DigitalBridge Group, Inc. - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - January 25, 2017

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Exhibit 99.1




COLONY NORTHSTAR
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Index
 
 
Page
 
Unaudited Pro Forma Condensed Consolidated Financial Statements
 
 
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2016

 
 
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 2016
 
 
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2015
 
 
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
 




1

COLONY NORTHSTAR UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial statements and notes set forth the impact of the Mergers and related transactions on the historical financial condition and results of operations of Colony, NSAM and NRF. The unaudited pro forma condensed consolidated financial statements were prepared using the acquisition method of accounting for business combinations with the Mergers accounted for as a reverse acquisition. In the Mergers, NSAM is the legal acquirer while Colony is considered to be the accounting acquirer for financial reporting purposes. The unaudited pro forma condensed consolidated financial statements give effect to: (i) completion of the Mergers; (ii) the NRF management agreement ceasing to exist; and (iii) completion of certain sales initiatives by NRF, which we refer to as NRF Sales Initiatives, that were executed or are under contract as of the date of this joint proxy statement/prospectus.
The unaudited pro forma condensed consolidated balance sheet consolidates the historical consolidated balance sheets of Colony, NSAM and NRF, giving effect to the Mergers and related transactions and NRF Sales Initiatives as if they had been consummated on September 30, 2016. The unaudited pro forma condensed consolidated statements of operations for the nine months ended September 30, 2016 and year ended December 31, 2015 consolidates the historical consolidated statements of operations of Colony, NSAM and NRF, giving effect to the Mergers and related transactions and NRF Sales Initiatives as if they had been consummated on January 1, 2015, the beginning of the earliest period presented. The unaudited pro forma condensed consolidated financial statements are derived from and should be read in conjunction with the historical consolidated financial statements and notes thereto included in each of Colony’s, NSAM’s and NRF’s respective Annual Reports on Form 10-K for year ended December 31, 2015, as amended, and each of Colony’s, NSAM’s and NRF’s respective Quarterly Reports on Form 10-Q for the nine months ended September 30, 2016, which are incorporated by reference into this joint proxy statement/prospectus. Refer to “Where You Can Find More Information; Incorporation by Reference” beginning on page [—] of this joint proxy statement/prospectus.
The unaudited pro forma condensed consolidated financial statements reflect the assets, liabilities and non-controlling interests of NSAM and NRF at their estimated fair value as of September 30, 2016 based upon a preliminary allocation of the consideration to be received by Colony stockholders, NSAM stockholders and NRF stockholders, respectively, in connection with the Mergers, which we refer to as the merger consideration. A final determination of the fair value and allocation of the merger consideration will be based upon the actual assets, liabilities and non-controlling interests as of the date of completion of the Mergers. The value of the per share consideration will be determined based on the trading price of Colony common stock and NRF preferred stock at the time of the completion of the Mergers. Accordingly, the estimated fair value and allocation of the merger consideration are subject to adjustment and may vary significantly from the actual fair value and allocation of the merger consideration upon completion of the Mergers, if completed. As of the date of this joint proxy statement/prospectus, the Companies expect the closing of the Mergers will occur in January 2017.
The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the financial position or results of operations of the Companies had the Mergers and related transactions and NRF Sales Initiatives been completed as of the beginning of the earliest period presented, nor indicative of future results of operations or future financial position of the combined company. The unaudited pro forma condensed consolidated financial statements do not reflect the costs of any integration activities or full benefits that may result from realization of future cost savings from operating efficiencies, revenue or other incremental synergies expected to result from the Mergers. The unaudited pro forma condensed consolidated financial statements reflect management’s best estimate based on available information and may be revised as additional information becomes available and as additional analyses are performed.


2

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2016
(In thousands)

 
 
Historical (Note 2)
 
Pro Forma Adjustments (Note 4)
 
Colony NorthStar Pro Forma Consolidated
 
 
Colony
 
NSAM
 
NRF
 
NRF Sales Initiatives(A)
 
Merger Adjustments(B)
 
Fair Value Adjustment(C)
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
440,173

 
$
85,593

 
$
725,360

 
$
1,317,920

 
$
(1,110,991
)
(1)(2)(3) 
$
—

 
$
1,458,055

Restricted cash
 
148,396

 
26,599

 
180,068

 
(4,986
)
 
—

 
—

 
350,077

Operating real estate, net
 
3,294,122

 
—

 
7,371,996

 
—

 
—

 
1,710,792

 
12,376,910

Real estate debt investments, net
 
3,685,654

 
—

 
348,539

 
—

 
—

 
544

 
4,034,737

Real estate debt investments. held for sale
 
56,357

 
—

 
—

 
—

 
—

 
—

 
56,357

Investments in private equity funds, at fair value
 
1,507

 
—

 
484,876

 
—

 
—

 
—

 
486,383

Investments in unconsolidated ventures
 
1,004,388

 
97,107

 
161,744

 
—

 
(39,443
)
(2) 
16,250

 
1,240,046

Real estate securities, available for sale
 
23,882

 
—

 
526,966

 
—

 
—

 
—

 
550,848

Securities, at fair value
 
—

 
38,438

 
—

 
—

 
(35,741
)
(4) 
—

 
2,697

Due from affiliates
 
13,718

 
109,753

 
1,888

 
—

 
(46,939
)
(5) 
—

 
78,420

Goodwill
 
680,127

 
243,328

 
44,767

 
—

 
—

 
94,806

 
1,063,028

Intangible assets, net
 
305,204

 
203,728

 
298,950

 
—

 
(1,800,000
)
(6) 
2,653,591

 
1,661,473

Assets of properties held for sale
 
216,339

 
—

 
2,653,959

 
(2,533,088
)
 
—

 
(11,775
)
 
325,435

Other assets
 
276,774

 
41,784

 
565,776

 
(208,260
)
 
(5,053
)
(7) 
12,033

 
683,054

Total assets
 
$
10,146,641

 
$
846,330

 
$
13,364,889

 
$
(1,428,414
)
 
$
(3,038,167
)
 
$
4,476,241

 
$
24,367,520

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage and other notes payable
 
$
2,249,834

 
$
—

 
$
6,922,027

 
$
(692,231
)
 
$
—


$
(63,220
)
 
8,416,410

Credit facilities and term borrowings
 
486,176

 
468,679

 
420,409

 
—

 
(889,087
)
(8) 
28,821

 
514,998

Convertible senior notes
 
592,382

 
—

 
27,356

 
—

 
—

 
2,085

 
621,823

Securitization bonds payable
 
632,828

 
—

 
257,877

 
—

 
—

 
—

 
890,705

Junior subordinated notes, at fair value
 
—

 
—

 
191,175

 
—

 
—

 
—

 
191,175

Accounts payable and other liabilities
 
293,544

 
91,155

 
205,142

 
7,321

 
97,786

(9) 
177,080

 
872,028

Due to affiliates—contingent consideration
 
39,350

 
—

 
—

 
—

 
—

 
—

 
39,350

Due to related parties
 
—

 
—

 
46,939

 
—

 
(46,939
)
(5) 
—

 
—

Intangible liabilities, net
 
22,791

 
—

 
113,967

 
—

 
(1,800,000
)
(6) 
1,830,124

 
166,882

Dividends payable
 
65,924

 
—

 
—

 
—

 
—

 
—

 
65,924

Liabilities of assets held for sale
 
112,266

 
—

 
1,502,659

 
(1,408,179
)
 
—

 
(41,051
)
 
165,695

Derivative liabilities, at fair value
 
8,677

 
—

 
302,316

 
—

 
—

 
—

 
310,993

Total liabilities
 
4,503,772

 
559,834

 
9,989,867

 
(2,093,089
)
 
(2,638,240
)
 
1,933,839

 
12,255,983

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable non-controlling interests
 
—

 
75,149

 
—

 
—

 
—

 
—

 
75,149

Equity
 
 
 
 
 
 
 
 
 
 
 
 
 

Performance common stock
 
—

 
52

 
—

 
—

 
—

 
—

 
52

Preferred stock
 
606,950

 
—

 
939,118

 
—

 
—

 
30,340

 
1,576,408

Common stock
 
1,139

 
1,890

 
1,807

 
—

 
715

(10) 
—

 
5,551

Additional paid-in capital
 
2,432,716

 
246,171

 
5,116,100

 
—

 
(2,539,594
)
(11) 
2,285,172

 
7,540,565

Accumulated other comprehensive income (loss)
 
(23,897
)
 
(210
)
 
(63,709
)
 
—

 
63,919

(11) 
—

 
(23,897
)
Retained earnings (accumulated deficit)
 
(183,585
)
 
(38,554
)
 
(2,891,153
)
 
384,044

 
2,112,267

(12) 
—

 
(616,981
)
Total stockholders’ equity
 
2,833,323

 
209,349

 
3,102,163

 
384,044

 
(362,693
)
 
2,315,512

 
8,481,698

Non-controlling interests—investments
 
2,406,753

 
—

 
241,061

 
280,631

 
—

 
226,890

 
3,155,335

Non-controlling interests—operating partnership
 
402,793

 
1,998

 
31,798

 
—

 
(37,234
)
(11) 
—

 
399,355

Total equity
 
5,642,869

 
211,347

 
3,375,022

 
664,675

 
(399,927
)
 
2,542,402

 
12,036,388

Total liabilities, redeemable non-controlling interests and equity
 
$
10,146,641

 
$
846,330

 
$
13,364,889

 
$
(1,428,414
)
 
$
(3,038,167
)
 
$
4,476,241

 
$
24,367,520











Refer to accompanying notes to unaudited pro forma condensed consolidated financial statements.


3

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2016
(In thousands, except per share data)

 
Historical (Note 2)
 
Pro Forma Adjustments (Note 5)
 
Colony NorthStar Pro Forma Consolidated
Colony
 
NSAM
 
NRF
 
NRF Sales Initiatives(D)
 
 Merger Adjustments(E) 
 
Fair Value Adjustment(F)
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental and escalation income
$
254,640

 
$
—

 
$
527,252

 
$
(265,336
)
 
$
—

 
$
(16,371
)
(8) 
$
500,185

Hotel operating income
24,830

 
—

 
636,283

 
—

 
—

 
—

 
661,113

Resident fee income
—

 
—

 
219,193

 
—

 
—

 
—

 
219,193

Interest income
291,496

 
—

 
115,117

 
(13,524
)
 
—

 
—

 
393,089

Fee income
49,347

 
276,339

 
—

 
—

 
(139,955
)
(1) 
—

 
185,731

Selling commission and dealer manager fees, related parties
—

 
15,115

 
—

 
—

 
—

 
—

 
15,115

Other income
10,071

 
7,569

 
14,747

 
(6,221
)
 
20,130

(1) 
—

 
46,296

Total revenues
630,384

 
299,023

 
1,512,592

 
(285,081
)
 
(119,825
)
 
(16,371
)
 
2,020,722

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Management fee
—

 
—

 
139,955

 
—

 
(139,955
)
(1) 
—

 
—

Interest expense
126,635

 
18,968

 
362,052

 
(76,281
)
 
(39,635
)
(2) 
(1,197
)
(9) 
390,542

Property operating expenses
89,469

 
—

 
708,934

 
(95,278
)
 
—

 
(543
)
(10) 
702,582

Commission expense
—

 
14,025

 
—

 
—

 
—

 
—

 
14,025

Other expense—investment and servicing expenses
17,448

 
5,461

 
20,933

 
(1,424
)
 
—

 
—

 
42,418

Transaction costs
18,638

 
32,127

 
15,590

 
(186
)
 
(46,114
)
(1) 
—

 
20,055

Impairment losses
5,461

 
—

 
75,506

 
—

 
—

 
—

 
80,967

Provision for loan losses
17,412

 
—

 
7,974

 
(3,051
)
 
—

 
—

 
22,335

General and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 

Compensation expense
80,689

 
107,547

 
23,295

 
—

 
(9,215
)
(1) 
—


202,316

Other general and administrative expenses
38,760

 
31,180

 
12,708

 
—

 
4,003

(1) 
—

 
86,651

Total general and administrative expenses
119,449

 
138,727

 
36,003

 
—

 
(5,212
)
 
—

 
288,967

Depreciation and amortization
129,276

 
7,355

 
260,287

 
(33,106
)
 
—

 
94,621

(11) 
458,433

Total expenses
523,788

 
216,663

 
1,627,234

 
(209,326
)
 
(230,916
)
 
92,881

 
2,020,324

Other income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments and other
—

 
(10,197
)
 
(269,052
)
 
—

 
10,475

(3) 
—

 
(268,774
)
Realized gain (loss) on investments and other
68,114

 
(874
)
 
(11,768
)
 
(36,914
)
 
—

 
—

 
18,558

Other gain (loss), net
18,270

 
—

 
—

 
—

 
—

 
—

 
18,270

Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
192,980

 
71,289

 
(395,462
)
 
(112,669
)
 
121,566

 
(109,252
)
 
(231,548
)
Equity in (loss) income of unconsolidated ventures
72,226

 
(5,094
)
 
101,838

 
(10,799
)
 
(3,526
)
(4) 
—


154,645

Income tax benefit (expense)
865

 
(9,331
)
 
(12,329
)
 
3,162

 
(12,692
)
(5) 
—


(30,325
)
Income (loss) from continuing operations
266,071

 
56,864

 
(305,953
)
 
(120,306
)
 
105,348

 
(109,252
)
 
(107,228
)
Redeemable non-controlling interests
—

 
2,991

 
—

 
—

 
—

 
—

 
2,991

Non-controlling interests—investments
130,508

 
—

 
(4,423
)
 
(3,602
)
 
(7,373
)
(6) 
(1,475
)
(12) 
113,635

Non-controlling interests—operating partnership
15,528

 
533

 
(3,537
)
 
—

 
(30,276
)
(7) 
—

 
(17,752
)
Preferred stock dividends
36,066

 
—

 
63,178

 
—

 
—

 
—

 
99,244

Net income (loss) from continuing operations attributable to common stockholders
$
83,969

 
$
53,340

 
$
(361,171
)
 
$
(116,704
)
 
$
142,997

 
$
(107,777
)
 
$
(305,346
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:(G)
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.73

 
$
0.28

 
$
(2.00
)
 
 
 
 
 
 
 
$
(0.56
)
Diluted
$
0.73

 
$
0.28

 
$
(2.00
)
 
 
 
 
 
 
 
$
(0.55
)
Weighted average number of shares:(G)
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
112,133

 
183,251

 
180,803

 
 
 
 
 
 
 
550,078

Diluted
112,133

 
185,083

 
182,664

 
 
 
 
 
 
 
551,916






Refer to accompanying notes to unaudited pro forma condensed consolidated financial statements.

4

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2015
(In thousands, except per share data)

 
Historical (Note 2)
 
Pro Forma Adjustments (Note 5)
 
Colony NorthStar Pro Forma Consolidated
Colony(a)
 
NSAM
 
NRF
 
NRF Sales Initiatives(D)
 
Merger Adjustments(E)
 
Fair Value Adjustment(F)
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental and escalation income
$
244,823

 
$
—

 
$
732,425

 
$
(381,981
)
 
$
—

 
$
46,630

(8) 
$
641,897

Hotel operating income
55,048

 
—

 
784,151

 
—

 
—

 
—

 
839,199

Resident fee income
—

 
—

 
271,394

 
—

 
—

 
—

 
271,394

Interest income
417,305

 
—

 
227,483

 
(45,451
)
 
—

 
—

 
599,337

Fee income
65,813

 
307,988

 
—

 
—

 
(198,695
)
(1) 
—

 
175,106

Selling commission and dealer manager fees, related parties
—

 
126,907

 
—

 
—

 
—

 
—

 
126,907

Other income
11,382

 
926

 
29,466

 
(10,339
)
 
36,484

(1) 
—

 
67,919

Total revenues
794,371

 
435,821

 
2,044,919

 
(437,771
)
 
(162,211
)
 
46,630

 
2,721,759

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Management fee
15,062

 
—

 
198,695

 
—

 
(198,695
)
(1) 
—

 
15,062

Interest expense
133,094

 
778

 
495,086

 
(109,499
)
 
(36,035
)
(2) 
(2,673
)
(9) 
480,751

Property operating expenses
117,713

 
—

 
915,701

 
(150,954
)
 
—

 
453

(10) 
882,913

Commission expense
—

 
117,390

 
—

 
—

 
—

 
—

 
117,390

Other expense—investment and servicing expenses
23,369

 
1,657

 
26,607

 
(11,992
)
 
—

 
—

 
39,641

Transaction costs
38,888

 
9,665

 
31,427

 
(1,833
)
 
—

 
—

 
78,147

Impairment losses
11,192

 
—

 
31,951

 
—

 
—

 
—

 
43,143

Provision for loan losses
37,475

 
—

 
4,201

 
(1,961
)
 
—

 
—

 
39,715

General and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation expense
84,506

 
125,817

 
41,437

 
—

 
18,740

(1) 
—


270,500

Other general and administrative expenses
38,238

 
33,386

 
16,658

 
—

 
4,901

(1) 
—

 
93,183

Total general and administrative expenses
122,744

 
159,203

 
58,095

 
—

 
23,641

 
—

 
363,683

Depreciation and amortization
140,977

 
1,863

 
456,916

 
(148,301
)
 
—

 
157,185

(11) 
608,640

Total expenses
640,514

 
290,556

 
2,218,679

 
(424,540
)
 
(211,089
)
 
154,965

 
2,669,085

Other income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments and other
—

 
(4,274
)
 
(204,112
)
 
—

 
3,745

(3) 
—

 
(204,641
)
Realized gain (loss) on investments and other
8,962

 
—

 
14,407

 
1,709

 
—

 
—

 
25,078

Gain on remeasurement of consolidated investment entities, net
41,486

 
—

 
—

 
—

 
—

 
—

 
41,486

Other gain (loss), net
(5,170
)
 
—

 
—

 
—

 
—

 
—

 
(5,170
)
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
199,135

 
140,991

 
(363,465
)
 
(11,522
)
 
52,623

 
(108,335
)
 
(90,573
)
Equity in income of unconsolidated ventures
47,605

 
1,625

 
219,077

 
(77,851
)
 
(4,443
)
(4) 
—


186,013

Income tax benefit (expense)
9,296

 
(21,869
)
 
(14,325
)
 
8,565

 
9,711

(5) 
—


(8,622
)
Income (loss) from continuing operations
256,036

 
120,747

 
(158,713
)
 
(80,808
)
 
57,891

 
(108,335
)
 
86,818

Non-controlling interests—investments
86,123

 
—

 
(20,802
)
 
7,896

 
(13,522
)
(6) 
8,075

(12) 
67,770

Non-controlling interests—operating partnership
19,933

 
953

 
(3,206
)
 
—

 
(23,600
)
(7) 
—

 
(5,920
)
Preferred stock dividends
42,569

 
—

 
84,238

 
—

 
—

 
—

 
126,807

Net income (loss) from continuing operations attributable to common stockholders
$
107,411

 
$
119,794

 
$
(218,943
)
 
$
(88,704
)
 
$
95,013

 
$
(116,410
)
 
$
(101,839
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:(G)
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.96

 
$
0.61

 
$
(1.25
)
 
 
 
 
 
 
 
$
(0.19
)
Diluted
$
0.96

 
$
0.60

 
$
(1.25
)
 
 
 
 
 
 
 
$
(0.19
)
Weighted average number of shares:(G)
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
110,931

 
188,706

 
174,873

 
 
 
 
 
 
 
548,328

Diluted
110,931

 
193,119

 
176,345

 
 
 
 
 
 
 
549,781

______________________
(a)
On April 2, 2015, Colony became an internally managed company by acquiring its manager, Colony Financial Manager, LLC, a wholly owned subsidiary of Colony Capital, LLC, as part of a combination transaction. Prior to such time, Colony was externally managed. The condensed consolidated pro forma statement of operations for the year ended December 31, 2015 does not adjust for activities prior to such combination transaction.



Refer to accompanying notes to unaudited pro forma condensed consolidated financial statements.

5



Notes to the Colony NorthStar Unaudited Pro Forma Condensed Consolidated Financial Statements
Note 1. Description of the Mergers
On June 2, 2016, a merger agreement was entered into among Colony, NSAM and NRF which provides for the mergers of Colony, NSAM and NRF with and into Colony NorthStar, as the publicly-traded company for the combined organizations. Upon the closing of the Mergers, Colony stockholders will own approximately 33.25%, NSAM stockholders will own approximately 32.85% and NRF stockholders will own approximately 33.90% of Colony NorthStar, on a fully diluted basis, excluding the effect of certain equity-based awards issuable in connection with the Mergers. Prior to the closing of the Mergers, NSAM expects the NSAM board or a duly authorized committee thereof to declare a special cash dividend in the amount of $228 million to NSAM common stockholders.
Each share of Colony class A and class B common stock issued and outstanding immediately prior to the effective time of the Mergers will be canceled and converted into the right to receive 1.4663 shares of Colony NorthStar class A and class B common stock, respectively. Concurrently, Colony OP will issue additional partnership units to equal the number of operating partnership units outstanding on the day prior to the closing of the Mergers multiplied by the exchange ratio of 1.4663.
Each share of NSAM common stock and NSAM performance common stock issued and outstanding immediately prior to the effective time of the Mergers will be canceled and converted into the right to receive one share of Colony NorthStar class A common stock and Colony NorthStar performance common stock, respectively.
In connection with the merger of NRF LP with and into NRF and related reorganization transactions: (i) each NRF LTIP unit outstanding as of immediately prior to such effective time will be deemed to be fully vested and converted into one share of NRF common stock; (ii) each partnership unit in NRF LP designated as a partnership common unit outstanding as of immediately prior to such effective time (other than those held by NRF) will be converted into one share of NRF common stock; and (iii) each other interest in NRF LP held by NRF will no longer be outstanding and will automatically be canceled and will cease to exist.
In connection with the merger of New Parent Merger Sub with and into NRF: (i) each share of NRF common stock issued and outstanding as of immediately prior to the effective time of such merger automatically will be canceled and converted into the right to receive one share of New NRF Parent common stock; and (ii) each share of each series of NRF preferred stock will be converted into the right to receive one share of a corresponding series of New NRF Parent preferred stock.
At the effective time of the NRF merger, each share of New NRF Parent common stock will be converted into the right to receive 1.0996 shares of Colony NorthStar class A common stock.
Each share of each series of the Colony and NRF preferred stock (New NRF Parent preferred stock) issued and outstanding immediately prior to the effective time of the Mergers will be canceled and converted into the right to receive one share of a corresponding series of Colony NorthStar preferred stock, having substantially the same preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption.
In connection with the strategic initiatives of NRF, NRF continues to execute a series of sales initiatives which include: (i) sales of certain real estate assets; (ii) sales of certain limited partnership interests in real estate private equity funds; and (iii) sales and/or accelerated repayments of certain commercial real estate, or CRE, debt and securities investments.
Under the merger agreement, NRF is required to use reasonable best efforts to continue certain agreed upon sales initiatives. In addition, in connection with the Mergers, NSAM and NRF plan to repay their respective outstanding corporate borrowings, which we refer to, collectively, as the NorthStar corporate borrowings (excluding NRF’s $280 million of trust preferred securities with maturities beginning in 2035), contemporaneous with the closing of the Mergers.
The completion of the Mergers is subject to, among other things, regulatory approvals and the receipt of Colony, NSAM and NRF stockholder approval. As of the date of this joint proxy statement/prospectus, the Mergers are expected to be completed in January 2017.
Note 2. Basis of Presentation
The unaudited pro forma condensed consolidated financial statements relating to the mergers of Colony, NSAM and NRF are prepared as of and for the nine months ended September 30, 2016 and for the year ended December 31, 2015, in accordance with Article 11 of Regulation S-X and, in the opinion of management, reflect all necessary adjustments. Accordingly, the historical financial information of Colony, NSAM and NRF has been adjusted to give pro forma effect to all significant events that are: (i) directly attributable to the Mergers and related transactions and NRF Sales Initiatives; (ii) factually supportable; and (iii) with respect to the unaudited pro forma condensed consolidated statements of operations, expected to have a continuing impact on the results of the combined company.

6

The unaudited pro forma condensed consolidated balance sheet as of September 30, 2016 is presented as if the Mergers and related transactions and NRF Sales Initiatives had become effective on September 30, 2016. The unaudited pro forma condensed consolidated statements of operations for the nine months ended September 30, 2016 and year ended December 31, 2015 are presented as if the Mergers and related transactions and NRF Sales Initiatives had become effective on January 1, 2015, the beginning of the earliest period presented.
Certain amounts in the historical consolidated financial statements of Colony, NSAM and NRF have been reclassified to conform to the presentation of the combined company in the unaudited pro forma condensed consolidated financial statements. Discontinued operations reported in NRF’s historical consolidated statement of operations for the year ended December 31, 2015 have been excluded from the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2015.
Significant transactions between NSAM and NRF during the nine months ended September 30, 2016 and year ended December 31, 2015 have been eliminated in the unaudited pro forma condensed consolidated financial statements as if NSAM and NRF were consolidated affiliates during these periods. There were no transactions between Colony and either NSAM or NRF during the periods presented.
The Mergers are accounted for under the acquisition method for business combinations as a reverse acquisition pursuant to Accounting Standards Codification Topic 805, Business Combinations. In the Mergers, NSAM is the legal acquirer while Colony is considered to be the accounting acquirer for financial reporting purposes. The consideration to be transferred establishes a new accounting basis for the assets acquired, liabilities assumed and non-controlling interests of NSAM and NRF, measured at their respective fair value as of the date the Mergers are consummated. Accordingly, the unaudited pro forma condensed consolidated financial statements include adjustments to record the assets, liabilities and non-controlling interests of NSAM and NRF at their estimated fair value, which are preliminary and subject to revision. To the extent fair value of the merger consideration exceeds fair value of net assets acquired, any such excess represents goodwill. Alternatively, if fair value of net assets acquired exceeds fair value of the merger consideration, the transaction could result in a bargain purchase gain that is recognized immediately in earnings and attributable to Colony NorthStar common stockholders. Adjustments to estimated fair value of identifiable assets and liabilities of NSAM and NRF, as well as adjustments to the merger consideration may change the determination and amount of goodwill and/or bargain purchase gain and may impact depreciation, amortization and accretion based on revised fair value of assets acquired and liabilities assumed. The actual value of the merger consideration will depend upon the market price of the Colony common stock and the NRF preferred stock at the time of closing of the Mergers. The final fair value and allocation of merger consideration will be determined upon completion of the Mergers, with the allocation to be finalized as soon as practicable within the measurement period of no later than one year following the closing date of the Mergers. The final acquisition accounting may vary significantly from that reflected in the unaudited pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the financial position or results of operations of the Companies had the Mergers and related transactions and NRF Sales Initiatives been completed as of the beginning of the earliest period presented, nor indicative of future results of operations or future financial position of the combined company. The unaudited pro forma condensed consolidated financial statements do not reflect the costs of any integration activities or full benefits that may result from realization of future cost savings from operating efficiencies, revenue or other incremental synergies expected to result from the Mergers. Additionally, the unaudited pro forma condensed consolidated financial statements should be read in connection with the historical consolidated financial statements and notes thereto included in each of Colony’s, NSAM’s and NRF’s respective Annual Reports on Form 10-K for the year ended December 31, 2015, as amended, and each of Colony’s, NSAM’s and NRF’s respective Quarterly Reports on Form 10-Q for the nine months ended September 30, 2016. The unaudited pro forma condensed consolidated financial statements represent management’s best estimate based on available information and may be revised as additional information becomes available and as additional analyses are performed.
Note 3. Pro Forma Merger Consideration
Pursuant to the merger agreement, NSAM common stock will first be converted into Colony NorthStar common stock through the Redomestication merger. NSAM will then acquire 100% of the common stock and preferred stock of Colony and NRF through the conversion of all such outstanding shares, based on pre-determined exchange ratios, into shares of Colony NorthStar.
As the Mergers are accounted for as a reverse acquisition, the fair value of the consideration transferred is measured based upon (i) the number of shares of common stock Colony, as the accounting acquirer, would theoretically have to issue to the stockholders of NSAM and NRF to achieve the same ratio of ownership in Colony NorthStar upon completion of the Mergers; and (ii) applying the Colony class A common stock price.

7

As a result, the implied shares of Colony common stock issued in consideration was computed based on the number of outstanding shares of NSAM and NRF common stock prior to the Mergers divided by the exchange ratios of 1.4663 and 1.3335, respectively.
Substantially all NSAM and NRF equity awards will vest upon consummation of the Mergers. As Colony NorthStar is obligated to issue Colony NorthStar common stock upon consummation of the Mergers and settlement of these equity awards relate to pre-combination services, these equity awards form part of the outstanding shares of NSAM and NRF common stock that are used to determine the merger consideration.
Any NSAM and NRF equity awards that do not vest by their terms upon consummation of the Mergers will be assumed by Colony NorthStar through conversion into comparable Colony NorthStar equity awards with substantially the same terms.  Accordingly, these equity awards are not included in the outstanding shares of NSAM and NRF common stock that are used to determine the merger consideration and will be recognized as compensation expense in the post-combination period. 
The pro forma merger consideration is estimated as follows (in thousands, except per share):
 
 
NSAM
 
NRF
 
Total
Outstanding shares of common stock prior to the Mergers
 
189,487

 
183,251

 


Exchange ratio(i)
 
1.4663

 
1.3335

 
 
Implied shares of Colony common stock issued in consideration
 
129,228

 
137,421

 
266,649

Price per share of Colony common stock(ii)
 
$
18.90

 
$
18.90

 
$
18.90

Fair value of implied shares of Colony common stock issued in consideration
 
$
2,442,409

 
$
2,597,257

 
$
5,039,666

Fair value of Colony NorthStar preferred stock to be issued(iii)
 
—

 
969,458

 
969,458

Total pro forma merger consideration
 
$
2,442,409

 
$
3,566,715

 
$
6,009,124

_________________________
(i)
Represents (a) the pre-determined exchange ratio of one Colony share for 1.4663 Colony NorthStar shares; and (b) the derived exchange ratio of one Colony share for 1.3335 NRF shares based on the pre-determined exchange ratio of one NRF share for 1.0996 Colony NorthStar shares.
(ii)
The pro forma merger consideration was determined based on the closing price of Colony common stock of $18.90 on November 9, 2016.
(iii)
Fair value of Colony NorthStar preferred stock to be issued is estimated based on the shares of NRF preferred stock outstanding as of September 30, 2016 multiplied by the closing price, which represents the clean price, of the respective series of NRF preferred stock as of November 9, 2016, as follows (in thousands, except per share):
 
 
Number of Shares Outstanding
 
Price Per Share
 
Fair Value
NRF Preferred Stock
 
 
 
 
 
 
Series A 8.75%
 
2,467

 
$
24.50

 
$
60,442

Series B 8.25%
 
13,999

 
23.99

 
335,836

Series C 8.875%
 
5,000

 
24.86

 
124,300

Series D 8.50%
 
8,000

 
25.06

 
200,480

Series E 8.75%
 
10,000

 
24.84

 
248,400

Fair value of Colony NorthStar preferred stock to be issued
 
 
 
 
 
$
969,458

The following table presents a summary of the preliminary purchase price allocation of the pro forma merger consideration to the assets acquired, liabilities assumed and non-controlling interests of NSAM and NRF based on their respective estimated fair value as of September 30, 2016, after adjusting for NRF Sales Initiatives. Based on current estimates, the consideration to be transferred is in excess of the estimated fair value of assets and liabilities for both NSAM and NRF thereby resulting in goodwill that is recognized as a fair value adjustment in the unaudited pro forma condensed consolidated balance sheet (in thousands):
 
 
NSAM
 
NRF
 
Total
Pro forma merger consideration(i)
 
$
2,442,409

 
$
3,566,715

 
$
6,009,124

Preliminary allocation of pro forma merger consideration:
 
 
 
 
 
 
Assets acquired
 
2,953,665

 
13,886,740

 
16,840,405

Liabilities assumed
 
(765,735
)
 
(9,624,716
)
 
(10,390,451
)
Redeemable non-controlling interests
 
(75,149
)
 
—

 
(75,149
)
Non-controlling interests—investments
 
—

 
(748,582
)
 
(748,582
)
Fair value of net assets acquired(ii)
 
2,112,781

 
3,513,442

 
5,626,223

Preliminary pro forma goodwill
 
$
329,628

 
$
53,273

 
$
382,901

__________________________

8

(i)
Refer to the table Note 3 above, Total pro forma merger consideration.
(ii)
Refer to fair value of net assets acquired in Note 4.C, Adjustments to Unaudited Pro Forma Condensed Consolidated Balance Sheet—Fair Value Adjustments.
The pro forma merger consideration does not purport to represent the actual value of the merger consideration, which will be measured on the closing date of the Mergers at the then-current market price per share of Colony common stock and NRF preferred stock. The exchange ratios are not subject to adjustments to account for fluctuations in the share prices of Colony, NSAM or NRF common stock between now and the closing date of the Mergers. Therefore, the implied value of the merger consideration, and consequently, the resulting goodwill, may vary significantly due to movements in the Colony common stock and NRF preferred stock. For example, each 10% increase or decrease in the price of Colony common stock on the closing date of the Mergers from the price of Colony common stock assumed in these unaudited pro forma condensed consolidated financial statements would result in an increase or decrease in the estimated merger consideration of $504.0 million and a corresponding increase or decrease in goodwill or result in a bargain purchase gain to the extent that merger consideration does not exceed the fair value of net assets acquired, measured separately for each acquired entity.
The estimated fair value and preliminary allocation of merger consideration are subject to revisions and will be finalized upon completion of the Mergers.

