business. Fair value is typically estimated based on discounting expected future cash flow of the underlying collateral taking into consideration the discount rate, capitalization rate, occupancy, creditworthiness of major tenants and many other factors. This requires significant judgment and because it is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If the estimated fair value of the underlying collateral for the debt investment is less than its net carrying value, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. With respect to a real estate investment, a property’s value is considered impaired if our estimate of the aggregate future undiscounted cash flow to be generated by the property is less than the carrying value of the property. The value of our investments may be impaired and their carrying values may not be recoverable due to our limited life. Investors should note that while impairment charges are excluded from the calculation of MFFO, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flow and the relatively limited term of a non-traded REIT’s anticipated operations, it could be difficult to recover any impairment charges through operational net revenues or cash flow prior to any liquidity event.

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We believe that MFFO is a useful non-GAAP measure for non-traded REITs. It is helpful to management and stockholders in assessing our future operating performance once our organization and offering and acquisition and development stages are complete, because it eliminates from net income non-cash fair value adjustments on our real estate securities and acquisition fees and expenses that are incurred as part of our investment activities. However, MFFO may not be a useful measure of our operating performance or as a comparable measure to other typical non-traded REITs if we do not continue to operate in a similar manner to other non-traded REITs, including if we were to extend our acquisition and development stage or if we determined not to pursue an exit strategy.

However, MFFO does have certain limitations. For instance, the effect of any amortization or accretion on debt investments originated or acquired at a premium or discount, respectively, is not reported in MFFO. In addition, realized gains (losses) from acquisitions and dispositions and other adjustments listed above are not reported in MFFO, even though such realized gains (losses) and other adjustments could affect our operating performance and cash available for distribution. Stockholders should note that any cash gains generated from the sale of investments would generally be used to fund new investments. Any mark-to-market or fair value adjustments may be based on many factors, including current operational or individual property issues or general market or overall industry conditions.

We typically purchase CMBS at a premium or discount to par value, and in accordance with U.S. GAAP, record the amortization of premium/accretion of the discount to interest income (the “CMBS effective yield”). We believe that reporting the CMBS effective yield in MFFO provides better insight to the expected contractual cash flows and is more consistent with our review of operating performance.

Neither FFO nor MFFO is equivalent to net income (loss) or cash flow provided by operating activities determined in accordance with U.S. GAAP and should not be construed to be more relevant or accurate than the U.S. GAAP methodology in evaluating our operating performance. Neither FFO nor MFFO is necessarily indicative of cash flow available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Furthermore, neither FFO nor MFFO should be considered as an alternative to net income (loss) as an indicator of our operating performance.

The following table presents a reconciliation of net income (loss) attributable to common stockholders to FFO and MFFO attributable to common stockholders (dollars in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015⁽¹⁾			2016			2015⁽¹⁾
Funds from operations:
Net income (loss) attributable to NorthStar Real Estate Income II, Inc. common stockholders	571			$	(4,652	)	$	7,193		$	(2,747	)
Adjustments:
Depreciation and amortization	5,438			212			10,770			212
Depreciation and amortization related to non-controlling interests	(86		)	—			(109		)	—
FFO attributable to NorthStar Real Estate Income II, Inc. common stockholders	5,923			$	(4,440	)	$	17,854		$	(2,535	)

Modified funds from operations:
FFO attributable to NorthStar Real Estate Income II, Inc. common stockholders	5,923			$	(4,440	)	$	17,854		$	(2,535	)
Adjustments:
Amortization of premiums, discounts and fees on investments and borrowings, net	883			323			1,612			620
Acquisition fees and transaction costs on investments	1,223			7,981			1,346			8,727
Straight-line rental (income) loss	(367		)	(19		)	(488		)	(19		)
Amortization of capitalized above/below market leases	124			—			246			—
Other non-cash adjustments	(520		)	—			(128		)	—
Adjustments related to non-controlling interests	(6		)	—			(19		)	—
MFFO attributable to NorthStar Real Estate Income II, Inc. common stockholders	$	7,260		$	3,845		$	20,423		$	6,793

______________________________

(1) Prior periods have been adjusted to conform to current period presentations.

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Distributions Declared and Paid

We generally pay distributions on a monthly basis based on daily record dates. From the commencement of our operations on September 18, 2013 through June 30, 2016, we paid distributions at an annualized distribution amount of $0.70, less distribution fees on our Class T Shares. Distributions are generally paid to stockholders on the first business day of the month following the month for which the distribution has accrued.

The following table presents distributions declared for the six months ended June 30, 2016 and year ended December 31, 2015 (dollars in thousands):



	Six Months Ended June 30, 2016				Year Ended December 31, 2015
Distributions⁽¹⁾
Cash	$	17,549			$	22,757
DRP	15,384				20,744
Total	$	32,933			$	43,501

Sources of Distributions⁽¹⁾
Funds from Operations⁽²⁾	$	17,854	55	%	$	6,385	15	%

Offering Proceeds - Distribution support	1,773		5	%	962		2	%
Offering proceeds	13,306		40	%	36,154		83	%
Total	$	32,933	100	%	$	43,501	100	%

Cash Flow Provided by (Used in) Operations	$	14,658			$	11,978

________________________________________________


(1)	Represents distributions declared for such period, even though such distributions are actually paid to stockholders the month following such period.


(2)	For the period from the date of our first investment on September 18, 2013 through June 30, 2016, we declared $87.0 million in distributions, of which 32% was paid from FFO, 64% was paid from offering proceeds and 4% was paid from distribution support proceeds. Cumulative FFO for the period from September 18, 2013 through June 30, 2016 was $27.4 million.

Distributions in excess of our cash flow provided by operations were paid using Offering proceeds, including from the purchase of additional shares by NorthStar Realty. Over the long-term, we expect that our distributions will be paid entirely from cash flow provided by operations. However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial performance of our investments in the current real estate and financial environment, the type and mix of our investments and accounting of our investments in accordance with U.S. GAAP. Future distributions declared and paid may exceed cash flow provided by operations. To the extent distributions are paid from sources other than FFO, the ownership interest of our public stockholders will be diluted.

As of August 10, 2016, our portfolio generated a 13.2% current yield on invested equity before expenses and excluding uninvested cash. There is no assurance we will realize the expected returns on invested equity over the term of these investments. Our actual return on invested equity could vary significantly from our expectations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are primarily subject to interest rate risk and credit risk. These risks are dependent on various factors beyond our control, including monetary and fiscal policies, domestic and international economic conditions and political considerations. Our market risk sensitive assets, liabilities and related derivative positions are held for investment and not for trading purposes.

Interest Rate Risk

We may be subject to interest rate changes as a result of long-term borrowings used to acquire real estate equity investments and may also be exposed to changes in net interest income of our real estate debt investments, which is the difference between the income earned and the interest expense incurred in connection with our borrowings and derivatives.

Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs by borrowing primarily at fixed rates or variable rates with the lowest margins available and by evaluating hedging opportunities.

Our CRE debt and securities investments bear interest at either a floating or fixed-rate. The interest rate on our floating-rate assets is a fixed spread over an index such as LIBOR and typically reprices every 30 days based on LIBOR in effect at the time. Currently, most of our floating-rate CRE debt investments have a fixed minimum LIBOR floor. We will not benefit from an increase in LIBOR until it is in excess of the LIBOR floors. Given the frequent and periodic repricing of our floating-rate assets, changes in benchmark interest rates are unlikely to materially affect the value of our floating-rate portfolio. Changes in short-term rates will, however, affect income from our investments.

A change in interest rates could affect the value of our fixed-rate CRE debt and securities investments. For instance, an increase in interest rates would result in a higher required yield on investments, which would decrease the value on existing fixed-rate investments in order to adjust their yields to current market levels.

Our general financing strategy has focused on the use of “match-funded” structures. This means that we seek to align the maturities of our liabilities with the maturities on our assets as closely as possible in order to manage the risks of being forced to refinance our liabilities prior to the maturities of our assets. In addition, we seek to match interest rates on our assets with like-kind borrowings, so fixed-rate investments are financed with fixed-rate borrowings and floating-rate assets are financed with floating-rate borrowings, directly or indirectly, through the use of interest rate swaps, caps and other financial instruments or through a combination of these strategies. We are subject to interest rate risk because, on certain investments, we maintain a net floating-rate asset position, and therefore our income will increase with increases in interest rates and decrease with declines in interest rates. As of June 30, 2016, 88.0% of the outstanding principal of our debt investments were floating rate investments and 67.0% of our total borrowings were floating rate liabilities. Of the floating rate liabilities, 76.6% related to CRE debt investments financing, 17.3% related to a CRE equity investment mortgage note payable, and 6.1% related to CRE securities financing. As of June 30, 2016, a hypothetical 100 basis point increase in interest rates (including the effect of the interest rate floor) would increase income by $2.1 million annually.

Credit Spread Risk

The value of our fixed and floating-rate investments also changes with market credit spreads. This means that when market-demanded risk premium, or credit spread, increases, the value of our fixed and floating-rate assets decrease and vice versa. Fixed-rate assets are valued based on a market credit spread over the rate payable on fixed-rate U.S. Treasury of like maturity. This means that their value is dependent on the yield demanded on such assets by the market, based on their credit relative to U.S. Treasuries. The floating-rate CRE debt and securities investments are valued based on a market credit spread over the applicable LIBOR. Demand for a higher yield on investments results in higher or “wider” spread over the benchmark rate (usually the applicable U.S. Treasury yield) to value these assets. Under these conditions, the value of our portfolio should decrease. Conversely, if the spread used to value these assets were to decrease or “tighten,” the value of these assets should increase.

Credit Risk

Credit risk in our CRE debt and securities investments relates to each individual borrower’s ability to make required interest and principal payments on scheduled due dates. We seek to manage credit risk through our Advisor’s comprehensive credit analysis prior to making an investment, actively monitoring our portfolio and the underlying credit quality, including subordination and diversification of our portfolio. Our analysis is based on a broad range of real estate, financial, economic and borrower-related factors which we believe are critical to the evaluation of credit risk inherent in a transaction. For the six months ended June 30, 2016, one debt investment contributed more than 10% of interest income, which was attributable to a non-recurring minimum interest payment upon early repayment of the debt investment. Excluding the non-recurring interest income, no debt investments contributed more than 10% of interest income.

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We are subject to the credit risk of the borrower when we make CRE debt and securities investments. We undertake a rigorous credit evaluation of each borrower prior to making an investment. This analysis includes an extensive due diligence investigation of the borrower’s creditworthiness and business as well as an assessment of the strategic importance of the underlying real estate to the borrower’s core business operations.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company’s management conducted an evaluation, as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended, or Exchange Act, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).

Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Internal Control over Financial Reporting

Changes in Internal Control over Financial Reporting.

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

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PART II. Other Information

Item 1. Legal Proceedings

We may be involved in various litigation matters arising in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, any current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.

Item 1A. Risk Factors

There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year

ended December 31, 2015 as filed with the SEC on March 17, 2016, except as noted below.

We have paid and may continue to pay distributions from sources other than our cash flow provided by operations, and as a result we will have less cash available for investments and stockholders’ overall return may be reduced.

Our organizational documents permit us to pay distributions from any source, including Offering proceeds, borrowings, our Advisor’s agreement to defer, reduce or waive fees (or accept, in lieu of cash, shares of our common stock) or sales of assets or we may make distributions in the form of taxable stock dividends. We have not established a limit on the amount of proceeds we may use to fund distributions. We have funded our cash distributions paid to date using net proceeds from our Offering and we may do so in the future. Until the proceeds from our Offering are fully invested, and otherwise during the course of our existence, we may not generate sufficient cash flow from operations to fund distributions. Distributions declared may be paid using proceeds from our Offering, including the purchase of additional shares by NorthStar Realty. For the six months ended June 30, 2016, we declared distributions of $32.9 million compared to cash provided by operating activities of $14.7 million with $15.1 million, or 45% of the distributions declared during this period being paid using proceeds from our Offering, including the purchase of additional shares by NorthStar Realty. For the year ended December 31, 2015, we declared distributions of $43.5 million compared to cash provided by operating activities of $12.0 million with $37.1 million, or 85% of the distributions declared during this period being paid using proceeds from our Offering, including the purchase of additional shares by NorthStar Realty.

Pursuant to our Distribution Support Agreement, in certain circumstances where our cash distributions exceed our MFFO, NorthStar Realty agreed to purchase up to $10.0 million in shares of our Class A common stock at the current offering price for Class A shares, net of selling commissions and dealer manager fees, (which includes the $2.0 million of shares purchased to satisfy the minimum offering amount) to provide additional cash to support distributions to stockholders and has, purchased 448,485 shares of our common stock as of June 30, 2016. The sale of these shares resulted in the dilution of the ownership interests of our public stockholders. Upon termination or expiration of our Distribution Support Agreement, we may not have sufficient cash available to pay distributions at the rate we had paid during preceding periods or at all. If we pay distributions from sources other than our cash flow provided by operations, we will have less cash available for investments, we may have to reduce our distribution rate, our book value may be negatively impacted and stockholders’ overall return may be reduced.

Our Sponsor, the parent company of our Advisor, announced that it entered into a merger agreement with Colony and NorthStar Realty, which could have an adverse impact on our business.

In June 2016, NSAM, our Sponsor and the parent company of our Advisor, announced that it entered into a merger agreement with Colony and NorthStar Realty, providing for the combination of NSAM, NorthStar Realty and Colony, which following the effective time of the mergers, will be publicly-traded and named Colony NorthStar, Inc., or Colony NorthStar. As a result of the mergers, Colony NorthStar will be an internally-managed equity REIT, with a diversified real estate and investment management platform. In addition, as a result of the mergers, our Advisor and Dealer Manager will be subsidiaries of Colony NorthStar.

The proposed mergers may be time consuming and disruptive to NSAM’s business operations, including its service to us as our Advisor and our Sponsor. It is also expected that, as part of the mergers, there will be changes to the composition of NSAM’s board of directors, certain members of its senior management team and certain members of our Advisor’s investment committee. In addition, it may be difficult for Colony NorthStar to address integration challenges following the completion of the mergers, and the anticipated benefits of the integration of the three companies may not be realized fully or at all. These changes to our Sponsor and our Advisor could be disruptive to our business and operations, as we are dependent on our Advisor for the management of our day-to-day affairs. Further, the completion of the mergers may give rise to additional conflicts of interest and competition for investment opportunities among Colony NorthStar, us and other companies managed by Colony NorthStar.

The proposed mergers are subject to customary closing conditions and there can be no assurance that they will be consummated. In the event that the proposed mergers are not consummated, NSAM will have expended considerable resources but neither we nor NSAM will realize any expected benefits of the proposed mergers. In addition, if the merger transaction is consummated, any value created for NSAM’s stockholders may not result in the creation of value for our stockholders.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds from Registered Securities

On May 6, 2013, our registration statement on Form S-11 (File No. 333-185640) for our Offering of up to $1,650,000,000 in shares of common stock in any combination of our Class A and Class T shares, consisting of $1,500,000,000 issuable pursuant to our Primary Offering and $150,000,000 issuable pursuant to our DRP, was declared effective under Securities Act of 1933, as amended, or the Securities Act. We commenced our Offering on the same date and retained our Dealer Manager to serve as our dealer manager of our Offering.

In March 2015, our board of directors determined to extend our Offering for one year to May 2016. In April 2016, the board of directors further extended our Offering for an additional six months, or such longer period as permitted by law.

As of June 30, 2016, we sold the following shares of common stock and raised the following gross proceeds in connection with our Offering (dollars and shares in thousands):



	Shares	Proceeds
Primary Offering	100,080	$	995,684
DRP	3,980	38,277
Total	104,060	$	1,033,961

From the commencement of our Offering through June 30, 2016, we incurred $62.3 million in selling commissions, $29.5 million in dealer manager fees, $11.0 million in other offering costs and $4.6 million in distribution fees in connection with the issuance and distribution of our registered securities and $74.5 million of these costs have been reallowed to third party participating broker dealers.

From the commencement of our Offering through June 30, 2016, the net proceeds to us from our Offering, after deducting the total expenses incurred described above, were $926.5 million. From the commencement of our Offering through June 30, 2016, we used proceeds of $414.0 million to acquire and originate real estate debt investments, $192.0 million to purchase real estate equity investments, $41.0 million to purchase real estate securities investments and $15.7 million to pay our Advisor and Prior Advisor acquisition fees.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We adopted our Share Repurchase Program effective May 6, 2013, which enables stockholders to sell their shares to us in limited circumstances. We may not repurchase shares unless a stockholder has held shares for at least one year. However, we may repurchase shares held for less than one year in connection with a stockholder’s death or qualifying disability. We are not obligated to repurchase shares under our Share Repurchase Program. We fund repurchase requests received during a quarter with proceeds set aside for that purpose which are not expected to exceed proceeds received from our DRP. However, to the extent that the aggregate DRP proceeds are not sufficient to fund repurchase requests, our board of directors may, in its sole discretion, choose to use other sources of funds. Subject to funds being available, we will limit the number of shares redeemed pursuant to our Share Repurchase Program to: (i) 5.0% of the weighted average number of shares of our common stock outstanding during the prior calendar year; and (ii) those that could be funded from the net DRP proceeds in the prior calendar year plus such additional funds as may be reserved for that purpose by our board of directors; provided, however, that the above volume limitations shall not apply to repurchases requested within two years after the death or qualifying disability of a stockholder. Our board of directors may, in its sole discretion, amend, suspend or terminate our Share Repurchase Program at any time provided that any amendment that adversely affects the rights or obligations of a participant (as determined in the sole discretion of our board of directors) will take effect only upon ten days’ prior written notice except that changes in the number of shares that can be repurchased during any calendar year will take effect only upon ten business days’ prior written notice. We may provide written notice by filing a Current Report on Form 8-K with the SEC and, if we are still engaged in our Offering, we may also provide a notice in a supplement to the prospectus or Post-Effective Amendment filed with the SEC. In addition, our Share Repurchase Program will terminate in the event a secondary market develops for our shares or until our shares are listed on a national exchange or included for quotation in a national securities market.

