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.

NORTHSTAR REALTY EUROPE CORP.

FORM 10-Q

TABLE OF CONTENTS

Index		Page
Part I.	Financial Information	5
Item 1.	Financial Statements	5
	Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017	5
	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2018 and 2017	6
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2018 and 2017	7
	Consolidated Statements of Equity (unaudited) for the nine months ended September 30, 2018 and 2017	8
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2018 and 2017	9
	Notes to Consolidated Financial Statements (unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	58
Part II.		59
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Purchases of Equity Securities by Issuers	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Events	60
Item 6.	Exhibits	61
Signatures		62

2

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;

3

• 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.

4

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.

5

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 endedSeptember 30, 2018 and 2017 is comprised of equity-based compensation expenses. For the nine months endedSeptember 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.

6

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.

7

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 endedSeptember 30, 2018 and 2017, the Company paid $0.15 of dividends per share of common stock, respectively. For the nine months endedSeptember 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.

8

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.

9

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.

10

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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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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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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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 endedSeptember 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 endedSeptember 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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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 endedSeptember 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 endedSeptember 30, 2018 and an income tax expense of $0.4 million for the three months endedSeptember 30, 2017. The Company recorded an income benefit of $0.3 million for the nine months endedSeptember 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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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 endedSeptember 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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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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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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2018 and 2017:

For the three months endedSeptember 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 endedSeptember 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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NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES

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 endedSeptember 30, 2018 (dollars and shares in thousands, except per share data):

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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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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

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

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 endedSeptember 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		)
Net cash receipt (payment) on derivatives	Other gain (loss), net(1)	(483		)	232			(4,854		)	1,688

_____________________________

(1) Excludes the gain (loss) relating to foreign currency transactions and write-off of deferred financing costs for the three months ended September 30, 2018 and 2017 of $(0.1) million and $0.2 million, respectively and for the nine months ended September 30, 2018 of $(0.8) million and $(0.3) million, respectively.

The Company’s counterparties held no cash margin as collateral against the Company’s derivative contracts as of September 30, 2018 and December 31, 2017. The Company had no derivative financial instruments that were designated as hedges in qualifying hedging relationships as of September 30, 2018 and December 31, 2017.

11. Fair Value

Fair Value Measurement

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

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

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

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

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

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Derivative Instruments

Derivative instruments consist of interest rate caps and foreign currency exchange contracts that are traded over-the-counter, and are valued using a third-party service provider. These quotations are not adjusted and are generally based on valuation models with observable inputs such as contractual cash flow, yield curve, foreign currency rates and credit spreads and as such, are classified as Level 2 of the fair value hierarchy. Derivative instruments are also assessed for credit valuation adjustments due to the risk of non-performance by the Company and derivative counterparties.

29

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Fair Value of Financial Instruments

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

The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of September 30, 2018 and December 31, 2017 (dollars in thousands):

	September 30, 2018						December 31, 2017
	Principal/Notional Amount		Carrying Value		Fair Value		Principal/Notional Amount		Carrying Value		Fair Value
Financial assets:(1)
Derivative assets	$	1,359,106	$	10,941	$	10,941	$	1,193,012	$	7,024	$	7,024
Preferred equity investment	34,137		34,137		34,558		35,347		35,347		35,783
Financial liabilities:(1)
Mortgage and other notes payable, net	$	1,101,377	$	1,092,708	$	1,097,532	$	1,234,642	$	1,223,443	$	1,231,321
Derivative liabilities	10,908		426		426		58,647		5,270		5,270

_____________________________

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

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

Mortgage and Other Notes Payable

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

Preferred Equity Investments

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

12. Commitments and Contingencies

The Company is involved in various litigation matters arising in the ordinary course of its business. Although the Company is unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, the current legal proceedings are not expected to have a material adverse effect on the Company’s financial position or results of operations.

The Company engages third-party service providers for its portfolio who are remunerated based on either a fixed fee or a percentage of rental income. The contract terms vary by party and are subject to termination options. These costs are recorded in properties - operating expense and other expenses in the consolidated statements of operations.

30

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As part of the terms of agreements relating to certain assets the Company disposed, as is customary for such transactions in Europe, the Company agreed to provide certain warranties to the buyer.

Risk Management

Concentrations of credit risk arise when a number of tenants related to the Company’s investments are engaged in similar business activities or located in the same geographic region to be similarly affected by changes in economic conditions. The Company monitors its portfolios to identify potential concentrations of credit risks. For the three and nine months endedSeptember 30, 2018, one tenant, DekaBank Deutsche Girozentrale, accounted for more than 10% of the Company’s total revenues. This tenant has 5.8 years remaining on its lease. Otherwise, the Company has no other tenant that generates 10% or more of its total revenues. Additionally, for the three and nine months endedSeptember 30, 2018, Germany, France and the United Kingdom each accounted for more than 10% of the Company’s total revenues. The Company believes the remainder of its portfolio is well diversified and does not contain any unusual concentrations of credit risks.

13. Segment Reporting

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

• Real Estate Equity - Focused on European prime office properties located in key cities within Germany, the United Kingdom and France.

• Preferred Equity - Represents the Company’s preferred equity investment secured by interest in a United Kingdom prime office property.

• Corporate - The corporate segment significantly includes corporate level interest expense, management fee and general and administrative expenses.

The following tables present segment reporting for the three and nine months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Three Months Ended September 30, 2018
Statement of Operations:	Real Estate Equity				Preferred Equity		Corporate				Total
Revenues
Rental income	$	23,920			$	—	$	—			$	23,920
Escalation income	4,283				—		—				4,283
Interest income	—				708		—				708
Expenses
Interest expense(1)	5,055				—		263				5,318
Management fee, related party	—				—		4,011				4,011
Transaction costs(2)	552				—		577				1,129
Depreciation and amortization	11,013				—		—				11,013
Realized (gain) on sale	(2,706		)		—		—				(2,706		)
Other expense (income)	7,156			(3)	—		2,674			(4)	9,830
Income (loss) before income tax benefit (expense)	7,133				708		(7,525		)		316
Income tax benefit (expense)	240				—		—				240
Net income (loss)	$	7,373			$	708	$	(7,525	)		$	556

_____________________________

(1) Includes $0.6 million and $0.2 million of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.

(2) Represents costs associated with the continual work of the strategic review committee in the corporate segment and costs associated with the refinancing of certain mortgage notes in the real estate equity segment.

(3) Primarily relates to properties - operating expenses and loss on interest rate caps.

(4) Primarily relates to the general and administrative expenses and compensation expense offset by a net gain on foreign currency derivatives.

31

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

	Three Months Ended September 30, 2017
Statement of Operations:	Real Estate Equity				Preferred Equity		Corporate				Total
Revenues
Rental income	$	27,747			$	—	$	—			$	27,747
Escalation income	5,641				—		—				5,641
Interest income	—				704		—				704
Expenses
Interest expense(1)	6,325				—		211				6,536
Management fee, related party	—				—		3,585				3,585
Transaction costs(2)	—				—		332				332
Depreciation and amortization	14,396				—		—				14,396
Other expense (income)	8,802			(3)	—		6,895			(4)	15,697
Income (loss) before income tax benefit (expense)	3,865				704		(11,023		)		(6,454		)
Income tax benefit (expense)	(352		)		—		—				(352		)
Net income (loss)	$	3,513			$	704	$	(11,023	)		$	(6,806	)

_____________________________

(1) Includes $0.6 million and $0.1 million of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.

(2) Represents costs associated with the continual work of the strategic review committee in the corporate segment.

(3) Primarily relates to properties - operating expenses and loss on interest rate caps.

(4) Primarily relates to general and administrative expenses and net loss on foreign currency derivatives.

	Nine Months Ended September 30, 2018
Statement of Operations:	Real Estate Equity				Preferred Equity		Corporate				Total
Revenues
Rental income	$	75,744			$	—	$	—			$	75,744
Escalation income	15,186				—		—				15,186
Interest income	—				2,143		—				2,143
Expenses
Interest expense(1)	16,611				—		669				17,280
Management fee, related party	—				—		12,391				12,391
Transaction costs(2)	594				—		1,392				1,986
Depreciation and amortization	34,640				—		—				34,640
Realized (gain) on sale	(42,020		)		—		—				(42,020		)
Other expense (income)	26,757			(3)	—		4,953			(4)	31,710
Income (loss) before income tax benefit (expense)	54,348				2,143		(19,405		)		37,086
Income tax benefit (expense)	277				—		—				277
Net income (loss)	$	54,625			$	2,143	$	(19,405	)		$	37,363

_____________________________

(1) Includes $1.9 million and $0.4 million of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.

(2) Represents costs associated with the continual work of the strategic review committee in the corporate segment and costs associated with the refinancing of certain mortgage notes in the real estate equity segment.

(3) Primarily relates to properties - operating expenses and loss on interest rate caps.

(4) Primarily relates to general and administrative expenses and compensation expense offset by a net gain on foreign currency derivatives.

32

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

	Nine Months Ended September 30, 2017
Statement of Operations:	Real Estate Equity				Preferred Equity		Corporate				Total
Revenues
Rental income	$	79,308			$	—	$	—			$	79,308
Escalation income	16,360				—		—				16,360
Interest income	—				1,001		—				1,001
Expenses
Interest expense(1)	18,896				—		745				19,641
Management fee, related party	—				—		10,716				10,716
Transaction costs(2)	—				538		1,027				1,565
Depreciation and amortization	39,479				—		—				39,479
Other expense (income)	23,575			(3)	—		34,247			(4)	57,822
Income (loss) before income tax benefit (expense)	13,718				463		(46,735		)		(32,554		)
Income tax benefit (expense)	(316		)		—		—				(316		)
Net income (loss)	$	13,402			$	463	$	(46,735	)		$	(32,870	)

_____________________________

(1) Includes $2.0 million and $0.3 million of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.

(2) Represents costs associated with the continual work of the strategic review committee in the corporate segment and costs associated with acquiring the Company’s preferred equity investment in the preferred equity segment.

(3) Primarily relates to properties - operating expense offset by a gain on the sale of real estate.

(4) Primarily relates to general and administrative expenses, loss on foreign currency derivatives and compensation expense relating to the impact of substantially all time based and certain performance based awards vesting in connection with the change of control of the Manager.

The following table presents total assets by segment as of September 30, 2018 and December 31, 2017 (dollars in thousands):

Total Assets	Real Estate Equity		Preferred Equity		Corporate		Total
September 30, 2018	$	1,652,308	$	34,914	$	11,504	$	1,698,726
December 31, 2017	1,901,282		37,133		2,502		1,940,917

Geography

The following table presents geographic information about the Company’s total rental income for the three and nine months endedSeptember 30, 2018 and 2017 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Properties(1)	23			26			23			26
Office
Germany	$	11,803		$	10,929		$	35,517		$	30,897
United Kingdom	5,809			8,383			17,952			22,158
France	4,630			4,677			14,127			13,290
Other office	199		(2)	2,565		(3)	4,143		(2)	9,599		(3)
Subtotal	22,441			26,554			71,739			75,944
Other Property Types
France/Germany(4)	1,479			1,193		(3)	4,005			3,364		(3)
Total	$	23,920		$	27,747		$	75,744		$	79,308

_____________________________

(1) Represents the number of properties owned as of September 30, 2018 and 2017, respectively.

(2) Includes partial period rental income from a property in the Netherlands (the Maastoren property) which was sold in April 2018 and a property in Portugal which was sold in September 2018.

(3) Includes an asset in the U.K. which was classified as held-for-sale as of September 30, 2017 and partial period rental income for the assets sold during the three and nine months endedSeptember 30, 2017.

(4) Represents five assets including two retail in Germany, one industrial in France and two hotel (net lease) assets in Germany.

33

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. Subsequent Events

Dividends

On November 2, 2018, the Company declared a dividend of $0.15 per share of common stock. The common stock dividend is expected be paid on November 16, 2018 to stockholders of record as of the close of business on November 12, 2018.

Trianon

On November 6, 2018, the Company executed a definitive sale and purchase agreement to sell the Trianon Tower in Frankfurt, Germany, the Company’s largest asset, for €670 million, or approximately $762 million. The Company expects to release approximately $360 million of net equity after repayment of financing and transaction costs. Completion is subject to customary conditions, including the Purchasers’ closing on a €390 million mortgage facility.

34

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

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Item 1. “Financial Statements” of this report. References to “NorthStar Europe,” “we,” “us” or “our” refer to NorthStar Realty Europe Corp. and its subsidiaries unless the context specifically requires otherwise. References to “our Manager” refer to NorthStar Asset Management Group Inc., or NSAM, for the period prior to the Mergers (refer below) and Colony Capital, Inc., formerly known as Colony NorthStar Inc., for the period subsequent to the Mergers.

NorthStar Realty Europe Corp., a publicly-traded real estate investment trust, or REIT, (NYSE: NRE) is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France. We commenced operations on November 1, 2015 following the spin-off by NorthStar Realty Finance Corp., or NorthStar Realty, of its European real estate business (excluding its European healthcare properties) into a separate publicly-traded company, NorthStar Realty Europe Corp., a Maryland corporation, or the Spin-off. Our objective is to provide our stockholders with stable and recurring cash flow supplemented by capital growth over time.

We are externally managed and advised by an affiliate of our Manager. Substantially all of our assets, directly or indirectly, are held by, and we conduct our operations, directly or indirectly, through NorthStar Realty Europe Limited Partnership, a Delaware limited partnership and our operating partnership, or our Operating Partnership. We have elected to be taxed and will continue to conduct our operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.

Significant Developments

Leasing

For the nine months ended September 30, 2018, we signed new leases or lease extensions relating to 49,000 square meters. These leases included a nine year lease extension for 11,200 square meters with BNP Paribas SA on a property on Boulevard MacDonald, in Paris, France, increasing the weighted average lease term of the asset by five years and a new 32,800 square meters lease on a property at Marly, in Greater Paris, France, increasing the asset’s occupancy from 45% to 100%. As a result, together with other leases signed during the year, portfolio occupancy increased from 86% as of December 31, 2017 to 97% as of September 30, 2018.

Refinancing

In May 2018, we entered into a second amendment and restatement loan agreement on the loan with Trias Germany, 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.

In August 2018, we amended and restated its loan agreement on the loans related to the Trias France portfolio, increasing the principal balance to $77 million, reducing the blended margin from 1.85% per annum to 1.65% per annum and extending the maturity by two years from April 8, 2020 to April 8, 2022. 

Merger Agreement among NSAM, NorthStar Realty and Colony Capital, Inc.

On January 10, 2017, our external manager, NSAM completed a tri-party merger with NorthStar Realty and Colony NorthStar, Inc., or Legacy Colony, pursuant to which the companies combined in an all-stock merger, or the Mergers, of equals transaction to create a diversified real estate and investment management company. Under the terms of the merger agreement, NSAM, Legacy Colony and NorthStar Realty, through a series of transactions, merged with and into NSAM, which was renamed Colony NorthStar. On June 25, 2018, Colony NorthStar Inc., changed its name to Colony Capital, Inc., and its trading symbol on the NYSE was correspondingly changed from “CLNS” to “CLNY.” Colony Capital is a leading global real estate and investment management firm.

Amended and Restated Management Agreement

On November 9, 2017, we entered into an amended and restated management agreement, or the Amended and Restated Management Agreement with an affiliate of our Manager, effective as of January 1, 2018. Refer to Note 6 “Related Party Arrangements” in our accompanying consolidated financial statements included in Part I “Financial Statements” for a description of the terms of the Amended and Restated Management Agreement.

Repurchases

In March 2018, our board of directors authorized the repurchase of up to $100 million of our outstanding common stock. The authorization expires in March 2019, unless otherwise extended by our board of directors. From the authorization in March 2018 through September 30, 2018, we repurchased 6.1 million shares of our common stock for approximately $83.4 million.

Our Investments

Our primary business line is investing in European real estate. We are predominantly focused on real estate equity and preferred equity, refer to Note 13, “Segment Reporting” in Part I, Item 1. “Financial Statements” for further disclosure.

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Real Estate Equity

Overview

Our real estate equity investment strategy is focused on European prime office properties located in key cities within Germany, the United Kingdom and France.

Our Portfolio

The following presents a summary of our portfolio as of September 30, 2018:

		Portfolio by Geographic Location
		September 30, 2018(5)	September 30, 2017(5)
Gross Book Value(1)	$1.7 billion
Number of properties	23
Number of countries	3
Total square meters(2)	281,636
Weighted average occupancy	97%
Weighted average occupancy - Office	96%
Weighted average lease term	6.1 years
In-place rental income:(3)
Office portfolio	93%
Other(4)	7%

_____________________________

(1) Represents gross operating real estate and intangibles as of September 30, 2018.

(2) Based on contractual rentable area, located in many key European markets, including Frankfurt, Hamburg, Berlin, London and Paris.

(3) In-place rental income represents contractual rent adjusted for vacancies based on the rent roll as of September 30, 2018 and is translated using foreign exchange rates as of September 30, 2018.

(4) Other represents five assets including two retail in Germany, one industrial in France and two hotel (net lease) assets in Germany.

(5) Based on rental income for 23 assets owned as of September 30, 2018.

The following table presents significant tenants in our portfolio, based on in-place rental income as of September 30, 2018:

Significant tenants:	Asset (Location)	Square Meters(1)	Percentage of In-Place Rental Income	Weighted Average Lease Term (in years)
DekaBank Deutsche Girozentrale	Trianon (Frankfurt, Germany)	36,524	22.2%	5.8
BNP PARIBAS RE	Berges de Seine (Paris, France)	15,406	9.9%	1.3
Deutsche Bundesbank	Trianon (Frankfurt, Germany)	22,303	9.1%	8.3
Invesco UK Limited	Portman Square (London, UK)	4,406	5.7%	8.9
BNP PARIBAS SA	Boulevard Macdonald (Paris, France)	11,210	5.5%	7.9
Cushman & Wakefield LLP	Portman Square (London, UK)	5,150	5.2%	6.5
Morgan Lewis & Bockius LLP	Condor House (London, UK)	4,848	4.1%	7.0
PAREXEL International GmbH	Parexel (Berlin, Germany)	18,254	3.5%	15.7
Moelis & Co UK LLP	Condor House (London, UK)	3,366	2.8%	6.5
Bigpoint GmbH	Drehbahn (Hamburg, Germany)	11,916	2.8%	2.7
		133,383	70.8%	6.4

_____________________________

(1) Based on contractual rentable area.

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The following table presents gross book value, percentage of net operating income, or NOI, square meters and weighted average lease term concentration by country and type for our portfolio as of September 30, 2018 (dollars in thousands):

Country	Number of Properties	Gross Book Value(1)		Percentage of NOI(2)	Square Meters(3)	Weighted Average Lease Term (in years)
Office
Germany	9	$	877,530	51%	143,404	6.5
United Kingdom	5	391,982		24%	28,893	6.9
France	4	312,355		19%	32,089	4.1
Subtotal	18	1,581,867		94%	204,386	6.1
Other Property Types
France/Germany(4)	5	93,434		6%	77,250	6.7
Total	23	$	1,675,301	100%	281,636	6.1

_____________________________

(1) Represents gross operating real estate and intangibles as of September 30, 2018.

(2) Based on annualized NOI, for the quarter ended September 30, 2018 (refer to “Non-GAAP Financial Measures” for a description of this metric).

(3) Based on contractual rentable area.

(4) Other represents five assets including two retail in Germany, one industrial in France and two hotel (net lease) assets in Germany.

Preferred Equity

In May 2017, we partnered with a leading property developer in China to acquire a Class A office building in London United Kingdom with 22,557 square meters, 100% occupancy and a 6.0 year weighted average lease term to expiry. We invested approximately $34.1 million (£26.2 million) of preferred equity with a base yield of 8% plus equity participation rights.

Sources of Operating Revenues and Cash Flows

We primarily generate revenue from rental and other operating income from our properties and interest income from our preferred equity investment. Our income is primarily derived through the difference between the revenue and the operating and financing expenses of our investments. We may also continue to acquire investments that generate attractive returns without any leverage.

Profitability and Performance Metrics

We calculate cash available for distribution, or CAD, and NOI, as metrics to evaluate the profitability and performance of our business (refer to “Non-GAAP Financial Measures” for a description of these metrics).

Outlook and Recent Trends

The pace of economic growth across Europe seemingly slowed during the third quarter with Gross Domestic Product, or GDP, in the European Union, or EU, and the Eurozone growing by 0.3% and 0.2%, respectively. In October 2018, the International Monetary Fund revised its 2018 GDP forecast for the Eurozone down by 0.2% to 2.0%, citing a greater than anticipated softening of the German and French economies in the first half of 2018.

Unemployment in the EU was 6.7% in September 2018, down from 7.5% a year earlier and the lowest level recorded since January 2000. Eurozone inflation was up to 2.2% in October 2018, compared to 1.5% a year earlier, exceeding the European Central Bank, or ECB’s, medium-term target of 2.0%.

On October 25, 2018, the ECB reaffirmed its intention to maintain interest rates at zero percent at least through the summer of 2019 while confirming that its asset purchase program of €15 billion per month is likely to conclude at the end of 2018.

According to a report issued by the Office for National Statistics in October, the U.K. economy rebounded following a slow start to the year, growing by 0.7% in the three months to August. However, uncertainty surrounding Brexit negotiations continues to weigh on business sentiment and the general outlook for the U.K. economy with recent data indicating a sharp drop in the U.K. services sector following a strong summer of activity. In October 2018, the IMF confirmed its 2018 UK GDP growth projection of 1.4%.

On August 2, 2018, in an effort to contain inflation which stood at 2.7%, (above the Bank of England, BOE’s, 2.0% target), the BoE raised the U.K. base interest rate from 0.50% to 0.75%, its highest level since 2009. The BoE cited low unemployment and improving economic conditions following a slow start to the year, but noted continued uncertainty regarding the UK’s departure from the EU as a potential downside risk to the economy.

European commercial real estate investment volume totaled €216 billion in the first nine months of 2018, in line with 2017. The U.K., France and Germany represented 60% of total 2018 investment volume. Prime property yields in most asset classes and markets were broadly stable during the third quarter and continued to remain at a significant premium to sovereign yields, with

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the exception of Italy, where the yield on the Italian 10 year bond has risen by 24% since June 30, 2018 to approximately 330bps with seemingly little or no impact on property yields.

European office take-up increased by 4% year over year in the third quarter of 2018, demonstrating the continued strength across European occupier markets. Driven by a combination of robust leasing activity and a subdued new supply pipeline, European office vacancy decreased by 30bps to 6.5% during the quarter, the lowest level since 2002. Office rents in Europe grew by 2.4% in the third quarter, or 6.0% year-over-year, continuing to exceed the 10-year average growth rate.

German real estate investment volume totaled €56 billion in the first nine months of 2018, 12% above the same period last year. Strong investment appetite and limited supply of core assets continued to put pressure on prime office yields that compressed by a further 10bps during the quarter (17bps compared to the same period last year). The vacancy rate in the top 6 cities was 4.6%, 20bps below the second quarter, while average office rents grew by 1.2% during the quarter.

French investment volume totaled €19 billion in the first nine months of 2018, 18% above the same period last year as investors continue to focus on large transactions exceeding €100 million. Paris office take up slowed following a strong start to 2018 (down 3% compared to the second quarter), but remained above 2017 levels. A constrained new supply pipeline continues to place pressure on rents, which grew by 4% year over year on average (9% in case of prime rents).

Total U.K. investment volume reached £49 billion in the first nine months of 2018, 5% below the same period last year. Take up across Central London stands 9% above the long term average, reflecting the resilience of the occupier market despite headwinds in the wider macroeconomic environment.

Source: CBRE, Savills, