Document
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37597
NORTHSTAR REALTY EUROPE CORP.
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or
Organization)
32-0468861
(IRS Employer
Identification No.)
590 Madison Avenue, 34th Floor, New York, NY 10022
(Address of Principal Executive Offices, Including Zip Code)
(212) 547-2600
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o

 
Smaller reporting company o

Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
The Company has one class of common stock, $0.01 par value per share, 49,817,436 shares outstanding as of November 2, 2018.
 


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

Index
 
Page
 
 
 
 
 
 
 
 
 
 
 








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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 the operating performance of our investments, our liquidity and financing needs, the effects of our current strategies and investment activities, our ability to grow our business, our expected leverage, our expected cost of capital, our ability to divest non-strategic properties, our management’s track record and our ability to raise and effectively deploy capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the economic environment. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements. These factors include, but are not limited to:
the effect of economic conditions, particularly in Europe, on the valuation of our investments and on the tenants of the real property that we own;
the effect of the Mergers (as defined in Note 1 to the financial statements included in Part I Item I) on our business;
the ability of Colony Capital Inc., or CLNY, to scale its operations in Europe to effectively manage our company;
the unknown impact of the exit of the United Kingdom, or Brexit, or one or more other countries from the European Union, or EU, or the potential default of one or more countries in the EU or the potential break-up of the EU;
our ability to qualify and remain qualified as a real estate investment trust, or REIT;
adverse domestic or international economic geopolitical conditions and the impact on the commercial real estate industry;
volatility, disruption or uncertainty in the financial markets;
access to debt and equity capital and our liquidity;
our substantial use of leverage and our ability to comply with the terms of our borrowing arrangements;
the impact that rising interest rates may have on our floating rate financing;
our ability to monetize our assets on favorable terms or at all;
our ability to obtain mortgage financing on our real estate portfolio on favorable terms or at all;
our ability to acquire attractive investment opportunities and the impact of competition for attractive investment opportunities;
the effect of an increased number of activist stockholders owning our stock and stockholder activism generally;
the effects of being an externally-managed company, including our reliance on CLNY and its affiliates and sub-advisors/co-venturers in providing management services to us, the payment of substantial base management and incentive fees to our manager, the allocation of investments by CLNY among us and CLNY’s other sponsored or managed companies and strategic vehicles and various conflicts of interest in our relationship with CLNY;
performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments and available for distribution;
restrictions on our ability to engage in certain activities and the requirement that we may be required to access capital at inopportune times as a result of our borrowings;
our ability to make borrowings under our credit facility;
the impact of adverse conditions affecting office properties;
illiquidity of properties in our portfolio;
our ability to realize current and expected return over the life of our investments;

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tenant defaults or bankruptcy;
any failure in our due diligence to identify all relevant facts in our underwriting process or otherwise;
the impact of terrorism or hostilities involving Europe;
our ability to manage our costs in line with our expectations and the impact on our cash available for distribution, or CAD, and net operating income, or NOI, of our properties;
our ability to satisfy and manage our capital requirements;
environmental and regulatory requirements, compliance costs and liabilities relating to owning and operating properties in our portfolio and to our business in general;
effect of regulatory actions, litigation and contractual claims against us and our affiliates, including the potential settlement and litigation of such claims;
changes in European, international and domestic laws or regulations governing various aspects of our business;
future changes in foreign, federal, state and local tax law that may have an adverse impact on the cash flow and value of our investments;
potential devaluation of foreign currencies, predominately the Euro and U.K. Pound Sterling, relative to the U.S. dollar due to quantitative easing in Europe, Brexit and/or other factors which could cause the U.S. dollar value of our investments to decline;
general foreign exchange risk associated with properties located in European countries located outside of the Euro Area, including the United Kingdom;
the loss of our exemption from the definition of an “investment company” under the Investment Company Act of 1940, as amended;
CLNY’s ability to hire and retain qualified personnel and potential changes to key personnel providing management services to us;
the lack of historical financial statements for properties we have acquired and may acquire in compliance with U.S. Securities and Exchange Commission, or SEC, requirements and U.S. generally accepted accounting principles, or U.S. GAAP, as well as the lack of familiarity of our tenants and third-party service providers with such requirements;
the potential failure to maintain effective internal controls and disclosure controls and procedures;
the historical consolidated financial statements included in this Quarterly Report on Form 10-Q not providing an accurate indication of our performance in the future or reflecting what our financial position, results of operations or cash flow would have been had we operated as an independent public company during the periods presented;
our status as an emerging growth company; and
compliance with the rules governing REITs.
The foregoing list of factors is not exhaustive. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.
Factors that could have a material adverse effect on our operations and future prospects are set forth in our filings with the SEC included in Part I, Item 1A. of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2017 under “Risk Factors.” The risk factors set forth in our filings with the SEC could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.



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PART I
Item 1.    Financial Statements
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
    
 
September 30, 2018
 
December 31, 2017
Assets
 
 

Operating real estate, gross
$
1,566,505


$
1,606,890

Less: accumulated depreciation
(119,133
)

(95,356
)
Operating real estate, net
1,447,372


1,511,534

Preferred equity investments
34,137


35,347

Cash and cash equivalents
61,869


64,665

Restricted cash
7,097


6,917

Receivables, net of allowance of $691 and $747 as of September 30, 2018 and December 31, 2017, respectively
8,013


9,048

Assets held for sale


169,082

Derivative assets, at fair value
10,941


7,024

Intangible assets, net
100,831


114,185

Other assets, net
28,466


23,115

Total assets
$
1,698,726


$
1,940,917

Liabilities
 

 
Mortgage and other notes payable, net
$
1,092,708


$
1,223,443

Accounts payable and accrued expenses
16,954


27,240

Due to affiliates (refer to Note 6)
4,259


3,590

Derivative liabilities, at fair value
426


5,270

Intangible liabilities, net
25,142


28,632

Liabilities related to assets held for sale


648

Other liabilities
24,276


25,757

Total liabilities
1,163,765


1,314,580

Commitments and contingencies



Redeemable noncontrolling interest (refer to Note 9)
1,930


1,992

Equity
 

 
NorthStar Realty Europe Corp. Stockholders’ Equity
 

 
Preferred stock, $0.01 par value, 200,000,000 shares authorized, no shares issued and outstanding as of September 30, 2018 and December 31, 2017



Common stock, $0.01 par value, 1,000,000,000 shares authorized, 49,726,647 and 55,402,259 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
498


555

Additional paid-in capital
860,853


940,579

Retained earnings (accumulated deficit)
(333,464
)

(347,053
)
Accumulated other comprehensive income (loss)
1,564


25,618

Total NorthStar Realty Europe Corp. stockholders’ equity
529,451


619,699

Noncontrolling interests
3,580


4,646

Total equity
533,031


624,345

Total liabilities, redeemable noncontrolling interest and equity
$
1,698,726


$
1,940,917

    


Refer to accompanying notes to consolidated financial statements.


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NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,

2018
 
2017
 
2018
 
2017
Revenues

 
 
 
 
 
 
Rental income
$
23,920

 
$
27,747

 
$
75,744

 
$
79,308

Escalation income
4,283

 
5,641

 
15,186

 
16,360

Interest income
708

 
704

 
2,143

 
1,001

Other income
76

 
171

 
497

 
708

Total revenues
28,987


34,263


93,570


97,377

Expenses

 
 
 
 
 
 
Properties - operating expenses
5,690

 
7,519

 
19,422

 
22,521

Interest expense
5,318

 
6,536

 
17,280

 
19,641

Transaction costs
1,129

 
332

 
1,986

 
1,565

Management fee, related party
4,011

 
3,585

 
12,391

 
10,716

Other expenses
1,150

 
1,996

 
3,847

 
6,604

General and administrative expenses
1,952

 
1,723

 
5,631

 
5,875

Compensation expense(1)
1,741

 
2,839

 
3,292

 
20,094

Depreciation and amortization
11,013

 
14,396

 
34,640

 
39,479

Total expenses
32,004


38,926


98,489


126,495

Other income (loss)


 
 
 
 
 
 
Other gain (loss), net
627

 
(3,510
)
 
(15
)
 
(10,833
)
Realized gain on sales, net
2,706

 
1,719

 
42,020

 
7,397

Income (loss) before income tax benefit (expense)
316


(6,454
)

37,086


(32,554
)
Income tax benefit (expense)
240

 
(352
)
 
277

 
(316
)
Net income (loss)
556


(6,806
)

37,363


(32,870
)
Net (income) loss attributable to noncontrolling interests
(4
)
 
36

 
(225
)
 
303

Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
$
552


$
(6,770
)

$
37,138


$
(32,567
)
Earnings (loss) per share:


 
 
 
 
 
 
Basic
$
0.01

 
$
(0.12
)
 
$
0.70

 
$
(0.59
)
Diluted
$
0.01

 
$
(0.12
)
 
$
0.68

 
$
(0.59
)
Weighted average number of shares:
 
 
 
 
 
 
 
Basic
49,991,303

 
55,155,440

 
52,125,685

 
55,004,888

Diluted
51,983,064

 
55,602,078

 
53,960,553

 
55,565,341

____________________________
(1)
For the nine months ended September 30, 2018, compensation expense includes the effects of the adoption of the accounting standard update related to stock compensation accounting (ASU 2018-07) (refer to Note 7). Compensation expense for the three and nine months ended September 30, 2018 and 2017 is comprised of equity-based compensation expenses. For the nine months ended September 30, 2017, compensation expense includes the impact of substantially all time based and certain performance based awards vesting in connection with the change of control of the Manager (refer to Note 7).








Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
556

 
$
(6,806
)
 
$
37,363

 
$
(32,870
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net
(4,300
)
 
20,532

 
(24,222
)
 
67,005

Total other comprehensive income (loss)
(4,300
)

20,532


(24,222
)
 
67,005

Comprehensive income (loss)
(3,744
)

13,726


13,141


34,135

Comprehensive (income) loss attributable to noncontrolling interests
 
 
 
 
 
 
 
Net income (loss)
(4
)
 
36

 
(225
)
 
303

Foreign currency translation adjustment, net
28

 
25

 
168

 
(300
)
Total comprehensive (income) loss attributable to noncontrolling interests
24


61


(57
)

3

Comprehensive income (loss) attributable to NorthStar Realty Europe Corp. common stockholders

$
(3,720
)

$
13,787


$
13,084


$
34,138






















Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY EUROPE CORP. 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 NorthStar Stockholders’ Equity
 
Non controlling
Interests
 
Total
Equity
 
 
Shares
 
Amount
 
Balance as of December 31, 2016
55,395

 
$
554

 
$
925,473

 
$
(282,769
)
 
$
(51,424
)
 
$
591,834

 
$
8,073

 
$
599,907

Reallocation of interest in Operating Partnership (refer to Note 9)

 

 
1,817

 

 

 
1,817

 
(1,817
)
 

Conversion of Common Units to common stock (refer to Note 9)
263

 
3

 
3,054

 

 

 
3,057

 
(3,057
)
 

Amortization of equity-based compensation (refer to Note 7)

 

 
17,842

 

 

 
17,842

 
2,174

 
20,016

Issuance and vesting of restricted stock, net of tax withholding
516

 
6

 
(6
)
 

 

 

 

 

Tax withholding related to vesting of equity-based compensation
(861
)
 
(9
)
 
(10,985
)
 

 

 
(10,994
)
 

 
(10,994
)
Other comprehensive income (loss)

 

 

 

 
66,705

 
66,705

 
300

 
67,005

Dividends on common stock and equity-based compensation(1)

 

 

 
(24,862
)
 

 
(24,862
)
 
(244
)
 
(25,106
)
Net income (loss)

 

 

 
(32,567
)
 

 
(32,567
)
 
(303
)
 
(32,870
)
Balance as of September 30, 2017 (Unaudited)
55,313

 
$
554

 
$
937,195

 
$
(340,198
)
 
$
15,281

 
$
612,832

 
$
5,126

 
$
617,958

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
55,402

 
$
555

 
$
940,579

 
$
(347,053
)
 
$
25,618

 
$
619,699

 
$
4,646

 
$
624,345

Reallocation of interest in Operating Partnership (refer to Note 9)

 

 
28

 

 

 
28

 
(28
)
 

Conversion of Common Units to common stock (refer to Note 9)
25

 

 
216

 

 

 
216

 
(216
)
 

Distributions to noncontrolling interest

 

 

 

 

 

 
(131
)
 
(131
)
Redemption of Common Units

 

 

 

 

 

 
(582
)
 
(582
)
Amortization of equity-based compensation (refer to Note 7)

 

 
4,168

 

 

 
4,168

 

 
4,168

Issuance and vesting of restricted stock, net of tax withholding
375

 
4

 
(4
)
 

 

 

 

 

Retirement of shares of common stock
(6,075
)
 
(61
)
 
(83,383
)
 

 

 
(83,444
)
 

 
(83,444
)
Other comprehensive income (loss)

 

 

 

 
(24,054
)
 
(24,054
)
 
(168
)
 
(24,222
)
Dividends on common stock and equity-based compensation(1)

 

 

 
(23,549
)
 

 
(23,549
)
 
(166
)
 
(23,715
)
Cumulative effect of adoption of new accounting pronouncements (refer to Note 2)

 

 
(751
)
 

 

 
(751
)
 

 
(751
)
Net income (loss)

 

 

 
37,138

 

 
37,138

 
225

 
37,363

Balance as of September 30, 2018 (Unaudited)
49,727


$
498


$
860,853


$
(333,464
)

$
1,564


$
529,451


$
3,580


$
533,031

________________
(1)
For the three months ended September 30, 2018 and 2017, the Company paid $0.15 of dividends per share of common stock, respectively. For the nine months ended September 30, 2018 and 2017, the Company paid $0.45 of dividends per share of common stock, respectively.

















Refer to accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
37,363

 
$
(32,870
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
34,640

 
39,479

Amortization of deferred financing costs
2,358

 
2,340

Amortization of equity-based compensation
3,292

 
20,016

Allowance for uncollectible accounts
468

 
403

Other (gain) loss, net
15

 
10,833

Realized (gain) loss on sales
(42,020
)
 
(7,397
)
Amortization of capitalized above/below market leases
379

 
(256
)
Straight line rental income
(6,489
)
 
(3,864
)
Deferred income taxes, net
(456
)
 
(141
)
Changes in assets and liabilities:
 
 
 
Receivables
426

 
(1,380
)
Other assets
(2,872
)
 
(579
)
Accounts payable and accrued expenses
(5,881
)
 
(6,412
)
Due to related party
675

 
(1,507
)
Other liabilities
(1,562
)
 
875

Net cash provided by (used in) operating activities
20,336


19,540

Cash flows from investing activities:
 
 
 
Improvements of operating real estate
(12,157
)
 
(10,143
)
Origination of preferred equity investments

 
(35,086
)
Payment relating to sale of operating real estate
204,639

 
48,622

Escrow receivable
3,260

 

Deferred leasing costs
(1,326
)
 
(3,813
)
Net cash provided by (used in) investing activities
194,416


(420
)
Cash flows from financing activities:
 
 
 
Repayment of mortgage and other notes payable
(122,412
)
 
(12,888
)
Borrowings from credit facility
20,000

 
35,000

Borrowings from mortgage and other notes payable
23,882

 
5,567

Repayment of credit facility
(20,000
)
 
(35,000
)
Payment of financing costs
(880
)
 
(1,888
)
Settlement of derivatives
(4,854
)
 
1,688

Purchase of derivative instruments
(3,419
)
 

Tax withholding related to vesting of equity-based compensation

 
(10,994
)
Repurchase of common stock
(83,444
)
 

Dividends
(23,715
)
 
(25,106
)
Redemption of Common Units
(582
)
 

Distributions to noncontrolling interest
(131
)
 

Net cash provided by (used in) financing activities
(215,555
)

(43,621
)
Effect of foreign currency translation on cash and cash equivalents and restricted cash
(1,813
)
 
6,195

Net increase (decrease) in cash and cash equivalents and restricted cash
(2,616
)

(18,306
)
Cash and cash equivalents and restricted cash—beginning of period
71,582

 
76,550

Cash and cash equivalents and restricted cash—end of period
$
68,966


$
58,244





Refer to accompanying notes to consolidated financial statements.

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

 
Nine Months Ended September 30,
 
2018
 
2017
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
Beginning of the period
 
 
 
Cash and cash equivalents
$
64,665

 
$
66,308

Restricted cash
6,917

 
10,242

Total cash, cash equivalents and restricted cash, beginning of period
$
71,582

 
$
76,550

 
 
 
 
End of period
 
 
 
Cash and cash equivalents
$
61,869

 
$
49,728

Restricted cash
7,097

 
8,516

Total cash, cash equivalents and restricted cash, end of period
$
68,966

 
$
58,244

 
 
 
 
 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Reclassification of operating real estate to assets held for sale
$

 
$
45,224

Conversion of Common Units to common stock
216

 
3,057

Reclassification of intangibles to assets and liabilities held for sale

 
25,608

Reclassification of other assets and liabilities to assets held for sale

 
2,856

Reallocation of interest in Operating Partnership
28

 
1,817

Accrued capital expenditures, deferred assets
1,007

 
689





























Refer to accompanying notes to consolidated financial statements.


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NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Formation and Organization
NorthStar Realty Europe Corp. (“NorthStar Europe” or the “Company”) (NYSE: NRE), a publicly-traded real estate investment trust (“REIT”), is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France. The Company commenced operations on November 1, 2015 following the spin-off by NorthStar Realty Finance Corp. (“NorthStar Realty”) of its European real estate business (excluding its European healthcare properties) into a separate publicly-traded company, NorthStar Realty Europe Corp., a Maryland corporation (the “Spin-off”). The Company’s objective is to provide its stockholders with stable and recurring cash flow supplemented by capital growth over time.
The Company is externally managed and advised by an affiliate of the Manager. References to “the Manager” refer to NorthStar Asset Management Group Inc. (“NSAM”) for the period prior to the Mergers (refer below) and Colony Capital, Inc. (“Colony Capital” or “CLNY”), formerly known as Colony NorthStar, Inc., for the period subsequent to the Mergers.    
Substantially all of the Company’s assets, directly or indirectly, are held by, and the Company conducts its operations, directly or indirectly, through NorthStar Realty Europe Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the “Operating Partnership”). The Company has elected to be taxed, and will continue to conduct its operations so as to continue to qualify, as a REIT for U.S. federal income tax purposes.
All references herein to the Company refer to NorthStar Realty Europe Corp. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.
Merger Agreements among NSAM, NorthStar Realty and Colony Capital, Inc.
On January 10, 2017, the Company’s external manager, NSAM, completed a tri-party merger with NorthStar Realty and Colony Capital, Inc. (“Legacy Colony”), pursuant to which the companies combined in an all-stock merger (“the Mergers”) of equals transaction to create a diversified real estate and investment management company. Under the terms of the merger agreement, NSAM, Legacy Colony and NorthStar Realty, through a series of transactions, merged with and into NSAM, which was renamed Colony NorthStar, Inc. (NYSE: CLNS). Effective June 25, 2018, Colony NorthStar, Inc. changed its name from Colony NorthStar, Inc. to Colony Capital, Inc. and its ticker symbol on the New York Stock Exchange (“NYSE”) from “CLNS” to “CLNY.”
Amended and Restated Management Agreement
On November 9, 2017, the Company entered into an amended and restated management agreement (the “Amended and Restated Management Agreement”) with an affiliate of the Manager, effective as of January 1, 2018. Refer to Note 6 “Related Party Arrangements” for a description of the terms of the Amended and Restated Management Agreement.
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 statement of the Company’s consolidated 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, as amended, for the fiscal year ended December 31, 2017, which was filed with the U.S. Securities and Exchange Commission (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 (“VIE”) where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.

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

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.
Reclassifications
Certain prior period amounts have been reclassified in the consolidated financial statements to conform to current period presentation. Unrealized gain (loss) on derivatives and other has been renamed to other gain (loss), net and realized gain (loss) on sales and other has been renamed to realized gain on sales, net for presentational purposes only. Additionally, the Company has reclassified the gain (loss) on net cash on derivatives from realized gain on sales, net to other gain (loss), net on the consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (refer to Note 10).
Intangible Assets and Intangible Liabilities
The Company records acquired identified intangibles, which includes intangible assets (such as value of the above-market leases, in-place leases, below-market ground leases, goodwill and other intangibles) and intangible liabilities (such as the value of below-market leases), based on estimated fair value. The value allocated to the above or below-market leases is amortized net to rental income, the value of above or below-market ground leases is amortized into properties - operating expense and in-place leases is amortized into depreciation and amortization expense, respectively, in the consolidated statements of operations on a straight-line basis over the respective remaining lease term.
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination and is not amortized. The Company analyzes goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit, related to such goodwill, is less than the carrying amount. If the carrying amount exceeds fair value an impairment is recorded for the difference.
The following table presents identified intangibles as of September 30, 2018 and December 31, 2017 (dollars in thousands):
 
September 30, 2018
 
December 31, 2017
 
Gross Amount
 
Accumulated Amortization
 
Net
 
Gross Amount
 
Accumulated Amortization
 
Net
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
In-place lease
$
63,400

 
$
(31,055
)
 
$
32,345

 
$
64,427

 
$
(24,290
)
 
$
40,137

Above-market lease
33,956

 
(12,660
)
 
21,296

 
34,882

 
(9,919
)
 
24,963

Below-market ground lease
33,348

 
(1,364
)
 
31,984

 
34,497

 
(1,109
)
 
33,388

Goodwill(1)
15,206

 
N/A

 
15,206

 
15,697

 
 N/A

 
15,697

Total
$
145,910


$
(45,079
)

$
100,831


$
149,503


$
(35,318
)
 
$
114,185

 
 
 
 
 
 
 
 
 
 
 
 
Intangible liabilities:
 
 
 
 
 
 
 
 
 
 
 
Below-market lease
$
31,225

 
$
(11,191
)
 
$
20,034

 
$
32,267

 
$
(8,964
)
 
$
23,303

Above-market ground lease
5,341

 
(233
)
 
5,108

 
5,513

 
(184
)
 
5,329

Total
$
36,566

 
$
(11,424
)
 
$
25,142

 
$
37,780

 
$
(9,148
)
 
$
28,632

_____________________________
(1)
Represents goodwill associated with certain acquisitions in exchange for shares in the underlying portfolios. The goodwill and a corresponding deferred tax liability was recorded at acquisition based on tax basis differences.


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

The following table presents annual amortization of intangible assets and liabilities as of September 30, 2018 (dollars in thousands):
 
 
Intangible Assets
 
Intangible Liabilities
 
 
In-place Leases, Net
 
Above-market Leases, Net
 
Below-market Ground Lease Value, Net
 
Below-market Leases, Net
 
Above-market Ground Lease Value, Net
Remaining 2018
 
$
2,258

 
$
1,055

 
$
97

 
$
677

 
$
18

Years ending December 31:
 
 
 
 
 
 
 
 
 
 
2019
 
8,553

 
3,927

 
388

 
2,708

 
72

2020
 
6,898

 
3,730

 
388

 
2,675

 
72

2021
 
5,851

 
3,722

 
388

 
2,510

 
72

2022
 
4,102

 
3,722

 
388

 
2,503

 
72

2023 and thereafter
 
4,683

 
5,140

 
30,335

 
8,961

 
4,802

Total
 
$
32,345


$
21,296


$
31,984


$
20,034


$
5,108

Other Assets and Other Liabilities
The following tables present a summary of other assets and other liabilities as of September 30, 2018 and December 31, 2017 (dollars in thousands):
 
September 30, 2018
 
December 31, 2017
Other assets:
 
 
 
Prepaid expenses
$
2,018

 
$
1,936

Deferred leasing and other costs, net
6,551

 
6,019

Deferred tax assets, net
1,126

 

Straight-line rent, net
15,800

 
10,969

Escrow receivable

 
3,286

Other
2,971

 
905

Total
$
28,466

 
$
23,115

 
 
 
 
 
September 30, 2018
 
December 31, 2017
Other liabilities:

 
 
Deferred tax liabilities
$
8,951

 
$
8,548

Prepaid rent received and unearned revenue
7,130

 
8,406

Tenant security deposits
4,059

 
4,435

Prepaid escalation and other income
4,023

 
3,982

Other
113

 
386

Total
$
24,276

 
$
25,757

Revenue Recognition
Operating Real Estate
Rental and escalation income from operating real estate is derived from leasing of space to various types of tenants. Rental revenue recognition commences when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. The leases are for fixed terms of varying length and generally provide for annual rentals, subject to indexation, and expense reimbursements to be paid in quarterly or monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in other assets, net 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. Escalation income represents revenue from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by the Company on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.
In a situation in which a lease or leases associated with a significant tenant have been, or are expected to be, terminated early, the Company evaluates the remaining useful life of depreciable or amortizable assets in the asset group related to the lease that will be terminated (i.e., tenant improvements, above and below market lease intangibles, in-place lease value and leasing commissions). Based upon consideration of the facts and circumstances surrounding the termination, the Company may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within depreciation and amortization in the consolidated statements of operations.

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

Preferred Equity 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 investment is reclassified to held for sale.
Equity-Based Compensation
Equity-classified stock awards granted to non-employees that have a service condition are measured at fair value at date of grant. For time-base awards, fair value is determined based on the closing price of the Company's common stock at date of grant. For performance-based awards, fair value is determined based on the stock price at the date of grant and an estimate of the probable achievement of such measure using a Monte Carlo analysis under a risk-neutral premise using a risk-free interest rate. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the awards, with the amount of compensation expense recognized at the end of a reporting period at least equal to the fair value of the portion of the award that has vested through that date. Compensation expense is adjusted for actual forfeitures upon occurrence.
Earnings Per Share
The Company’s basic earnings per share (“EPS”) is calculated using the two-class method for each class of common stock and participating security as if all earnings had been distributed by dividing net income (loss) attributable to common stockholders by the weighted average number of common stock outstanding. Diluted EPS reflects the maximum potential dilution that could occur from the Company’s share-based compensation, consisting of unvested restricted stock awards, restricted stock units (“RSUs”), performance common stock or other contracts to issue common stock, assuming performance hurdles have been met, were converted to common stock, including limited partnership interests in the Operating Partnership owned by holders other than the Company (“Common Units”) and Common Units which are structured as profits interests (“LTIP Units” collectively referred to as Unit Holders). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period. The Company’s unvested restricted stock awards, certain RSUs and LTIP Units contain rights to receive non-forfeitable dividends and thus are participating securities. Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, net income is first reduced for distributions declared on all classes of participating securities to arrive at undistributed earnings. Under the two-class method, net loss is reduced for distributions declared on participating securities only if such security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are translated into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency translation adjustment (“CTA”), net, is recorded as a component of accumulated OCI in the consolidated statements of equity. For the three months ended September 30, 2018 and 2017, the Company reclassified $(0.4) million and $0.1 million, respectively, of CTA to realized gain on sales, net in the consolidated statements of operations due to the sale of certain real estate assets (refer to Note 3). For the nine months ended September 30, 2018 and 2017, the Company reclassified $7.6 million and $(0.3) million, respectively, of CTA to realized gain on sales, net in the consolidated statements of operations due to the sale of certain real estate assets (refer to Note 3).
Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are remeasured into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency remeasurement adjustment is recorded in other gain (loss), net in the consolidated statements of operations.

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

Income Taxes
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes with the initial filing of its 2015 U.S. federal tax return and will continue to comply with the related provisions of the Internal Revenue Code of 1986, as amended, the (“Internal Revenue Code”). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. The Company distributes to its stockholders 100% of its taxable income and therefore no provision for U.S. federal income taxes has been included in the accompanying consolidated financial statements for the three and nine months ended September 30, 2018 and 2017.
The Company conducts its business through foreign subsidiaries which may be subject to local level income tax in the European jurisdictions it operates. The Company has also elected taxable REIT subsidiary (“TRS”) status on certain subsidiaries. This enables the Company to provide services that would otherwise be considered impermissible for REITs and participate in activities that do not qualify as “rents from real property.” The TRS that is not resident in the U.S. (“foreign TRS”) and, as such, not subject to U.S. taxation but is subject to foreign income taxes only. In addition, the REIT will not generally be subject to any additional U.S. taxes on the repatriation of foreign TRS earnings.
For the Company’s foreign subsidiaries, including the Company’s foreign TRS, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the foreign tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. The Company evaluates the realizability of its deferred tax assets (e.g. net operating loss) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Due to past and projected losses in certain local jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company recognized net cumulative valuation allowances against the Company’s deferred tax assets. The Company will continue to review its deferred tax assets in accordance with U.S. GAAP. The Company recorded an income tax benefit of $0.2 million for the three months ended September 30, 2018 and an income tax expense of $0.4 million for the three months ended September 30, 2017. The Company recorded an income benefit of $0.3 million for the nine months ended September 30, 2018 and an income tax expense of $0.3 million for the nine months ended September 30, 2017.
Recent Accounting Pronouncements: Accounting Standards Adopted in 2018
Revenue Recognition - In May 2014, FASB issued an accounting update (ASU No. 2014-09) 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 Company has adopted the standard on its required effective date of January 1, 2018 using the modified retrospective approach and has applied the guidance to contracts not yet completed as of the date of adoption. The new revenue standard specifically excludes revenue streams for which specific guidance is stipulated in other sections of the codification and therefore it will not impact rental income or interest income generated on financial instruments such as preferred equity investments. The Company is the lessor for triple net and gross leases classified as operating leases in which rental income and tenant reimbursements are recorded. The revenue from these leases is scoped out of the new revenue recognition guidance. All leases are accounted for under ASC 840 until the adoption of the new leasing guidance within ASC 842. There were no changes as a result of the new revenue recognition standard. In addition, the Company will adopt the practical expedient which allows lessors to consider lease and non-lease components as a single performance obligation to the extent that the timing and pattern of transfer is the same and the lease is classified an operating lease.
Cash Flow Classification - In August 2016, the FASB issued guidance (ASU No. 2016-15) that makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company has adopted this guidance on January 1, 2018 and it did not have a material impact on its consolidated financial statements and related disclosures.

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

Restricted Cash - In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires that cash and cash equivalent balances in the statement of cash flows include restricted cash and restricted cash equivalent amounts, and therefore, changes in restricted cash and restricted cash equivalents be presented in the statement of cash flows. This will eliminate the presentation of transfers between cash and cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item of the balance sheet, this ASU requires disclosure of a reconciliation between the totals in the statement of cash flows and the related captions on the balance sheet. The new guidance also requires disclosure of the nature of the restricted cash and restricted cash equivalents, similar to the existing requirements under Regulation S-X, however, it does not define restricted cash and restricted cash equivalents. The Company adopted this guidance on January 1, 2018 and the required retrospective application of this new standard resulted in changes to the previously reported statement of cash flows as follows (dollars in thousands):
 
 
As of September 30, 2017
Cash flow provided by (used in):
 
As Previously Reported
 
After Adoption of ASU 2016-18
Operating activities
 
$
21,511

 
$
19,540

Investing activities
 
(420
)
 
(420
)
Financing activities
 
(43,621
)
 
(43,621
)
Business Combination - In January 2017, the FASB issued guidance (ASU No. 2017-01) to clarify the definition of a business under ASC 805. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets). A significant difference between the accounting for an asset acquisition and a business combination is that transaction costs are capitalized for an asset acquisition, rather than expensed for a business combination. The Company adopted the standard on its required effective date of January 1, 2018. This guidance did not have a material impact on its consolidated financial statements and related disclosures.
Derecognition and Partial Sales of Nonfinancial Assets - In February 2017, the FASB issued an accounting update (ASU No. 2017-05) which clarifies the scope of recently established guidance on nonfinancial asset derecognition, which applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets.  In addition, the guidance clarifies the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets to align with the new revenue recognition standard to be more consistent with the accounting for sale of a business. Specifically, in a partial sale to a noncustomer, when a noncontrolling interest is received or retained, the latter is considered a noncash consideration and measured at fair value, which would result in full gain or loss recognized upon sale. The Company has adopted this guidance on January 1, 2018 and it did not have a material impact on its consolidated financial statements and related disclosures as there were no such sales for the three and nine months ended September 30, 2018.
Goodwill Impairment - In January 2017, the FASB issued guidance (ASU No. 2017-04) which removes Step 2 from the goodwill impairment test. The Company has adopted this guidance on January 1, 2018 and it did not have a material impact on its consolidated financial statements and related disclosures.
Share-based Payments - In May 2017, the FASB issued guidance (ASU No. 2017-09) clarifying when to account for a change to the terms or conditions of a share-based payment award as a modification. The Company has adopted this guidance on January 1, 2018 and it did not have a material impact on its consolidated financial statements and related disclosures.
In June 2018, the FASB issued guidance (ASU 2018-07) which simplifies the accounting for share-based payments to non-employees by generally aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance applies to non-employee awards issued in exchange for goods or services used in an entity’s own operations and to awards granted by an investor to an equity method investee, but does not apply to equity instruments issued to a lender or investor in a financing transaction or equity instruments issued when selling goods or services to customers, which is under the revenue recognition model. Key changes in the guidance include measuring non-employee awards based on fair value of the equity instrument issued, rather than fair value of goods or services received or equity instrument issued, whichever is more reliably measured. In terms of timing, equity-classified non-employee awards that were previously remeasured through performance completion date will now have a fixed measurement on grant date, which will reduce volatility on the income statement. For non-employee awards with performance conditions, compensation cost will be recognized when achievement of the performance

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

condition is probable, rather than upon actual achievement of the performance condition. Similar to employee awards, forfeitures may be recognized as they occur or based on an estimate under an accounting policy election, but the guidance allows separate elections for employee and non-employee awards. The accounting model for non-employee awards, however, remains different for attribution of share-based payment costs over the vesting period, in which compensation cost for non-employee awards continues to be recognized in the same period and in the same manner (i.e., capitalize or expense) as if the grantor had paid cash for the goods or services. No changes to disclosure requirements were prescribed. Transition is on a modified retrospective basis, with a remeasurement at fair value as of the adoption date through a cumulative effect adjustment to opening retained earnings, applied to all equity-classified non-employee awards where a measurement date has not been established by the adoption date and unsettled liability-classified non-employee awards. The transition provisions eliminate the need to retrospectively determine fair values at historical grant dates. The Company has early adopted this guidance on July 1, 2018 and the net impact relating to the adoption was a $0.8 million decrease to additional paid in capital.
Recent Accounting Pronouncements: Future Application of Accounting Standards
Leases - In February 2016, the FASB issued an accounting update (ASU No. 2016-02) which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The update is expected to result in the recognition of a right-to-use asset and related liability to account for the Company’s future obligations under its ground lease arrangements for which it is the lessee. The update will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Under this guidance, allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained will no longer be capitalized as initial direct costs and instead will be expensed as incurred. Lessors will continue to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company expects to adopt the package of practical expedients under the guidance and the Company will not need to reassess whether any expired or expiring contracts contain leases; will not need to revisit lease classification for any expired or expiring leases; and will not need to reassess initial direct costs for any existing leases. In addition, the Company expects to adopt the practical expedient which allows lessors to consider lease and non-lease components as a single performance obligation to the extent that the timing and pattern of transfer is the same and the lease is classified an operating lease. As of September 30, 2018, the Company had two ground lease agreements with annual payments of $0.7 million. 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. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial statements and related disclosures.
Financial Instruments - In June 2016, the FASB issued guidance (ASU No. 2016-13) that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments). The new guidance is effective for reporting periods beginning after December 15, 2019 and will be applied as a cumulative adjustment to retained earnings as of the effective date. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company continues to assess the potential effect the adoption of this guidance will have on its consolidated financial statements and related disclosures.
Fair Value Disclosures - In August 2018, the FASB issued guidance (ASU No. 2018-13) that requires new disclosures of changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value of instruments held at balance sheet date, as well as the range and weighted average or other quantitative information, if more relevant, of significant unobservable inputs for recurring and nonrecurring Level 3 fair values. Certain disclosures are now eliminated, specifically around the valuation process required for Level 3 fair values, policy for timing of transfers between levels of the fair value hierarchy, as well as amounts and reason for transfers between Levels 1 and 2. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2019. The adoption of this standard is not expected to have a material effect on the Company's existing disclosures.

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

3.
Operating Real Estate
The following table presents operating real estate, net as of September 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
September 30, 2018
 
December 31, 2017
Land
 
$
381,313

 
$
393,691

Buildings and improvements
 
930,770

 
954,314

Building and leasehold interests
 
187,191

 
195,929

Furniture, fixtures and equipment
 
3,988

 
1,653

Tenant improvements
 
63,243

 
61,303

Operating real estate, gross
 
1,566,505

 
1,606,890

Less: accumulated depreciation
 
(119,133
)
 
(95,356
)
Operating real estate, net
 
$
1,447,372

 
$
1,511,534

Real Estate Sales
The following table summarizes the Company’s real estate sales for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Properties
1
 
2
 
2
 
5
Carrying Value(1)
$
12,164

 
$
9,573

 
$
168,271

 
$
36,874

Sales Price(2)(3)
$
15,083

 
$
11,117

 
$
203,329

 
$
44,429

Net Proceeds(4)
$
14,643

 
$
10,636

 
$
200,707

 
$
42,742

Realized Gain(5)
$
2,479

 
$
1,063

 
$
32,436

 
$
6,243

_____________________________
(1)
Includes the assets and liabilities related to share sales.
(2)
For the three months ended September 30, 2017, the Company sold two properties for €9.6 million and for the nine months ended September 30, 2017, the Company sold five properties for €40.3 million.
(3)
For the three months ended September 30, 2018, the Company sold one property, located in Portugal in September 2018 for €13.0 million. For the nine months ended September 30, 2018, the Company sold two properties, one located in Portugal in September 2018 for €13.0 million and one located in the Netherlands (the Maastoren property) in April 2018 for €159.3 million.
(4)
Represents proceeds net of sales costs prior to the repayment of the associated property debt. For the three months ended September 30, 2018, the asset sold was not collateralized with any debt. For the nine months ended September 30, 2018, the Company repaid $106.7 million of associated property debt and $15.7 million preferred equity certificates. For the three and nine months ended September 30, 2017, the Company repaid $2.1 million and $10.2 million, respectively, of associated property debt.
(5)
The Company recorded an additional realized gain for the three and nine months ended September 30, 2018 of $0.2 million and $9.6 million, respectively, related to the release of escrow accounts and CTA release, net of subsequent sale costs from prior period disposals. The Company recorded an additional realized gain for the three and nine months ended September 30, 2017 of $0.7 million and $1.2 million, respectively, related to the release of escrow accounts and CTA release, net of subsequent sale costs from prior period disposals
Certain escrow accounts are not held by the Company and are expected to be released within the next 12 months and to the extent this cash has not been released to purchasers to satisfy claims, the Company will recognize an additional gain on the sale at the earlier of the time of the cash receipt or when collection can be reasonably assured. As of September 30, 2018, there were $0.6 million in certain escrow accounts that were not held by the Company which the Company could potentially record as a realized gain.
4.
Preferred Equity Investments
In May 2017, the Company partnered with a property developer in China to acquire 20 Gresham Street, a Class A office building in London, United Kingdom and the Company invested $34.1 million (£26.2 million) of preferred equity, which the Company accounts for as a debt investment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following table presents one preferred equity investment as of September 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Asset Type
 
Principal Amount(1)
 
Carrying Value
 
Principal Amount
 
Carrying Value
 
Fixed Rate
 
Mandatory Redemption
Preferred equity investment
 
$
34,137

 
$
34,137

 
$
35,347

 
$
35,347

 
8.00
%
 
May 2020
_____________________________
(1)
The Company’s preferred equity investment is denominated in U.K. Pound Sterling, and as such, the principal amount decreased from 2017 to 2018 due to the change in the U.K. Pound Sterling to U.S. dollar exchange rate.
Credit Quality Monitoring
The Company’s preferred equity investment is secured 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 preferred equity investment at least quarterly and determines the relative credit quality principally based on: (i) whether the borrower is currently paying 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 preferred equity 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 preferred equity 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 preferred equity investment that is not performing, which the Company defines as a loan in maturity default and/or past due on its contractual debt service payments and deemed not to be collectible, as a non-performing loan (“NPL”).
As of September 30, 2018, the Company’s preferred equity investment was performing in accordance with the contractual terms of its governing documents, in all material respects, and was categorized as a performing loan. For the three and nine months ended September 30, 2018 and 2017, the preferred equity investment contributed all interest income recorded on the consolidated statement of operations.
5.
Borrowings
The following table presents borrowings as of September 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
Country
 
Final
Maturity
 
Contractual
Interest Rate
(2)
 
Principal
Amount
 
Carrying
Value
 
Principal
Amount
 
Carrying
Value
Mortgage and other notes payable:(1)
 
 
 
 
 
 
 
 
 
 
 
 
Trias Portfolio 1(3)(5)
France
 
Apr-22(9)
 
EURIBOR + 1.65%(9)
 
$
76,678

 
$
75,560

 
$
55,192

 
$
53,800

Trias Portfolio 2(3)(5)(7)
Germany
 
Jun-25(7)
 
EURIBOR + 1.00%(7)
 
88,717

 
88,423

 
91,577

 
90,880

Trias Portfolio 4(3)(5)
U.K.
 
Apr-20
 
GBP LIBOR + 2.70%
 
16,732

 
16,563

 
17,326

 
17,123

SEB Portfolio 1(5)
Germany/France
 
Jul-24(8)
 
EURIBOR + 1.55%(8)
 
205,752

 
203,110

 
317,317

 
313,153

SEB Portfolio 2(5)
U.K.
 
Jul-24(8)
 
GBP LIBOR + 1.55%(8)
 
242,237

 
239,658

 
250,825

 
247,902

SEB Portfolio - Preferred(4)
Germany/France/U.K.
 
Apr-60
 
0.90%
 
83,900

 
83,668

 
102,560

 
102,271

Trianon Tower(5)
Germany
 
Jul-23
 
EURIBOR + 1.30%
 
382,952

 
381,670

 
395,294

 
393,763

Other - Preferred(6)
Germany
 
Oct-45
 
1.00%
 
4,409

 
4,056

 
4,551

 
4,551

Total mortgage and other notes payable
 
 
 
$
1,101,377


$
1,092,708


$
1,234,642


$
1,223,443

_____________________________
(1)
All mortgage notes and other notes payable are denominated in local currencies, and as such, the principal amount generally decreased from December 31, 2017 to September 30, 2018 due to the change in the Euro and U.K. Pound Sterling to U.S. dollar exchange rate and the repayment of $122.4 million offset by additional borrowings of $23.9 million. All borrowings are non-recourse and are interest-only through maturity, subject to compliance with covenants of the respective borrowing, and denominated in the same currency as the assets securing the borrowing.
(2)
All floating rate debt is subject to interest rate caps of 0.5% for EURIBOR and 2.0% for GBP LIBOR which are used to manage interest rate exposure.
(3)
Trias Portfolio represents the cross-collateralized borrowings among the IVG Portfolio, Internos Portfolio and Deka Portfolio.
(4)
Represents preferred equity certificates with a contractual interest rate of 0.90% through May 2019, which increases to EURIBOR plus 12.0% through May 2022 and subsequently to EURIBOR plus 15.0% through final maturity. Certain prepayments prior to May 2019 are subject to the payment of the unpaid coupon on outstanding principal amount through May 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(5)
Prepayment provisions include a fee based on principal amount of 0.50% through April 2020 for the Trias Portfolio 1 borrowings, 0.35% to 1.0% through May 2022 for the Trias Portfolio 2 borrowings, 0.5% through July 2019 for the SEB Portfolio borrowings and 0.30% through June 30, 2019 for Trianon Tower borrowings.
(6)
Represents preferred equity certificates each with a fixed contractual interest rate of 1.0% per annum plus variable interest based on specified income levels associated with the German property companies of the Trias Portfolio which can be prepaid at any time without penalty through final maturity, which is thirty years from the issuance date.
(7)
In May 2018, the Company entered into a second amended and restated loan agreement, which reduced the margin from 1.55% to 1.00%, extended the maturity date of the loan from December 2020 to June 2025 and eliminated certain covenants limited to portfolio concentration and required capital expenditures.
(8)
In September 2017, the Company amended and restated the agreement to reduce the margin from 1.80% to 1.55% and extended the maturity date from April 1, 2022 to July 20, 2024.
(9)
In August 2018, the Company amended and restated the loan agreement to increase the principal balance to $76.7 million, reduce the blended margin from 1.85% per annum to 1.65% per annum and extend the maturity from April 8, 2020 to April 8, 2022. After the loan amendment, the Company has combined the previously disclosed “Trias 3 Portfolio” into “Trias 1 Portfolio.”
The following table presents a reconciliation of principal amount to carrying value of the Company’s mortgage and other notes payable as of September 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
September 30, 2018
 
December 31, 2017
Principal amount
 
$
1,101,377

 
$
1,234,642

Deferred financing costs, net
 
(8,669
)
 
(11,199
)
Carrying value
 
$
1,092,708

 
$
1,223,443

The following table presents scheduled principal on borrowings, based on final maturity as of September 30, 2018 (dollars in thousands):
 
 
Mortgage
and Other Notes
Payable
Remaining 2018
 
$

Years ending December 31:
 
 
2019
 

2020
 
16,732

2021
 

2022
 
76,678

2023
 
382,952

2024 and thereafter
 
625,015

Total
 
$
1,101,377

As of September 30, 2018 and December 31, 2017, the Company was in compliance with all of its financial covenants.
Credit Facility
In April 2017, the Company amended and restated corporate revolving credit facility (the “Credit Facility”) with aggregate commitments of $35.0 million and an initial two year term. The Credit Facility no longer contains a limitation on availability based on a borrowing base and the interest rate remains the same. In March 2018, the Company amended the Credit Facility, increasing the size to $70.0 million and extending the term until April 2020 with one year extension option. The Credit Facility includes an accordion feature, providing for the ability to increase the facility to $105.0 million. As of September 30, 2018, there was no outstanding balance on the Credit Facility.
6.    Related Party Arrangements
Colony Capital, Inc.
The Company entered into a management agreement with an affiliate of the Manager in November 2015 (the “Original Management Agreement”). On November 9, 2017, the Company entered into an Amended and Restated Management Agreement with an affiliate of the Manager, effective as of January 1, 2018 (the “Amended and Restated Management Agreement”). As asset manager, the Manager is responsible for the Company’s day-to-day operations, subject to supervision and management of the Company’s board of directors (the “Board”). Through its global network of subsidiaries and branch offices, the Manager performs services and engages in activities relating to, among other things, investments and financing, portfolio management and other administrative services, such as accounting and investor relations, to the Company and its subsidiaries. The management agreement with the Manager provides for a base management fee, incentive fee and expense reimbursement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Term: Renewals
The Amended and Restated Management Agreement provides for an initial term (beginning January 1, 2018) of five years (the “Initial Term”), with subsequent automatic renewals for additional three year terms, unless either party provides notice to the other party of its intention to decline to renew the agreement at least six months prior to the expiration of the then-current term. During the Initial Term, the Amended and Restated Management Agreement is terminable only for cause (as described in the Amended and Restated Management Agreement).
If the Company elects not to renew the Amended and Restated Management Agreement at the end of a term, it will be obligated to pay the Manager a termination fee (the “Termination Fee”) equal to three times the amount of the base management fees earned by the Manager over the four most recent quarters immediately preceding the non-renewal. In addition, if at any time after the Initial Term, the Company undergoes a “change of control” (as described in the Amended and Restated Management Agreement), the Company may elect to terminate the agreement but upon any such termination it will be obligated to pay the Termination Fee to the Manager.
Assignment
The Amended and Restated Management Agreement provides that in the event of a change of control of the Manager or other event that could be deemed an assignment of the Amended and Restated Management Agreement, the Company will consider such assignment in good faith and not unreasonably withhold, condition or delay the Company’s consent. The Amended and Restated Management Agreement further provides that the Company anticipates consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over $10 billion of assets under management. The Amended and Restated Management Agreement also provides that, notwithstanding anything in the agreement to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction by the Company or the Manager, directly or indirectly, the surviving entity will succeed to the terms of the Amended and Restated Management Agreement.
Base Management Fee
Pursuant to the Amended and Restated Management Agreement, beginning January 1, 2018, the Company is obligated to pay quarterly, in arrears, in cash, the Manager a base management fee per annum equal to:
1.50% of the Company’s reported EPRA NAV (as described in the Amended and Restated Management Agreement) for EPRA NAV amounts up to and including $2.0 billion; plus
1.25% of the Company’s reported EPRA NAV on any EPRA NAV amount exceeding $2.0 billion.
EPRA NAV is based on a U.S. GAAP balance sheet adjusted based on the Company’s interpretation of the European Public Real Estate Association (“EPRA”) guidelines, and similar as prior practices, including adjustments such as fair value of operating real estate, straight-line rent and deferred taxes and additional adjustments to be determined by the Company in good faith based on any changes to U.S. GAAP, international accounting standards or EPRA guidelines. In calculating EPRA NAV, the liquidation preference of preferred securities outstanding shall not be included as a liability of the Company and shall not reduce EPRA NAV.
For the three and nine months ended September 30, 2018, the Company incurred $4.0 million and $12.4 million, respectively, related to the base management fee.
Under the Original Management Agreement, for the three and nine months ended September 30, 2017, the Company incurred $3.6 million and $10.7 million, respectively, related to the base management fee. The Original Management Agreement base management fee to the Manager was $14 million subject to increase by an amount equity to 1.5% per annum of the sum of:
any equity the Company issues in exchange or conversion of exchangeable or stock-settlable notes;
any other issuances by the Company of common equity, preferred equity or other forms of equity, including but not limited to LTIP Units in the Operating Partnership (excluding units issued to the Company and equity-based compensation, but including issuances related to an acquisition, investment, joint venture or partnership); and
cumulative cash available for distribution (“CAD”), if any, of the Company in excess of cumulative distributions paid on common stock, LTIP Units or other equity awards which began with the Company’s fiscal quarter ended March 31, 2016.
Incentive Fee
In addition to the base management fees, the Company is obligated to pay the Manager an incentive fee, if any (the “Incentive Fee”), with respect to each measurement period equal to twenty percent (20%) of: (i) the excess of (a) the Company’s Total Stockholder Return (as defined in the Amended and Restated Management Agreement, which includes stock price appreciation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

and dividends received and is subject to a high watermark price established when a prior incentive fee is realized) for the relevant measurement period above (b) a 10% cumulative annual hurdle rate, multiplied by (ii) the Company’s Weighted Average Shares (as defined in the Amended and Restated Management Agreement) during the measurement period. The first measurement period for the incentive fee began January 1, 2018 (based on an initial price of $13.67) and will end on December 31 of the applicable calendar year and subsequent measurement periods will begin on January 1 of the subsequent calendar year. Subject to the conditions set forth in Section 4(d) of the Amended and Restated Management Agreement for common stock payments, the Company may elect to pay the Incentive Fee, if any, in cash or in shares of restricted common stock or shares of unrestricted common stock repurchased by the Company in the open market or a combination thereof. Any shares of common stock delivered by the Company will be subject to lock-up restrictions that will be released in equal one-third increments on each anniversary of the end of the measurement period with respect to which such incentive fee was earned. In calculating the value of the shares of the Company’s common stock paid in satisfaction of the Incentive Fee obligation, the shares of restricted common stock will be valued at the higher of: (i) the volume weighted average trading price per share for the ten consecutive trading days (as defined in the Amended and Restated Management Agreement) ending on the trading day prior to the date the payment is due and (ii) the Company’s EPRA NAV per share, based on the Company’s most recently published EPRA NAV and the Weighted Average Shares as of the end of the period with respect to which such EPRA NAV was published. For the three and nine months ended September 30, 2018, the Company did not record an incentive fee.
Under the Original Management Agreement, for the three and nine months ended September 30, 2017, the Company did not incur an incentive fee. The incentive fee under the Original Management Agreement was calculated and was payable quarterly in arrears in cash, equal to:
the product of: (a) 15.0% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of $0.30 per share and up to $0.36 per share; plus
the product of: (a) 25.0% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of $0.36 per share;
multiplied by the Company’s Weighted Average Shares outstanding for the calendar quarter.
Weighted Average Shares represents the number of shares of the Company’s common stock, LTIP Units or other equity-based awards (with some exclusions), outstanding on a daily weighted average basis. With respect to the base management fee under the Original Management Agreement, all equity issuances are allocated on a daily weighted average basis during the fiscal quarter of issuance. With respect to the incentive fee under the Original Management Agreement, such amounts will be appropriately adjusted from time to time to take into account the effect of any stock split, reverse stock split, stock dividend, reclassification, recapitalization or other similar transaction.
Costs and Expenses
The Company is responsible to pay (or reimburse the Manager) for all of the Company’s direct, out of pocket costs and expenses of the Company as a stand alone company incurred by or on behalf of the Company and its subsidiaries, all of which must be reasonable, customary and documented. Internalized Service Costs (as defined below) are not intended to be covered costs and expenses under this provision and are subject to the limits described in the next paragraph.
The Company is obligated to reimburse the Manager for (i) all direct, reasonable, customary and documented costs and expenses incurred by the Manager for salaries, wages, bonuses, payroll taxes and employee benefits for personnel employed by the Manager: (a) who solely provide services to the Company which prior to January 1, 2018 were provided by unaffiliated third parties, including accounting and treasury services or (b) who were hired by the Manager after January 1, 2018 but who solely provide services to the Company in respect of one of the categories of services previously internalized pursuant to clause (a) and who were not hired in connection with any event which otherwise resulted in an increase to the Company’s net asset value (such costs and expenses set forth in clauses (i) and (ii), the “Internalized Service Costs”), plus (ii) 20% of the amount calculated under clause (i) to cover reasonable overhead charges with respect to such personnel, provided that the Company shall not be obligated to reimburse the Manager for such costs and expenses to the extent they exceed the following quarterly limits:
0.0375% of the Company’s aggregate gross asset value as of the end of the prior calendar quarter (excluding cash and cash equivalents and certain other exclusions) as calculated for purposes of determining EPRA NAV (“GAV”), for GAV amounts to and including $2.5 billion, plus
0.0313% of GAV amounts between $2.5 billion and $5.0 billion, plus
0.025% of GAV amounts exceeding $5.0 billion.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

If the Manager’s actual Internalized Service Costs during any quarter exceed the quarterly limit described in the preceding paragraph (the cumulative excess amounts, if any, in respect of each quarter during a calendar year, the (“Quarterly Cap Excess Amount”), the Company is obligated to reimburse the Manager on an annual basis for an amount equal to the lesser of (i) the Quarterly Cap Excess Amount and (ii) the sum of the amounts, if any, determined for each quarter within such calendar year by which Internalized Services Costs in respect of such quarter were less than the quarterly limits described in the prior paragraph.
For the three and nine months ended September 30, 2018, the Manager allocated $0.3 million and $0.8 million, respectively, of Internalized Service Costs to the Company, which is recorded in general and administration expenses in the consolidation statements of operations.
Equity Based Compensation
In addition, the Company expects to make annual equity compensation grants to management of the Company and other employees of the Manager, provided that the aggregate annual grant amount, type and other terms of such equity compensation must be approved by the Company’s compensation committee. The Manager will have discretion in allocating the aggregate grant among the Company’s management and other employees of the Manager.
Under the Amended and Restated Management Agreement, beginning with the Company’s 2018 annual stockholders’ meeting, the Manager has the right to nominate one individual to be included in the slate of nominees nominated by the Company’s board of directors for election at each annual meeting. In the third quarter 2018, at the 2018 annual stockholders’ meeting, the Manager nominated one individual to the Company’s board of directors.
Colony Capital Ownership Waiver and Voting Agreement
In connection with the entry into the Amended and Restated Management Agreement, the Company provided Colony Capital with an ownership waiver under the Company’s Articles of Amendment and Restatement, allowing Colony Capital to purchase up to 45% of the Company’s stock. The waiver provides that if the Amended and Restated Management Agreement is terminated, Colony Capital may not purchase any shares of the Company’s common stock to the extent Colony Capital owns (or would own as a result of such purchase) more than 9.8% of the Company’s capital stock. In connection with the waiver, Colony Capital also agreed that for all matters submitted to a vote of the Company’s stockholders, to the extent Colony Capital owns more than 25% of the Company’s common stock (such shares owned by Colony Capital in excess of the 25% threshold, the “Excess Shares”), it will vote the Excess Shares in the same proportion that the remaining shares of the Company not owned by Colony Capital or its affiliates are voted. If the Amended and Restated Management Agreement is terminated, then beginning on the third anniversary of such termination, the threshold described in the prior sentence will be reduced from 25% to 9.8%.
Manager Ownership of Common Stock
As of September 30, 2018, Colony Capital and its subsidiaries owned 5.6 million shares of the Company’s common stock, or approximately 11.3% of the total outstanding common stock.
7.
Compensation Expense
The following summarizes the equity-based compensation for the three and nine months ended September 30, 2018 and 2017:
For the three months ended September 30, 2018 and 2017, the Company recorded $1.7 million and $2.8 million, respectively, of equity-based compensation expense which is recorded in compensation expenses on the consolidated statements of operations. For the nine months ended September 30, 2018 and 2017, the Company recorded $3.3 million and $20.1 million, respectively, of equity-based compensation expense which is recorded in compensation expenses on the consolidated statements of operations. As of September 30, 2018, equity-based compensation expense to be recognized over the remaining vesting period through May 2021 is $6.9 million, provided no additional forfeitures.
In the third quarter 2018, the Company adopted ASU 2018-07 which required the Company to retrospectively adjust compensation expense for the three months ended March 31, 2018 and June 30, 2018 by $0.2 million and $1.6 million, respectively (refer to Note 2).
2015 Omnibus Stock Incentive Plan
Pursuant to the NorthStar Realty Europe Corp. 2015 Omnibus Stock Incentive Plan (the “2015 Plan”), the Company may issue equity awards to directors, officers, employees, co-employees, consultants and advisors of the Company, the Manager or of any parent or subsidiary who provides services to the Company. The number of shares that may be issued under the 2015 Plan equals 10 million shares of common stock, plus on January 1, 2017 and each January 1 thereafter, an additional 2% of the number of shares of common stock issued and outstanding on the immediately preceding December 31. In addition, shares of common stock

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

underlying any awards that are forfeited, canceled, held back upon exercise of a stock option or settlement of an award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of common stock or otherwise terminated (other than by exercise) will be added back to the shares of common stock available for issuance under the 2015 Plan. As of September 30, 2018, under the 2015 Plan, a total of 1.6 million shares of common stock had been issued (net of forfeitures and shares held back for tax withholding), 1.9 million shares were reserved for issuance pursuant to outstanding equity awards (including 0.4 million reserved for issuance upon conversion of outstanding LTIP Units and Common Units and 1.5 million reserved for issuance pursuant to the outstanding Absolute RSUs and Relative RSUs) and 8.7 million otherwise unreserved shares remained available for issuance.
All of the equity awards issued by the Company since the spin-off from NorthStar Realty on November 1, 2015 have been issued under the 2015 Plan. During the year ended December 31, 2017, the Company issued 500,642 restricted shares of common stock under the 2015 Plan to employees of the Manager or its subsidiaries in accordance with the terms of the management agreement described above in Note 6, of which 379,594 vested in connection with the Mergers.
In March 2016, as contemplated in connection with the Spin-off, the Company granted an aggregate of 995,698 restricted shares of common stock and 1,493,551 RSUs to employees of the Manager or one of its subsidiaries under the 2015 Plan. The restricted shares of common stock were subject to vesting over the approximately four year period ending December 31, 2019, subject to continued employment with the Manager or one of its subsidiaries and the RSUs were market-based awards subject to the achievement of performance-based vesting conditions and continued employment with the Manager or one of its subsidiaries. Approximately one-half of these RSUs are subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return and continued employment with the Manager or one of its subsidiaries over the approximately four year period from the grant date through December 31, 2019 (the “Absolute RSUs”). The other approximately one-half of these RSUs are subject to the achievement of performance-based hurdles based on the Company’s total stockholder return relative to the MSCI US REIT Index and continued employment with the Manager or one of its subsidiaries over the approximately four year period from the grant date through December 31, 2019 (the “Relative RSUs”). Award recipients may earn up to 100% of the Absolute RSUs that were granted and up to 125% of the Relative RSUs that were granted. Upon vesting pursuant to the terms of the Absolute RSUs and Relative RSUs, the RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each share that vests) on or after the date the RSUs were initially granted. In accordance with their terms, all of these restricted shares of common stock that remained outstanding vested in connection with the Mergers. The Absolute and Relative RSUs were not affected by the Mergers and remain outstanding, subject to forfeitures occurring in connection with termination of employment with the Manager or one of its subsidiaries. For the nine months ended September 30, 2018, 171,529 Absolute RSUs and 171,529 Relative RSUs that had previously been granted to key employees of the Manager who are no longer providing services to the Company were forfeited. In May 2018, in order to assist in the retention of employees of the Manager who are continuing to provide services to the Company, the Company’s compensation committee utilized 300,000 of these forfeited RSUs to make retention grants consisting of 150,000 restricted shares of common stock that are subject to vesting based on continued service and established a retention pool consisting of an additional 150,000 shares of common stock or RSUs that will be allocated prior to May 2019 to employees of the Manager who are providing services to the Company as designated by the compensation committee, in its discretion.  
In March 2018, as contemplated by the Amended and Restated Management Agreement, the Company established an annual equity compensation pool under the 2015 Plan to be allocated among members of management of the Company and other employees of the Manager consisting of an aggregate of 198,000 restricted shares of common stock and 132,000 performance based RSUs. This annual equity compensation pool was then allocated to individual award recipients by the Manager, and individual grants were made. The restricted shares of common stock are subject to vesting in approximately equal annual installments over the three-year period ending March 1, 2021, subject to the Manager continuing to serve as the Company’s manager and the recipient’s continued employment with the Manager or Colony Capital or one of its subsidiaries. The RSUs are market-based awards subject to the achievement of performance-based vesting conditions. Approximately one-half of these RSUs are subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return over the three-year period from the grant date through February 28, 2021 (the “2018 Absolute RSUs”). The other approximately one-half of these RSUs are subject to the achievement of performance-based hurdles based on the Company’s total stockholder return relative to the MSCI US REIT Index over the three-year period from the grant date through February 28, 2021 (the “2018 Relative RSUs”). Award recipients may earn up to 200% of the 2018 Absolute RSUs and Relative RSUs that were granted. Vesting of the 2018 Absolute and Relative RSUs are also subject to the Manager continuing to serve as the Company’s manager and the recipient’s continued employment with the Manager or Colony Capital or one of its subsidiaries through the end of the performance period. The RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each share that vests) on or after the date the RSUs were initially granted.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Pre-Spin-off NorthStar Realty Equity Awards
In addition to equity awards issued under the 2015 Plan, the Company also had equity subject to outstanding equity-based awards granted by NorthStar Realty prior to the Spin-Off. In connection with the Spin-Off, holders of shares of common stock of NorthStar Realty and LTIP units of NorthStar Realty’s operating partnership subject to outstanding equity awards received one share of the Company’s common stock or one Common Unit in the Operating Partnership, respectively, for every six shares of common stock of NorthStar Realty or LTIP units of NorthStar Realty’s operating partnership held. Other equity and equity-based awards relating to NorthStar Realty’s common stock, such as RSUs, were adjusted to also relate to one-sixth of a share of the Company’s common stock, but otherwise generally remained subject to the same vesting and other terms that applied prior to the Spin-off. Performance-based vesting conditions based on total stockholder return of NorthStar Realty or NorthStar Realty and NSAM were adjusted to refer to combined total stockholder return of NorthStar Realty and the Company or NorthStar Realty, NSAM and the Company, respectively, with respect to periods after the Spin-Off and references to a change of control or similar term in outstanding awards, which referred to a change of control of either NorthStar Realty or NSAM, were adjusted, to the extent such awards relate to common stock of the Company or Common Units in the Operating Partnership, to refer to a change of control of either the Company or NSAM.
Following the Spin-off, NorthStar Realty and the compensation committee of its Board continued to administer all awards granted by NorthStar Realty prior to the Spin-off, but the Company was obligated to issue shares of the Company’s common stock or other equity awards of its subsidiaries or make cash payments in lieu thereof or with respect to dividend or distribution equivalent obligations to the extent required by these awards. These awards continued to be governed by the NorthStar Realty equity plans, as applicable, and shares of the Company’s common stock issued pursuant to these awards were not be issued pursuant to, and did not reduce availability under, the 2015 Plan. In connection with the Mergers, all of these outstanding equity-based awards vested or were forfeited.
The following table presents activity related to the issuance, vesting, redemption, conversion and forfeitures of restricted stock, Common Units and performance RSUs. The balance as of September 30, 2018 represents vested Common Units and unvested restricted stock and performance RSUs (grants in thousands):
 
Nine Months Ended September 30, 2018
 
Restricted Stock(1)
 
Common Units
 
Performance RSUs(2)
 
Total Grants
 
Weighted
Average
Grant Price
December 31, 2017
121

 
420

 
1,453

 
1,994

 
$
11.95

Granted
348

 

 
132

 
480

 
13.23

Redeemed

 
(46
)
 

 
(46
)
 
12.70

Converted

 
(25
)
 

 
(25
)
 
12.05

Forfeited
(1
)
 

 
(343
)
 
(344
)
 
12.60

September 30, 2018
468

 
349

 
1,242

 
2,059

 
$
12.12

_____________________________
(1)
Represents restricted stock included in common stock.
(2)
As of September 30, 2018, represented outstanding Spin-off Absolute and Relative RSUs and 2018 Absolute and Relative RSUs.
8.
Stockholders’ Equity
Share Repurchase
In March 2018, the Company’s board of directors authorized the repurchase of up to $100 million of its outstanding common stock. The authorization expires in March 2019, unless otherwise extended by the Company’s board of directors.
The following table presents the number of share repurchased by the Company, the average price paid per share and the gross amount paid for the repurchased shares for the three and nine months ended September 30, 2018 (dollars and shares in thousands, except per share data):

25

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

Period
 
Shares
 
Average Price Paid per Share
 
Gross
January 1 - March 31(1)
 
1,051

 
$
12.70

 
$
13,350

April 1 - June 30
 
4,018

 
14.00

 
56,244

July 1 - September 30
 
1,006

 
13.71

 
13,799

Total
 
6,075

 
$
13.73

 
$
83,393

_____________________________
(1)
The authorization for the repurchases was approved by the Company’s board of directors in March 2018. For the three and nine months ended September 30, 2017, the Company did not repurchase any shares of its common stock.
Director Grants
In August 2018, the Company issued 27,735 shares of common stock with a fair value at the date of grant of $0.4 million to its independent directors as an annual grants of equity. The shares were fully vested at issuance.
Dividends
The following table presents dividends declared (on a per share basis) with respect to the nine months ended September 30, 2018 and 2017:
Common Stock
Declaration Date
 
Dividend Per Share
2018
 
 
May 7
 
$
0.15

August 3
 
$
0.15

November 2
 
$
0.15

2017
 
 
May 1
 
$
0.15

August 2
 
$
0.15

November 6
 
$
0.15


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

Earnings Per Share
The following table presents EPS for the three and nine months ended September 30, 2018 and 2017 (dollars and shares in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
556

 
$
(6,806
)
 
$
37,363

 
$
(32,870
)
Net (income) loss attributable to Unit Holders noncontrolling interest
(4
)
 
62

 
(225
)
 
372

Net income (loss) attributable to common stockholders and Unit Holders(1)
$
552

 
$
(6,744
)
 
$
37,138

 
$
(32,498
)
Net (income) allocated to participating securities
(105
)
 

 
(442
)
 

Net income (loss) allocated to common stockholders—basic and dilutive
$
447

 
$
(6,744
)
 
$
36,696

 
$
(32,498
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock - basic
49,991

 
55,155

 
52,126

 
55,005

Weighted average effect of dilutive shares
1,992

(2) 
447

 
1,835

(2) 
560

Weighted average shares of common stock - dilutive
51,983

 
55,602

 
53,961

 
55,565

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
(0.12
)
 
$
0.70

 
$
(0.59
)
Diluted
$
0.01

 
$
(0.12
)
 
$
0.68

 
$
(0.59
)
_____________________________
(1)
The EPS calculation takes into account Unit Holders, which receive non-forfeitable dividends from the date of grant, share equally in the Company’s net income (loss) and convert on a one-for-one basis into common stock.
(2)
Includes the Absolute and Relative RSUs and 2018 Absolute and Relative RSUs as the performance targets would have been met if the performance period ended on September 30, 2018.
9.
Noncontrolling Interests
Operating Partnership
Noncontrolling interests include the aggregate Unit Holders’ interest in the Operating Partnership. Net income (loss) attributable to the noncontrolling interest is based on the weighted average Unit Holders’ ownership percentage of the Operating Partnership for the respective period. The issuance of additional common stock, Common Units or LTIP Units changes the percentage ownership of both the Unit Holders and the Company. Since a Common Unit or LTIP Unit is generally redeemable for cash or common stock at the option of the Company, it is deemed to be equivalent to common stock. Therefore, such transactions are treated as capital transactions and result in an allocation between stockholders’ equity and noncontrolling interests on the accompanying consolidated balance sheets to account for the change in the ownership of the underlying equity in the Operating Partnership. On a quarterly basis, the carrying value of such noncontrolling interest is reallocated based on the number of Unit Holders in total in proportion to the number of Units Holders plus the number of shares of common stock outstanding. As of September 30, 2018 and December 31, 2017, the Company allocated an immaterial amount and $1.8 million, respectively, from stockholders’ equity to noncontrolling interest on the consolidated balance sheets and consolidated statement of equity.
As of September 30, 2018, 349,290 Common Units and LTIP Units were outstanding, representing a 0.7% ownership and noncontrolling interest in the Operating Partnership. Net income (loss) attributable to the Operating Partnership noncontrolling interest for the three months ended September 30, 2018 and 2017 was a net income (loss) of an immaterial amount and $(0.1) million, respectively. Net income (loss) attributable to the Operating Partnership noncontrolling interest for the nine months ended September 30, 2018 and 2017 was a net income (loss) of $0.2 million and $(0.4) million, respectively.
Redeemable Noncontrolling Interest
In connection with the acquisition of the Trianon Tower in July 2015, the Company sold a 5.5% noncontrolling interest in certain subsidiaries that own the Trianon Tower for $1.5 million. In conjunction with the sale, the Company entered into a put option whereby the holder may redeem its interest for cash at the greater of fair market value of such noncontrolling interest or €2.1 million beginning in November 2020 through January 2021. The Company recorded the noncontrolling interest at its acquisition date fair value as temporary equity due to the redemption option. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in additional paid-in capital.

27

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

10.
Risk Management and Derivative Activities
Derivatives
The Company uses derivative instruments primarily to manage certain interest rate and currency risk and such derivatives are not considered speculative. These derivative instruments are in the form of interest cap agreements where the primary objective is to minimize interest rate risks associated with investment and financing activities and foreign currency forward agreements where the primary objective is to minimize foreign currency exchange rate risks associated with operating activities. The counterparties of these arrangements are major financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties and it monitors their financial condition; however, the Company currently does not anticipate that any of the counterparties will fail to meet their obligations.
The following tables present derivative instruments that were not designated as hedges under U.S. GAAP as of September 30, 2018 and December 31, 2017 (dollars, UK pound sterling and Euros in thousands):

Number(1)

Notional
Amount

Fair Value
Asset (Liability)

Range of
Fixed GBP LIBOR / EURIBOR/ Strike Price

Range of Maturity
As of September 30, 2018:
 
 
 
 
 
 
 
 
 
Interest rate caps (EUR)
29
 
€894,694
 
$
8,003

 
3 Month EURIBOR 0.5%
 
April 2020 - May 2025
Interest rate caps (GBP)
5
 
£202,645
 
24

 
3 Month GBP LIBOR 2.0%
 
April 2020
Foreign currency forwards(2)
6
 
€58,360
 
2,488

 
1.25 EUR/USD(3)
 
November 2018 - November 2019
    Total
40
 

 
$
10,515

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017:
 
 
 
 
 
 
 
 
 
Interest rate caps (EUR)
26
 
€767,718
 
$
6,917

 
3 Month EURIBOR 0.5%
 
April 2020 - July 2023
Interest rate caps (GBP)
5
 
£202,645
 
107

 
3 Month GBP LIBOR 2.0%
 
April 2020
Foreign currency forwards(2)
4
 
€48,960
 
(5,270
)
 
1.12 EUR/USD(3)
 
February 2018 - November 2018
Total
35
 

 
$
1,754

 
 
 
 
_____________________________
(1)    Represents number of transactions.
(2)    Includes Euro currency forwards.
(3)    The strike prices for the foreign currency forwards maturing in 2018 and 2019 represent the average price.
The following table presents the fair value of derivative instruments, as well as their classification on the consolidated balance sheets, as of September 30, 2018 and December 31, 2017 (dollars in thousands):
 
Balance Sheet
 
September 30, 2018
 
December 31,
2017

Location
 
 
Interest rate caps
Derivative assets
 
$
8,027

 
$
7,024

Foreign currency forwards
Derivative assets
 
$
2,914

 
$

Foreign currency forwards
Derivative liabilities
 
$
426

 
$
5,270


28

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

The following table presents the effect of derivative instruments in the consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,

 

2018
 
2017
 
2018
 
2017
Amount of gain (loss) recognized in earnings:
Statements of operations location:

 
 
 
 
 
 
 
Adjustment to fair value of interest rate caps
Other gain (loss), net

$
(80
)
 
$
(1,235
)
 
$
(2,079
)
 
$
(1,949
)
Adjustment to fair value of foreign currency forwards held at the end of the reporting period
Other gain (loss), net
 
1,264

 
(2,737
)
 
7,758

 
(10,309