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For the three months ended June 30, 2016, we repurchased shares of our common stock as follows:



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program
April 1 to April 30	171,667	$	9.52	171,667	⁽¹⁾
May 1 to May 31	—	—		—	⁽¹⁾
June 1 to June 30	—	—		—	⁽¹⁾
Total	171,667	$	9.52	171,667

________________________


(1)	Subject to funds being available, we will limit the number of shares of our common stock repurchased during any calendar year to 5.0% of the weighted average number of shares of our common stock outstanding during the prior calendar year; provided however, shares of our common stock subject to a repurchase requested upon the death of a stockholder will not be subject to this cap.

As of June 30, 2016, we had no unfulfilled repurchase requests.

Unregistered Sales of Equity Securities

On June 24, 2016, we granted 3,442 shares of restricted Class A common stock at $10.17 per share to four of our independent and non-management directors, pursuant to our independent director compensation plan. The shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act for transactions not involving a public offering.

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Item 6. Exhibits



Exhibit Number		Description of Exhibit
3.1		Articles of Amendment and Restatement of NorthStar Real Estate Income II, Inc. (filed as Exhibit 3.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-11 (File No. 333-185640) filed with the SEC on May 2, 2013, and incorporated herein by reference)
3.2		Amended and Restated Bylaws of NorthStar Real Estate Income II, Inc. (filed as Exhibit 3.2 to Post-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-11 (File No. 333-185640) filed with the SEC on April 18, 2014, and incorporated herein by reference)
3.3		Articles of Amendment of NorthStar Real Estate Income II, Inc., dated October 7, 2015 (filed as Exhibit 3.3 to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 11 to the Company’s Registration Statement on Form S-11 (File No. 333-185640) filed with the SEC on October 9, 2015 and incorporated herein by reference)
3.4		Articles Supplementary of NorthStar Real Estate Income II, Inc., dated October 7, 2015 (filed as Exhibit 3.4 to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 11 to the Company’s Registration Statement on Form S-11 (File No. 333-185640) filed with the SEC on October 9, 2015 and incorporated herein by reference)
4.1		Form of Subscription Agreement (included as Appendix B to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 11 to the Company’s Registration Statement on Form S-11 (File No. 333-185640) filed with the SEC on October 9, 2015 and incorporated herein by reference)
4.2		Distribution Reinvestment Plan (included as Appendix C to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 11 to the Company’s Registration Statement on Form S-11 (File No. 333-185640) filed with the SEC on October 9, 2015 and incorporated herein by reference)
10.1*		Third Amended and Restated Distribution Support Agreement, dated April 25, 2016, by and between NorthStar Realty Finance Corp. and the Company
31.1*		Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*		The following materials from the NorthStar Real Estate Income II, Inc. Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015; (ii) Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2016 and 2015; (iv) Consolidated Statements of Equity for the six months ended June 30, 2016 (unaudited) and the year ended December 31, 2015; (v) Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2016 and 2015; and (vi) Notes to Consolidated Financial Statements (unaudited)

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*	Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		NorthStar Real Estate Income II, Inc.
Date:	August 11, 2016	By:	/s/ DANIEL R. GILBERT
			Name:	Daniel R. Gilbert
			Title:	Chief Executive Officer and President

		By:	/s/ FRANK V. SARACINO
			Name:	Frank V. Saracino
			Title:	Chief Financial Officer and Treasurer

Attached files

NorthStar Real Estate Income II, Inc. Reports

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