Note 4. Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet
A. NRF Sales Initiatives
The following table presents a summary of the pro forma adjustments to the unaudited condensed consolidated balance sheet as of September 30, 2016 related to NRF Sales Initiatives. Such adjustments eliminate the net assets of those asset sales under contract but not yet sold as of November 4, 2016 as presented in NRF’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2016 (in thousands):
 
 
Manufactured Housing(1)
 
Medical Office Buildings(2)
 
Multifamily(3)
 
Private Equity Portfolio(4)
 
Healthcare Joint Venture(5)
 
Total NRF Sales Initiatives
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(6)
 
$
613,750

 
$
114,828

 
$
44,670

 
$
204,672

 
$
340,000

 
$
1,317,920

Restricted cash
 
—

 
(945
)
 
(4,041
)
 
—

 
—

 
(4,986
)
Assets of properties held for sale(7)
 
(1,592,357
)
 
(807,731
)
 
(133,000
)
 
—

 
—

 
(2,533,088
)
Other assets
 
(276
)
 
(2,632
)
 
(680
)
 
(204,672
)
 
—

 
(208,260
)
Total assets
 
$
(978,883
)
 
$
(696,480
)
 
$
(93,051
)
 
$
—

 
$
340,000

 
$
(1,428,414
)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage and other notes payable
 
$
—

 
$
(692,231
)
 
$
—

 
$
—

 
$
—

 
$
(692,231
)
Accounts payable and other liabilities
 
(1,473
)
 
(8,161
)
 
(3,045
)
 
—

 
20,000

 
7,321

Liabilities of properties held for sale(7)
 
(1,281,438
)
 
(19,229
)
 
(107,512
)
 
—

 
—

 
(1,408,179
)
Total liabilities
 
(1,282,911
)
 
(719,621
)
 
(110,557
)
 
—

 
20,000

 
(2,093,089
)
Equity
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
 
325,924

 
49,182

 
18,938

 
—

 
(10,000
)
 
384,044

Non-controlling interests—investments
 
(21,896
)
 
(26,041
)
 
(1,432
)
 
—

 
330,000

 
280,631

Total equity
 
304,028

 
23,141

 
17,506

 
—

 
320,000

 
664,675

Total liabilities and equity
 
$
(978,883
)
 
$
(696,480
)
 
$
(93,051
)
 
$
—

 
$
340,000

 
$
(1,428,414
)
__________________________________
(1)
In May 2016, NRF entered into an agreement to sell its manufactured housing portfolio for $2.0 billion with $1.3 billion of related mortgage financing (recorded in liabilities of properties held for sale) expected to be assumed by the buyer as part of the transaction. NRF expects to receive $614.8 million of net proceeds, including a $50.0 million deposit made by the buyer. The transaction is expected to close in the first quarter 2017.
(2)
In September 2016, NRF entered into a definitive agreement to sell a portfolio of medical office buildings for $837.9 million with $692.2 million of related mortgage financing expected to be paid off as part of the transaction. NRF expects to receive $114.8 million of net proceeds. The transaction is expected to close in the fourth quarter 2016.
(3)
To date through November 2016, the Company sold ten multifamily properties for $307.0 million with $210.0 million of mortgage financing assumed as part of the transaction. The above adjustment represents the remaining six properties sold subsequent to September 30, 2016. The Company received $85.0 million of net proceeds from such sales.
(4)
In September 2016, NRF sold a portfolio of PE Investments for a gross sales price of $317.6 million with $44.7 million of deferred purchase price assumed as part of the transaction. NRF received $33.9 million of net proceeds and will receive the remaining $204.7 million of net proceeds in the fourth quarter 2016.
(5)
In November 2016, NRF entered into an agreement to sell a non-controlling interest in its healthcare portfolio for net proceeds of approximately $340 million.
(6)
Proceeds from such sales are net of cash and cash equivalent balances as of September 30, 2016, as applicable.

9

(7)
The following table presents the major classes of long-lived assets and liabilities classified as held for sale as of September 30, 2016 (in thousands):
 
 
Assets
 
Liabilities
Description
 
Operating Real Estate(i)
 
Intangible Assets(ii)
 
Other Assets(iii)
 
Total
 
Mortgage and Other Notes Payable
 
Intangible Liabilities
 
Other Liabilities(iv)
 
Total
Manufactured housing communities
 
$
1,441,656

 
$
23,983

 
$
126,718

 
$
1,592,357

 
$
1,255,454

 
$
—

 
$
25,984

 
$
1,281,438

Medical office buildings
 
742,485

 
63,818

 
1,428

 
807,731

 
—

 
19,229

 
—

 
19,229

Multifamily
 
133,000

 
—

 
—

 
133,000

 
107,512

 
—

 
—

 
107,512

Total
 
$
2,317,141

 
$
87,801

 
$
128,146

 
$
2,533,088

 
$
1,362,966

 
$
19,229

 
$
25,984

 
$
1,408,179

___________________________________________
(i)Operating real estate is comprised of the following (in thousands):
Operating real estate - held-for-sale
 
Manufactured Housing Communities
 
Medical Office Buildings
 
Multifamily
 
Total
Land and improvements
 
$
1,453,007

 
$
65,097

 
$
15,333

 
$
1,533,437

Buildings and improvements
 
141,593

 
723,719

 
128,517

 
993,829

Furniture, fixtures and equipment
 
7,814

 
29

 
329

 
8,172

Subtotal
 
1,602,414

 
788,845

 
144,179

 
2,535,438

Less: accumulated depreciation
 
(160,758
)
 
(46,360
)
 
(11,179
)
 
(218,297
)
Total
 
$
1,441,656

 
$
742,485

 
$
133,000

 
$
2,317,141


(ii)Represents the carrying value of in-place and above-market leases, net of amortization.
(iii)Includes cash and cash equivalents, restricted cash, accounts, notes and other receivables.
(iv)Includes interest, taxes and accounts payable.
B.
Merger Adjustments
(1)
Includes an adjustment related to the payment of the NSAM special dividend of $228.0 million. Refer to footnote 12.
(2)
Includes an adjustment for the expected disposition of NSAM’s investment in Island Hospitality Management Inc., which, for the purpose of this pro forma adjustment, is assumed to be at its carrying value of $39.4 million. NSAM’s investment in Island Hospitality Management Inc. is expected to be sold in connection with the Mergers.
(3)
The following table presents a summary of merger-related adjustments in connection with the pay down of NorthStar corporate borrowings (in thousands):
Adjustments to cash and cash equivalents related to the pay down of the NorthStar corporate borrowings:
 
NSAM
 
NRF
 
Total
Principal pay down of NorthStar corporate borrowings (refer to footnote 8)
 
$
(497,500
)
 
$
(425,000
)
 
$
(922,500
)
Prepaid interest (refer to footnote 7)
 
—

 
4,328

 
4,328

Interest payable (refer to footnote 9)
 
(4,262
)
 
—

 
(4,262
)
Total
 
$
(501,762
)
 
$
(420,672
)
 
$
(922,434
)

(4)
Represents the elimination of the carrying value of NSAM’s ownership of 2.7 million shares of NRF common stock. Refer to footnotes 10 and 11.
(5)
Represents the elimination of the management fee receivable (payable) between NSAM and NRF, respectively.
(6)
Represents the elimination of the fair value of the management contract value between NSAM and NRF, which will cease to exist upon completion of the Mergers. Refer to Note 4.C, Fair Value Adjustments for further disclosure.
(7)
The following table presents a summary of merger-related adjustments related to other assets (in thousands):
Adjustments related to other assets:
 
NRF
 
Deferred financing costs
 
$
(725
)
(i) 
Prepaid interest
 
(4,328
)
(ii) 
Total
 
$
(5,053
)
 
___________________________________________
(i)
Represents an adjustment to eliminate deferred financing costs related to NRF’s corporate revolving credit facility, which is expected to be paid down and terminated in connection with the Mergers. Refer to footnotes 3 and 12 for additional information.
(ii)
Represents an adjustment to eliminate prepaid interest related to NRF’s term borrowing, which is expected to be paid down and terminated in connection with the Mergers. Refer to footnote 3 for additional information.

10

(8)
The following table presents a summary of merger-related adjustments related to credit facilities and term borrowings (in thousands):
Adjustments related to credit facilities and term borrowings:
 
NSAM
 
NRF
 
Total
Principal pay down of NorthStar corporate borrowings (refer to footnote 3)(i)
 
$
(497,500
)
 
$
(425,000
)
 
$
(922,500
)
Elimination of deferred financing costs
 
28,822

 
4,591

 
33,413

Total
 
$
(468,678
)
 
$
(420,409
)
 
$
(889,087
)
___________________________________________
(i)
Proceeds from NRF Sales Initiatives are expected to be used for the pay down of NorthStar corporate borrowings. However, to the extent NRF Sales Initiatives are not completed by the closing of the Mergers, Colony has obtained bridge financing for up to $400 million in addition to the $850 million available under its credit facility that can be used to pay off such NorthStar corporate borrowings, if necessary. Colony NorthStar does not expect to draw on the bridge financing and therefore, the pro forma adjustments do not reflect any additional borrowing on such credit facility or the bridge financing.
(9)
The following table presents a summary of merger-related adjustments related to accounts payable and other liabilities (in thousands):
Adjustments related to accounts payable and other liabilities:
 
Colony
 
NSAM
 
NRF
 
Total
Merger-related transaction and other costs(i)
 
$
29,955

 
$
37,743

 
$
59,155

 
$
126,853

NSAM executive compensation accrual(ii)
 
—

 
(22,766
)
 
(2,039
)
 
(24,805
)
Interest payable related to NSAM’s corporate borrowing(iii)
 
—

 
(4,262
)
 
—

 
(4,262
)
Total
 
$
29,955

 
$
10,715

 
$
57,116

 
$
97,786

___________________________________________
(i)
Represents non-recurring transaction and other costs incurred in connection with the Mergers, consisting primarily of advisory, legal, accounting, tax and other professional services and are factually supportable as such amounts are based on reliable, documented evidence such as invoices for costs incurred to date and estimates from third-parties for additional costs expected to be incurred until the closing of the Mergers. Such costs are reflected as a reduction to retained earnings and not included in the unaudited pro forma condensed consolidated statements of operations. Refer to footnote 12.
(ii)
Represents an adjustment to eliminate compensation payable related to arrangements entered into with the NSAM executive officers in connection with the Mergers. Refer to footnote 12.
(iii)
Represents an adjustment to eliminate interest payable related to NSAM’s corporate borrowings. Refer to footnote 3 for additional information.
(10)
The following table presents a summary of the merger-related adjustment to common stock par value as of September 30, 2016 (in thousands, except for exchange ratios and par value per share):
Adjustments to common stock at par:
 
Colony
 
NSAM
 
NRF
 
Pro Forma Colony NorthStar
Outstanding shares of common stock as of September 30, 2016(i)
 
113,928

 
188,983

 
180,730

 
 
Equity awards to vest upon the Mergers and converted into Colony NorthStar common stock, net of shares withheld for tax(ii)
 
—

 
504

 
665

 
 
NRF LTIP units converted to common stock(iii)
 
—

 
—

 
1,856

 
 
Outstanding shares of common stock prior to the Mergers
 
113,928

 
189,487

 
183,251




Exchange ratio
 
1.4663

 
1.0000

 
1.0996

 
 
Shares of Colony NorthStar common stock—pro forma basis
 
167,053

 
189,487

 
201,503

 
 
Shares of NRF common stock owned by NSAM(iv)
 
NA

 
NA

 
(2,969
)
 
 
Shares of Colony NorthStar common stock—pro forma basis (as adjusted)(v)
 
167,053

 
189,487

 
198,534


555,074

Par value per share
 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

Common stock at par of Colony NorthStar—pro forma basis
 
$
1,671

 
$
1,895

 
$
1,985


5,551

Common stock at par as of September 30, 2016
 
(1,139
)
 
(1,890
)
 
(1,807
)
 
(4,836
)
Pro forma adjustment to common stock at par
 
$
532

 
$
5

 
$
178

 
$
715

___________________________________________
(i)
Includes restricted common stock issued as equity-based awards.
(ii)
Represents 9.4 million equity-based shares of NSAM that will convert to Colony NorthStar class A common stock upon completion of the Mergers, net of 4.1 million shares forfeited by NSAM executives and 4.8 million shares estimated to be retired upon vesting for NSAM executive and employee tax withholding. Represents 3.2 million equity-based shares of NRF common stock that will convert to Colony NorthStar class A common stock upon completion of the Mergers, net of 1.1 million shares forfeited by NSAM executives and 1.4 million shares estimated to be retired upon vesting for NSAM executive and employee tax withholding. Refer to the section entitled “The Mergers-Interests of NSAM’s Directors and Executive Officers in the Mergers” for further information regarding shares forfeited by NSAM executives. Shares withheld for taxes include amounts related to restricted common stock included in outstanding common stock.
(iii)
In connection with the Mergers, NRF LP will be merged into NRF resulting in the conversion to NRF common stock of existing LTIP units in NRF LP.
(iv)
Represents the 2.7 million shares of NRF common stock owned by NSAM after giving effect to the exchange ratio.
(v)
Includes shares of both class A and class B pro forma Colony NorthStar common stock.

11


(11)
The following table presents a summary of the merger-related adjustments to additional paid-in capital as of September 30, 2016 (in thousands):
Adjustments to additional paid-in capital:
 
Colony
 
NSAM
 
NRF
 
Total
Adjustment to common stock par value (refer to footnote 10)
 
$
(532
)
 
$
(5
)
 
$
(178
)
 
$
(715
)
Elimination of retained earnings (accumulated deficit)
 
—

 
(38,554
)
 
(2,891,153
)
 
(2,929,707
)
Elimination of accumulated other comprehensive income (loss)
 
—

 
(210
)
 
(63,709
)
 
(63,919
)
Adjustment to non-controlling interests in operating partnership
 
—

 
5,436

(iv) 
31,798

(i) 
37,234

Elimination of carrying value of NRF common stock owned by NSAM
 
—

 
—

 
(35,741
)
(ii) 
(35,741
)
Acceleration of equity-based awards vested upon the Mergers(iii)
 
—

 
69,210

 
—

 
69,210

Elimination of retained earnings from NRF Sale Initiatives
 
—

 
—

 
384,044

 
384,044

Total merger-related adjustments to additional paid-in capital
 
 
 
 
 
 
 
$
(2,539,594
)
___________________________________________
(i)
In connection with the Mergers, NRF LP will be merged into NRF.
(ii)
Represents the carrying value of 2.7 million shares of NRF common stock owned by NSAM (refer to footnote 4).
(iii)
Represents the acceleration of amortization of equity-based compensation related to substantially all outstanding NSAM equity awards that will vest in accordance with their terms upon the closing of the Mergers. Colony and NRF equity awards that vest in connection with the Mergers are not included as adjustments as such events occur prior to the Mergers.
(iv)
The following table presents a summary of the adjustment to Colony NorthStar’s non-controlling interests in the operating partnership as of September 30, 2016 (in thousands, except for exchange ratio):
Pro forma Colony NorthStar non-controlling interest in the operating partnership:(i)
 
Colony
 
NSAM
 
Total Colony NorthStar
OP units owned by non-controlling interests as of September 30, 2016
 
20,787

 
1,790

 
 
Exchange ratio
 
1.4663

 
1.0000

 
 
Non-controlling interests’ ownership of Colony NorthStar OP units—pro forma basis
 
30,480

 
1,790

 
32,270

Shares of Colony NorthStar common stock—pro forma basis
 
 
 
 
 
555,074

Pro forma non-controlling OP unit ownership % in Colony NorthStar
 
 
 
 
 
5.5
%
Adjustment to non-controlling interests in operating partnership
 
 
 
 
 
$
5,436

___________________________________________
(i)In connection with the Mergers, NRF LP will be merged into NRF.

(12)
The following table presents a summary of merger-related adjustments to retained earnings (accumulated deficit) as of September 30, 2016 (in thousands):
Adjustments to retained earnings (accumulated deficit):
 
Colony
 
NSAM
 
NRF
 
Total
Elimination of retained earnings (accumulated deficit) as of September 30, 2016
 
$
—

 
$
38,554

 
$
2,891,153

 
$
2,929,707

NSAM special dividend (refer to footnote 1)
 
—

 
(228,000
)
 
—

 
(228,000
)
Merger-related transaction costs(i)
 
(29,955
)
 
(37,743
)
 
(59,155
)
 
(126,853
)
NSAM executive compensation accrual(ii)
 
—

 
22,766

 
2,039

 
24,805

Acceleration of equity-based awards vested upon the Mergers(iii)
 
—

 
(69,210
)
 
—

 
(69,210
)
NorthStar corporate borrowings deferred financing costs(iv)
 
—

 
(28,822
)
 
(5,316
)
 
(34,138
)
Elimination of retained earnings from NRF Sale Initiatives
 
—

 
—

 
(384,044
)
 
(384,044
)
Total merger-related adjustments to retained earnings (accumulated deficit)
 
 
 
 
 
 
 
$
2,112,267

___________________________________________
(i)
Represents non-recurring transaction costs directly attributable to the Mergers, of which $126.9 million is a pro forma adjustment to accounts payable and other liabilities (refer to footnote 9) in the historical financial statements as of September 30, 2016.
(ii)
Represents an adjustment to eliminate compensation payable related to arrangements entered into with the NSAM executive officers in connection with the Mergers.
(iii)
Represents the acceleration of amortization of equity-based compensation related to substantially all outstanding NSAM equity awards that will vest in accordance with their terms upon the closing of the Mergers. NRF equity awards that vest in connection with the Mergers are not included as an adjustment as such event occurs prior to the Mergers.
(iv)
Represents an adjustment to eliminate deferred financing costs of $0.7 million related to NRF’s corporate revolving credit facility and $33.4 million related to NSAM and NRF’s respective term borrowings. The NorthStar corporate borrowings are expected to be paid off and terminated in connection with the Mergers.

12

C.
Fair Value Adjustments
The fair value adjustments reflected in the unaudited pro forma condensed consolidated balance sheet represent the differences between fair value amounts based on a preliminary purchase price allocation of the assets acquired and liabilities assumed of NSAM and NRF and the corresponding historical balances of NSAM and NRF, as adjusted (in thousands):
 
 
NSAM
 
NRF
 
Fair Value Adjustment
 
 
 
Fair Value(1)
 
Adjusted Historical
 
Fair Value(1)(2)
 
Adjusted Historical(3)
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
125,037

 
$
125,037

(15)
$
2,043,280

 
$
2,043,280

 
$
—

 
Restricted cash
 
26,599

 
26,599

 
175,082

 
175,082

 
—

 
Operating real estate, net
 
—

 
—

 
9,082,788

 
7,371,996

 
1,710,792

(4)
Real estate debt investments, net
 
—

 
—

 
349,083

 
348,539

 
544

 
Investments in private equity funds
 
—

 
—

 
484,876

 
484,876

 
—

(5)
Investments in unconsolidated ventures
 
57,664

 
57,664

(15)
177,994

 
161,744

 
16,250

(5)
Real estate securities, available for sale
 
—

 
—

 
526,966

 
526,966

 
—

(5)
Securities, at fair value
 
2,697

 
2,697

(16)
—

 
—

 
—

 
Due from affiliates
 
109,753

 
109,753

 
1,888

 
1,888

 
—

 
Goodwill
 
329,628

 
243,328

 
53,273

 
44,767

 
94,806

(6)
Intangible assets, net
 
2,511,020

 
203,728

 
645,249

 
298,950

 
2,653,591

(4)
Assets of properties held for sale
 
—

 
—

 
109,096

 
120,871

 
(11,775
)
(3)
Other assets
 
120,895

 
41,784

 
290,438

 
357,516

 
12,033

(7) (10)
Total assets
 
$
3,283,293

 
$
810,590

 
$
13,940,013

 
$
11,936,475

 
$
4,476,241

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Mortgage and other notes payable
 
$
—

 
$
—

 
$
6,166,576

 
$
6,229,796

 
$
(63,220
)
(8)
Credit facilities and term borrowings
 
497,500

 
468,679

 
420,409

 
420,409

 
28,821

(9)
Convertible senior notes
 
—

 
—

 
29,441

 
27,356

 
2,085

(8)
Securitization bonds payable
 
—

 
—

 
257,877

 
257,877

 
—

(5)
Junior subordinated notes
 
—

 
—

 
191,175

 
191,175

 
—

(5)
Accounts payable and other liabilities
 
268,235

 
91,155

 
212,463

 
212,463

 
177,080

(10)
Due to related parties
 
—

 
—

 
46,939

 
46,939

 
—

 
Intangible liabilities, net
 
—

 
—

 
1,944,091

 
113,967

 
1,830,124

(4)
Liabilities of properties held for sale
 
—

 
—

 
53,429

 
94,480

 
(41,051
)
(3)(11)
Derivative liabilities, at fair value
 
—

 
—

 
302,316

 
302,316

 
—

 
Total liabilities
 
765,735

 
559,834

 
9,624,716

 
7,896,778

 
1,933,839

 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
Redeemable non-controlling interests
 
75,149

 
75,149

 
—

 
—

 
—

 
Equity
 
 
 
 
 
 
 
 
 
 
 
Performance common stock
 
52

 
52

 
—

 
—

 
—

 
Preferred stock
 
—

 
—

 
969,458

 
939,118

 
30,340

(12)
Common stock
 
1,890

 
1,890

 
1,807

 
1,807

 
—

 
Additional paid-in capital
 
2,477,233

 
210,431

(15)(16)
2,243,317

 
2,224,947

 
2,285,172

(13)
Accumulated other comprehensive income (loss)
 
(210
)
 
(210
)
 
(63,709
)
 
(63,709
)
 
—

 
Retained earnings (accumulated deficit)
 
(38,554
)
 
(38,554
)
 
384,044

 
384,044

 
—


Total stockholders’ equity
 
2,440,411

 
173,609

 
3,534,917

 
3,486,207

 
2,315,512

 
Non-controlling interests—investments
 
—

 
—

 
748,582

 
521,692

 
226,890

(14)
Non-controlling interests—operating partnership
 
1,998

 
1,998

 
31,798

 
31,798

 
—

(14)
Total equity
 
2,442,409

 
175,607

 
4,315,297

 
4,039,697

 
2,542,402


Total liabilities, redeemable non-controlling interests and equity
 
$
3,283,293

 
$
810,590

 
$
13,940,013


$
11,936,475

 
$
4,476,241


_________________________
(1)
Fair value reflected in the unaudited pro forma condensed consolidated balance sheet was estimated as follows:
(i)
Real estate and related intangibles—based on a discounted cash flow analysis or direct capitalization analysis, and for real estate held for sale, contracted sale price or a sales comparison approach, adjusted for estimated selling costs. The fair value is allocated to tangible assets such as land, building, tenant and land improvements and identified intangibles, such as above- and below-market leases, above- and below market ground lease obligations, in-place lease value and goodwill.

13

(ii)
Real estate debt investments—determined 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 or based on discounted cash flow projections of principal and interest expected to be collected, which include consideration of borrower or sponsor credit, as well as operating results of the underlying collateral. For certain real estate debt investments considered to be impaired, their carrying value approximates fair value.
(iii)
Private equity funds and investments in unconsolidated ventures—based on the timing and amount of expected future cash flow for income and realization events for underlying assets.
(iv)
Real estate securities—based on quotations from brokers or financial institutions that act as underwriters of the securities, third-party pricing service or discounted cash flow depending on the type of securities.
(v)
Management agreements and related intangible assets—comprised of NSAM’s management contracts, customer relationships and trade name. The fair value of management contracts and customer relationships represent the discounted excess earnings attributable to the future management fee income from in-place management contracts and to the potential fee income from repeat customers through future sponsored funds, respectively. The fair value of trade name is estimated based on a discounted royalty rate.
(vi)
Mortgage and other notes payable—estimated by discounting expected future cash outlays at interest rates currently available for instruments with similar terms and remaining maturities.
(vii)
Convertible senior notes—based on quoted market prices or recent transactions.
(viii)
Securitization bonds payable and junior subordinated notes—based on quotations from brokers or financial institutions that act as underwriters of the securitized bonds or subordinated notes.
(2)
Fair value excludes assets and liabilities associated with the NRF Sales Initiatives (refer to footnote 3).
(3)
The following table presents the assets and liabilities of NRF as of September 30, 2016, adjusted to reflect the impact of the NRF Sales Initiatives (in thousands):
 
 
NRF
 
 
Historical
 
NRF Sales Initiatives(i)
 
Adjusted Historical
Assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
725,360

 
$
1,317,920

 
$
2,043,280

Restricted cash
 
180,068

 
(4,986
)
 
175,082

Operating real estate, net
 
7,371,996

 
—

 
7,371,996

Real estate debt investments, net
 
348,539

 
—

 
348,539

Investments in private equity funds, at fair value
 
484,876

 
—

 
484,876

Investments in unconsolidated ventures
 
161,744

 
—

 
161,744

Real estate securities, available for sale
 
526,966

 
—

 
526,966

Due from affiliates
 
1,888

 
—

 
1,888

Goodwill
 
44,767

 
—

 
44,767

Intangible assets, net
 
298,950

 
—

 
298,950

Assets of properties held for sale
 
2,653,959

 
(2,533,088
)
 
120,871

Other assets
 
565,776

 
(208,260
)
 
357,516

Total assets
 
$
13,364,889

 
$
(1,428,414
)
 
$
11,936,475

Liabilities
 
 
 
 
 
 
Mortgage and other notes payable
 
$
6,922,027

 
$
(692,231
)
 
$
6,229,796

Credit facilities and term borrowings
 
420,409

 
—

 
420,409

Convertible senior notes
 
27,356

 
—

 
27,356

Securitization bonds payable
 
257,877

 
—

 
257,877

Junior subordinated notes
 
191,175

 
—

 
191,175

Accounts payable and other liabilities
 
205,142

 
7,321

 
212,463

Due to related parties
 
46,939

 
—

 
46,939

Intangible liabilities, net
 
113,967

 
—

 
113,967

Liabilities of properties held for sale
 
1,502,659

 
(1,408,179
)
 
94,480

Derivative liabilities, at fair value
 
302,316

 
—

 
302,316

Total liabilities
 
$
9,989,867

 
$
(2,093,089
)
 
$
7,896,778

_______________________
(i)
Refer to A, Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet—NRF Sales Initiatives.


14

(4)
The acquired assets and liabilities assumed for real estate generally include, but are not limited to land, buildings and improvements, identified tangible and intangible assets and liabilities associated with in-place leases, above- and below-market leases and goodwill, if any. The following table presents a summary of the major classes of intangible assets acquired and liabilities assumed as part of the Mergers (in thousands):
 
 
NSAM
 
NRF
 
Fair Value
Intangible assets
 
Fair Value
 
Historical
 
Fair Value
 
Historical
 
Adjustment
Management agreements and related intangibles(i)
 
$
2,511,020

 
$
203,728

 
$
—

 
$
—

 
$
2,307,292

In-place lease values
 
—

 
—

 
151,921

 
104,668

 
47,253

Above-market lease values
 
—

 
—

 
400,256

 
157,003

 
243,253

Below-market ground lease obligations
 
—

 
—

 
34,082

 
—

 
34,082

Other real estate intangible assets
 
—

 
—

 
58,990

 
37,279

 
21,711

Total
 
$
2,511,020

 
$
203,728

 
$
645,249

 
$
298,950

 
$
2,653,591

 
 
 
 
 
 
 
 
 
 
 
Intangible liabilities
 
 
 
 
 
 
 
 
 
 
NRF management agreement
 
$
—

 
$
—

 
$
1,800,000

 
$
—

 
$
1,800,000

Below-market lease values
 
—

 
—

 
133,222

 
111,828

 
21,394

Other real estate intangible liabilities
 
—

 
—

 
10,869

 
2,139

 
8,730

Total
 
$
—

 
$
—

 
$
1,944,091

 
$
113,967

 
$
1,830,124

__________________
(i)
NSAM’s management agreements and related intangibles are summarized as follows (in thousands):
 
 
NSAM
 
 
Fair Value
 
Historical
NSAM:
 
 
 
 
NSAM Retail Companies management agreements(a)
 
$
333,100

 
$
—

NorthStar Europe management agreement(a)
 
109,600

 
—

Trade name
 
59,000

 
—

NRF management agreement(a)
 
1,800,000

 
—

Townsend:
 
 
 
 
Customer relationships
 
185,580

 
180,862

Performance fees
 
5,710

 
5,289

Trade name
 
17,820

 
17,424

Proprietary technology
 
210

 
153

Total
 
$
2,511,020

 
$
203,728

___________________
(a)
The preliminary value was estimated using a discounted cash flow analysis, comparing the existing NSAM management agreements with a range of observable inputs for similar contracts including discount rates ranging between 7.0% and 9.0%. The NRF management agreement represents the off market fair value of such agreement. The NRF management agreement will cease to exist upon completion of the Mergers.
(b)
The estimated useful lives of NSAM’s management agreement and related intangibles range from three years to 30 years.

(5)
NRF has historically elected the fair value option for its investments in private equity funds, certain investments in unconsolidated ventures, real estate securities, securitization bonds payable and junior subordinated notes, where carrying value represents fair value. The adjustment reflects the fair value of certain investments in unconsolidated ventures carried at historical cost.
(6)
Represents elimination of historical goodwill of NSAM and certain NRF properties and an adjustment for goodwill based on the preliminary purchase price allocation (refer to Note 3. Pro Forma Merger Consideration).
(7)
Straight-lining of rent pursuant to the underlying leases associated with the real estate acquired in connection with the Mergers will commence at the effective date of the Mergers; therefore the amount of unbilled rent receivable on the balance sheet as of September 30, 2016 has been eliminated.
(8)
Represents fair value adjustments, including the elimination of deferred financing costs.
(9)
The carrying value of NRF credit facilities and term borrowings approximate fair value. The adjustment represents elimination of NSAM historical deferred financing costs related to its credit facility.
(10)
Represents the estimated deferred tax effect of the pro forma adjustments related to NSAM management agreements and investment in The Townsend Group using an estimated 40% effective income tax rate.
(11)
Represents an adjustment to eliminate a mortgage note payable related to certain properties for which NRF is currently in negotiations with the lender to foreclose. In April 2016, NRF gave three properties back to the lender and is expected to give the remaining property back to the lender in the fourth quarter 2016 upon which the mortgage note will be extinguished.
(12)
Represents an adjustment to reflect the fair value of Colony NorthStar preferred stock to be issued as merger consideration, as discussed in Note 3, Pro Forma Merger Consideration.
(13)
Adjustment to additional paid-in capital represents the remaining net asset value of NSAM and NRF after adjustments to retained earnings (accumulated deficit) and non-controlling interests (refer to footnote 14).
(14)
Fair value of non-controlling interests are derived as their proportionate share of the fair value of net assets attributable to them, such fair value is determined on same basis as described above.

15

(15)
NSAM historical includes an adjustment to eliminate NSAM’s interest in Island Hospitality Management Inc. Refer to footnote 2 in Note 4.B, Merger Adjustments, for additional information.
(16)
NSAM historical includes an elimination of the carrying value of NSAM’s ownership of 2.7 million shares of NRF common stock.  Refer to footnote 4 in Note 4.B, Merger Adjustments for additional information.

Note 5. Adjustments to the Unaudited Pro Forma Condensed Consolidated Statements of Operations
D.
NRF Sales Initiatives
The following tables present summarized pro forma adjustments for the nine months ended September 30, 2016 and year ended December 31, 2015 related to NRF Sales Initiatives. Such adjustments eliminate any activity related to assets sold or under contract to sell through November 4, 2016, as disclosed in NRF’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2016, however, it excludes the impact of potential reinvestment of proceeds from the NRF Sale Initiatives (in thousands):
 
 
Nine Months Ended September 30, 2016
 
 
Manufactured Housing
 
Multifamily
 
Healthcare Portfolio(1)
 
Industrial Portfolio
 
Private Equity Portfolio
 
CRE Debt Investments
 
CRE Securities
 
Total NRF Sales Initiatives
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental and escalation income
 
$
(147,680
)
 
$
(21,189
)
 
$
(69,239
)
 
$
(27,228
)
 
$
—

 
$
—

 
$
—

 
$
(265,336
)
Interest income
 
(4,341
)
 
—

 
(3
)
 
(3
)
 
—

 
(8,405
)
 
(772
)
 
(13,524
)
Other income
 
(4,018
)
 
(1,273
)
 
(930
)
 
—

 
—

 
—

 
—

 
(6,221
)
Total revenues
 
(156,039
)
 
(22,462
)
 
(70,172
)
 
(27,231
)
 
—

 
(8,405
)
 
(772
)
 
(285,081
)
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(42,781
)
 
(5,481
)
 
(22,729
)
 
(4,897
)
 
—

 
(393
)
 
—

 
(76,281
)
Property operating expenses
 
(58,034
)
 
(9,660
)
 
(23,735
)
 
(3,849
)
 
—

 
—

 
—

 
(95,278
)
Other expense—investment and servicing expenses
 
(389
)
 
(113
)
 
(95
)
 
(785
)
 
—

 
(42
)
 
—

 
(1,424
)
Transaction costs
 
(186
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(186
)
Provision for loan losses
 
(245
)
 
—

 
—

 
—

 
—

 
(2,806
)
 
—

 
(3,051
)
Depreciation and amortization
 
—

 
—

 
(27,889
)
 
(5,217
)
 
—

 
 
 
 
 
(33,106
)
Total expenses
 
(101,635
)
 
(15,254
)
 
(74,448
)
 
(14,748
)
 
—

 
(3,241
)
 
—

 
(209,326
)
Other income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments and other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Realized gain (loss) on investments and other
 
3,626

 
(21,800
)
 
(16,696
)
 
(13,235
)
 
9,889

 
1,302

 
—

 
(36,914
)
Equity in earnings of unconsolidated joint ventures
 
—

 
—

 
—

 
—

 
(10,799
)
 
—

 
—

 
(10,799
)
Income tax benefit (expense)
 
(542
)
 
—

 
(21
)
 
—

 
3,707

 
18

 
—

 
3,162

Income (loss) from continuing operations
 
(51,320
)
 
(29,008
)
 
(12,441
)
 
(25,718
)
 
2,797

 
(3,844
)
 
(772
)
—

(120,306
)
Non-controlling interests—investments
 
—

 
(2,179
)
 
(1,423
)
 


 
—

 
—

 
—

 
(3,602
)
Net income (loss) from continuing operations attributable to common stockholders
 
$
(51,320
)
 
$
(26,829
)
 
$
(11,018
)
 
$
(25,718
)
 
$
2,797

 
$
(3,844
)
 
$
(772
)
 
$
(116,704
)


16

 
 
Year Ended December 31, 2015
 
 
Manufactured Housing
 
Multifamily
 
Healthcare Portfolio(1)
 
Industrial Portfolio
 
Private Equity Portfolios
 
CRE Debt Investments
 
CRE Securities
 
Total NRF Sales Initiatives
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental and escalation income
 
$
(174,559
)
 
$
(32,201
)
 
$
(135,371
)
 
$
(39,850
)
 
$
—

 
$
—

 
$
—

 
$
(381,981
)
Interest income
 
(6,251
)
 
—

 
(1
)
 
(1
)
 
—

 
(34,023
)
 
(5,175
)
 
(45,451
)
Other income
 
(6,209
)
 
(1,951
)
 
(2,179
)
 
 
 
—

 
—

 
—

 
(10,339
)
Total revenues
 
(187,019
)
 
(34,152
)
 
(137,551
)
 
(39,851
)
 
—

 
(34,023
)
 
(5,175
)
 
(437,771
)
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(51,819
)
 
(8,560
)
 
(39,774
)
 
(7,319
)
 
—

 
(2,027
)
 
—

 
(109,499
)
Property operating expenses
 
(72,808
)
 
(15,509
)
 
(57,033
)
 
(5,604
)
 
—

 
—

 
—

 
(150,954
)
Other expense—investment and servicing expenses
 
(2,078
)
 
(87
)
 
(8,553
)
 
(1,116
)
 
—

 
(158
)
 
—

 
(11,992
)
Transaction costs
 
(1,779
)
 
—

 
—

 
(54
)
 
—

 
—

 
—

 
(1,833
)
Provision for loan losses
 
(766
)
 
—

 
—

 
 
 
—

 
(1,195
)
 
—

 
(1,961
)
Depreciation and amortization
 
(68,331
)
 
(6,928
)
 
(62,641
)
 
(10,401
)
 
—

 
—

 
—

 
(148,301
)
Total expenses
 
(197,581
)
 
(31,084
)
 
(168,001
)
 
(24,494
)
 
—

 
(3,380
)
 
—

 
(424,540
)
Other income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized gain (loss) on investments and other
 
1,709

 
—

 
—

 
—

 
—

 
—

 
—

 
1,709

Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
 
12,271

 
(3,068
)
 
30,450

 
(15,357
)
 
—

 
(30,643
)
 
(5,175
)
 
(11,522
)
Equity in earnings of unconsolidated joint ventures
 
—

 
—

 
—

 
 
 
(77,851
)
 
—

 
—

 
(77,851
)
Income tax benefit (expense)
 
435

 
—

 
55

 
 
 
7,911

 
164

 
—

 
8,565

Income (loss) from continuing operations
 
12,706

 
(3,068
)
 
30,505

 
(15,357
)
 
(69,940
)
 
(30,479
)
 
(5,175
)
 
(80,808
)
Non-controlling interests—investments
 
—

 
(165
)
 
8,061

 
 
 


 
—

 
—

 
7,896

Net income (loss) from continuing operations attributable to common stockholders
 
$
12,706

 
$
(2,903
)
 
$
22,444

 
$
(15,357
)
 
$
(69,940
)
 
$
(30,479
)
 
$
(5,175
)
 
$
(88,704
)
___________________
(1) Includes a portfolio of medical office buildings and a senior housing portfolio.
E.
Merger Adjustments
As a result of the Mergers, Colony NorthStar expects estimated annualized synergies of $115 million, consisting of $80 million of cash savings and $35 million of equity-based compensation savings.  The merger adjustments to the unaudited pro forma condensed consolidated statements of operations exclude integration activities or full savings that may result from realization of such future cost savings from operating efficiencies, revenue or other incremental synergies expected to result from the Mergers other than the executive compensation adjustments noted in footnotes 1(v) and 1(vii) below. The nine months ended September 30, 2016 and year ended December 31, 2015 pro forma condensed consolidated statements of operations exclude $48 million and $34 million, respectively, of expected cash savings as such amounts are not currently supportable through contracts or other agreements in place.

17

(1)
The following table presents a summary of pro forma adjustments related to the Mergers (in thousands):
 
Nine Months Ended September 30, 2016
 
Year Ended December 31, 2015
 
Colony
 
NSAM
 
NRF
 
Total
 
Colony
 
NSAM
 
NRF
 
Total
Pro Forma Adjustments to Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fee income
$
—

 
$
(139,955
)
(i) 
$
—

 
$
(139,955
)
 
$
—

 
$
(198,695
)
(i) 
$
—

 
$
(198,695
)
Other income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

Dividend income
$
—

 
$
(3,256
)
(ii) 
$
—

 
$
(3,256
)
 
$
—

 
$
—

 
$
—

 
$
—

Loan origination fee
—

 
—

 
(843
)
(iv) 
(843
)
 
—

 
—

 
(2,995
)
(iv) 
(2,995
)
Reimbursement between NSAM and managed companies
—

 
24,229

(iii) 
—

 
24,229

 
—

 
39,479

(iii) 
—

 
39,479

Total other income
$
—

 
$
20,973

 
$
(843
)
 
$
20,130

 
$
—

 
$
39,479

 
$
(2,995
)
 
$
36,484

Pro Forma Adjustments to Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

Management fee
$
—

 
$
—

 
$
(139,955
)
(i) 
$
(139,955
)
 
$
—

 
$
—

 
$
(198,695
)
(i) 
$
(198,695
)
Transaction costs
$
(11,345
)
(ix) 
$
(24,431
)
(ix) 
$
(10,338
)
(ix) 
$
(46,114
)
 
$
—

 
$
—

 
$
—

 
$
—

Compensation costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

Reimbursement between NSAM and managed companies
$
—

 
$
19,383

(iii) 
$
—

 
$
19,383

 
$
—

 
$
31,583

(iii) 
$
—

 
$
31,583

Cash compensation
—

 
(11,595
)
(v) 
(186
)
(v) 
(11,781
)
 
—

 
(45,353
)
(v) 
(499
)
(v) 
(45,852
)
Equity-based compensation expense
(815
)
(vi) 
(11,746
)
(v) 
(4,256
)
(v) 
(16,817
)
 
(1,726
)
(vi) 
55,127

(v)(vii) 
(20,392
)
(v) 
33,009

Total compensation costs(viii)
$
(815
)
 
$
(3,958
)
 
$
(4,442
)
 
$
(9,215
)
 
$
(1,726
)
 
$
41,357

 
$
(20,891
)
 
$
18,740

Other general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

Loan origination fee
$
—

 
$
(843
)
(iv) 
$
—

 
$
(843
)
 
$
—

 
$
(2,995
)
(iv) 
$
—

 
$
(2,995
)
Reimbursement between NSAM and managed companies
—

 
4,846

(iii) 
—

 
4,846

 
—

 
7,896

(iii) 
—

 
7,896

Total other general and administrative expenses
$
—

 
$
4,003

 
$
—

 
$
4,003

 
$
—

 
$
4,901

 
$
—

 
$
4,901

___________________________________________
(i)
Represents elimination of the management fee income (expense) between NSAM and NRF, respectively.
(ii)
Represents elimination of dividend income NSAM received from its ownership of NRF common stock for the nine months ended September 30, 2016. NSAM did not earn any dividend income for the year ended December 31, 2015.
(iii)
Represents reclassification of reimbursable expenses incurred on behalf of NSAM’s managed companies (excluding amounts allocated to NRF which do not result in an adjustment).
(iv)
Represents elimination of loan origination fees from NSAM to NRF.
(v)
Includes an adjustment to eliminate cash and equity-based compensation related to arrangements entered into by the NSAM executive officers in connection with the Mergers. The nine months ended September 30, 2016 does not adjust to eliminate the historical cash and equity-based compensation related to Messrs. Hamamoto and Gilbert who will remain at Colony NorthStar, and therefore, their historical cash and equity-based compensation will have a continuing impact on Colony NorthStar. Messrs. Hamamoto and Gilbert are expected to enter into new employment arrangements prior to the Mergers. Their historical cash and equity-based compensation may not be indicative of any future cash and equity-based compensation.
(vi)
Represents an adjustment to recognize equity-based compensation expense on outstanding Colony equity awards at their remeasured fair value.
(vii)
Includes the amortization of $97.3 million of equity-based compensation related to NSAM executive restricted stock units, which we refer to as RSUs, which will vest one year from issuance.  This amount was determined using the November 9, 2016 closing price of NSAM common stock multiplied by the maximum number of RSUs to be issued of 7,977,000; refer to Note G, Pro Forma Shares Outstanding and Earnings Per Share (3).
(viii)
The consolidated pro forma compensation expense of $202.3 million and $270.5 million for the nine months ended September 30, 2016 and year ended December 31, 2015 includes $56.8 million and $126.0 million of equity-based compensation expense, respectively.
(ix)
Represents the elimination of merger-related transaction costs incurred for the nine months ended September 30, 2016.
(2)
The following table summarizes adjustments to interest expense (in thousands):    
 
 
Nine Months Ended September 30, 2016
 
Year Ended December 31, 2015
Adjustments to interest expense:
 
Colony(i)
 
NSAM
 
NRF
 
Total
 
Colony(i)
 
NSAM
 
NRF
 
Total
Interest expense on NorthStar corporate borrowings(ii)
 
$
—

 
$
(16,060
)
 
$
(16,552
)
 
$
(32,612
)
 
$
—

 
$
(437
)
 
$
(29,519
)
 
$
(29,956
)
Amortization of deferred financing
 
—

 
(4,115
)
 
(2,908
)
 
(7,023
)
 
—

 
(341
)
 
(5,738
)
 
(6,079
)
Total
 
$
—

 
$
(20,175
)
 
$
(19,460
)
 
$
(39,635
)
 
$
—

 
$
(778
)
 
$
(35,257
)
 
$
(36,035
)
___________________________________________
(i)
The pro forma adjustments assume no additional borrowing on Colony’s credit facility or bridge financing. Refer to Note 4.B, Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet—Merger Adjustments footnote 7 for further information.
(ii)
NorthStar corporate borrowings are expected to be paid off and terminated in connection with the Mergers.
(3)
Represents elimination of historical unrealized losses related to NSAM’s ownership of NRF common stock.
(4)
Represents an adjustment to eliminate equity in earnings related to NSAM’s interest in Island Hospitality Management Inc. Refer to footnote 2 in Note 4.B, Merger Adjustments—NRF Sales Initiatives, for additional information.
(5)
Represents the income tax effect of pro forma adjustments related to the Mergers, calculated using an estimated 40% effective income tax rate on assets held in taxable REIT subsidiaries.

18

(6)
Represents an adjustment related to the non-controlling interest partner in the healthcare joint venture.
(7)
The following table summarizes adjustments to non-controlling interests in the operating partnership (in thousands):
Adjustments to non-controlling interests-operating partnership:
 
Nine Months Ended September 30, 2016
 
Year Ended December 31, 2015
Allocation to non-controlling interests—Colony NorthStar operating partnership(i)
 
$
(33,813
)

$
(26,806
)
Elimination of NRF operating partnership(ii)
 
3,537

 
3,206

Total
 
$
(30,276
)
 
$
(23,600
)
___________________________________________
(i)
Represents an adjustment to allocate the pro forma ownership interest of Colony NorthStar of 5.5%. Refer to Note 4.B, Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet—Merger Adjustments, footnote 11 for additional information.
(ii)
Represents elimination of the non-controlling interests in NRF LP. In connection with the Mergers, NRF LP will merge with NRF, converting non-controlling LTIP unit interests into common stock.
F.
Fair Value Adjustment
(8)
The following table presents a summary of adjustments related to NRF to amortization of above and below-market leases based on remaining lease terms ranging from one to 29 years (in thousands):
Adjustments to amortization of above/below market leases:
 
Nine Months Ended September 30, 2016
 
Year Ended December 31, 2015
 
 
 
 
 
Remove historical
 
$
5,016

 
$
11,289

Amortization using preliminary fair value
 
(21,387
)
 
35,341

Total
 
$
(16,371
)
 
$
46,630


(9)
The following table presents a summary of adjustments to interest expense related to the fair value of convertible senior notes, securitization bonds payable and mortgage and other notes payable related to NRF amortized over the respective remaining term of each borrowing (in thousands):
Adjustments to interest expense:
 
Nine Months Ended September 30, 2016
 
Year Ended December 31, 2015
Convertible senior notes
 
$
(5
)
 
$
(7
)
Mortgage and other notes payable
 
(1,192
)
 
(2,666
)
Total
 
$
(1,197
)
 
$
(2,673
)

(10)
Represents adjustments to amortization of NRF’s below-market ground lease and straight-line ground rent of $0.5 million and $0.5 million for the nine months ended September 30, 2016 and year ended December 31, 2015, respectively.
(11)
The following table presents a summary of adjustments to depreciation and amortization based on the historical useful lives for operating real estate and lease and other terms for intangible assets ranging from four to 40 years (in thousands):
 
 
Nine Months Ended September 30, 2016
 
Year Ended December 31, 2015
Adjustments to depreciation and amortization:
 
NSAM
 
NRF
 
Total
 
NSAM
 
NRF
 
Total
Remove historical
 
$
(7,355
)
 
$
(227,181
)
 
$
(234,536
)
 
$
—

 
$
(308,615
)
 
$
(308,615
)
Depreciation and amortization using preliminary fair value
 
57,298

 
271,859

 
329,157

 
76,398

 
389,402

 
465,800

Total
 
$
49,943

 
$
44,678

 
$
94,621

 
$
76,398

 
$
80,787

 
$
157,185

(12)
Represents the share of pro forma adjustments to interest and depreciation expenses attributable to non-controlling interests—investments based upon their respective ownership in each venture, as a result of the preliminary fair value adjustments to assets and liabilities.

19

G.
Pro Forma Shares Outstanding and Earnings Per Share
Shares and Units Outstanding
The following table presents a summary of pro forma shares, OP units and RSUs outstanding at the effective time of the Mergers (in thousands):
 
 
Colony
 
NSAM
 
NRF
 
Total(5)
Shares of Colony NorthStar common stock—pro forma basis(1)
 
167,053

 
189,487

 
198,534

 
555,074

OP units(2)
 
30,480

 
1,790

 
—

 
32,270

NSAM executive RSUs(3)
 
—

 
7,977

 
—

 
7,977

Restricted stock units(4)
 
—

 
660

 
275

 
935

Total
 
197,533

 
199,914

 
198,809

 
596,256

___________________________________________
(1)
Refer to Note 4.B, Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet—Merger Adjustments, footnote 9. Includes shares of both class A and class B pro forma Colony NorthStar common stock.
(2)
Refer to Note 4.B, Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet—Merger Adjustments, footnote 10.
(3)
The number of RSUs subject to replacement equity awards may vary based on a per share price equal to the greater of $15.00 or the volume weighted average price of a share of Colony NorthStar common stock over the first five trading days immediately following the closing of the Mergers.  The maximum number of RSUs to be issued are 7,977,000 with a maximum value of $119.6 million.  The above represents the maximum number of NSAM executive RSUs that would be issued; refer to Note E. Merger Adjustments (1)(vii).
(4)
Represents RSU grants to a non-employee of NSAM and NRF.
(5)
Excludes potential shares that may be issued in connection with retention plans or other equity awards issued prior to the Mergers.
Earnings (Loss) Per Share
The following table presents pro forma basic and diluted earnings (loss) per share after giving effect to the pro forma adjustments to the unaudited consolidated statements of operations (in thousands, except for per share data):
Pro forma earnings per share:
 
Nine Months Ended
September 30, 2016
 
Year Ended December 31, 2015
 
Numerator:
 
 
 
 
 
Net income (loss) from continuing operations attributable to common stockholders
 
$
(305,346
)
 
$
(101,839
)
 
Denominator:
 
 
 
 
 
Weighted average number of shares outstanding—basic
 
550,078

(1) 
548,328

(2) 
Weighted average number of shares outstanding—diluted
 
551,916

(1) 
549,781

(2) 
Earnings (loss) per share:
 
 
 
 
 
Net income (loss) from continuing operations attributable to common stockholders per share—basic
 
$
(0.56
)

$
(0.19
)
 
Net income (loss) from continuing operations attributable to common stockholders per share—diluted
 
$
(0.55
)

$
(0.19
)
 
___________________________________________
(1)
The following table presents pro forma basic and diluted weighted average shares outstanding for the nine months ended September 30, 2016 (in thousands, except for exchange ratios):
Weighted Average Shares—Basic
 
Colony
 
NSAM
 
NRF
 
Pro Forma Colony NorthStar
Historical weighted average shares—basic
 
112,133

 
183,251

 
180,803

 
 
NSAM executive officers equity-based awards vested upon the Mergers and converted into common stock, net(i)
 
—

 
3,593

 
846

 
 
NRF LTIP units converted to common stock(ii)
 
—

 
—

 
1,856

 
 
Shares of NRF common stock owned by NSAM
 
—

 
—

 
(2,700
)
 
 
Adjusted basic weighted average shares of common stock prior to the Mergers
 
112,133

 
186,844

 
180,805

 
 
Exchange ratio
 
1.4663

 
1.0000

 
1.0996

 
 
Weighted average shares of Colony NorthStar common stock—basic(iii)
 
164,421

 
186,844

 
198,813

 
550,078


20

Weighted Average Shares—Dilutive
 
Colony
 
NSAM
 
NRF
 
Pro Forma Colony NorthStar
Historical weighted average shares—dilutive
 
112,133

 
185,083

 
182,664

 
 
NSAM executive officers equity-based awards vested upon the Mergers and converted into common stock, net(i)
 
—

 
3,593

 
846

 
 
Shares of NRF common stock owned by NSAM
 
—

 
—

 
(2,700
)
 
 
Adjusted dilutive weighted average shares of common stock prior to the Mergers
 
112,133

 
188,676

 
180,810

 
 
Exchange ratio
 
1.4663

 
1.0000

 
1.0996

 
 
Weighted average shares of Colony NorthStar common stock—dilutive(iii)
 
164,421

 
188,676

 
198,819

 
551,916

___________________________________________
(i)
Represents an adjustment related to NSAM and NRF executive equity-based awards that vest upon the Mergers and converted into class A common stock, net of forfeitures, estimated shares withheld for tax and adjustments due to timing. The adjustment assumes such awards convert to common stock on January 1, 2015, the beginning of the earliest period presented. The adjustment related to NSAM includes 3.0 million executive equity-based shares (10.6 million shares issued net of 4.0 million shares forfeited and 3.7 million shares estimated to be retired upon vesting for tax withholding) and 0.6 million shares due to timing. The adjustment related to NRF includes 0.8 million executive equity-based shares (2.9 million issued net of 1.1 million shares forfeited and 1.0 million shares estimated to be retired upon vesting for tax withholding) and an immaterial amount due to timing.
(ii)
In connection with the Mergers, NRF LP will be merged into NRF resulting in existing LTIP units to be converted into common stock.
(iii)
Excludes the effect of (a) convertible senior notes that were not dilutive as of September 30, 2016; (b) 8.0 million of NSAM executive RSUs; (c) 2.7 million and 0.5 million shares of NSAM and NRF non-executive RSUs and restricted stock, respectively; (d) 0.7 million and 0.3 million shares of NSAM and NRF RSUs to non-employees, respectively; (e) 0.7 million shares of NSAM restricted stock issued to Townsend Holdings LLC; (f) 2.1 million shares of Colony restricted stock; and (g) potential shares that may be issued in connection with retention plans or other equity awards issued prior to the Mergers.
(2)
The following tables present pro forma basic and diluted weighted average shares outstanding for the year ended December 31, 2015 (in thousands, except for exchange ratios):
Weighted Average Shares—Basic
 
Colony
 
NSAM
 
NRF
 
Pro Forma Colony NorthStar
Historical weighted average shares—basic
 
110,931

 
188,706

 
174,873

 
 
NSAM executive officers equity-based awards vested upon the Mergers and converted into common stock, net(i)
 
—

 
4,332

 
1,155

 
 
NRF LTIP units converted to common stock(ii)
 
—

 
—

 
1,856

 
 
Shares of NRF common stock owned by NSAM
 
—

 
—

 
(2,700
)
 
 
Adjusted basic weighted average shares of common stock prior to the Mergers
 
110,931

 
193,038

 
175,184

 
 
Exchange ratio
 
1.4663

 
1.0000

 
1.0996

 
 
Weighted average shares of Colony NorthStar class A common stock—basic(iii)
 
162,658

 
193,038

 
192,632

 
548,328

Weighted Average Shares—Dilutive
 
Colony
 
NSAM
 
NRF
 
Pro Forma Colony NorthStar
Historical weighted average shares—dilutive
 
110,931

 
193,119

 
176,345

 
 
NSAM executive officers equity-based awards vested upon the Mergers and converted into common stock, net(i)
 
—

 
1,794

 
1,155

 
 
Shares of NRF common stock owned by NSAM
 
—

 
—

 
(2,700
)
 
 
Adjusted dilutive weighted average shares of common stock prior to the Mergers
 
110,931

 
194,913

 
174,800

 
 
Exchange ratio
 
1.4663

 
1.0000

 
1.0996

 
 
Weighted average shares of Colony NorthStar common stock—dilutive(iii)
 
162,658

 
194,913

 
192,210

 
549,781


21

___________________________________________
(i)
Represents NSAM and NRF executive equity-based awards that vest upon the Mergers and converted into common stock, net of forfeitures, estimated shares withheld for tax and adjustments due to timing. The adjustment assumes such awards convert to common stock on January 1, 2015, the beginning of the earliest period presented. The adjustment related to NSAM includes 3.0 million net shares issued, as described in footnote 1(i), and 1.3 million shares due to timing. Diluted shares for the year ended December 31, 2015 also includes an adjustment to exclude 2.6 million shares that were included in the historical dilutive for such period presented. The adjustment related to NRF includes 0.8 million net shares issued, as described in footnote 1(i), and 0.3 million shares due to timing.
(ii)
In connection with the Mergers, NRF LP will be merged into NRF resulting in existing LTIP units converted to common stock.
(iii)
Excludes the effect of: (a) convertible senior notes that were not dilutive as of December 31, 2015; (b) 8.0 million of NSAM executive RSUs; (c) an immaterial amount of NRF and 2.3 million shares of NSAM non-executive RSUs and restricted stock; (d) 0.7 million and 0.3 million of NSAM and NRF RSUs to non-employees, respectively; (e) 1.2 million shares of Colony restricted stock; and (f) potential shares that may be issued in connection with retention plans or other equity awards issued prior to the Mergers.

22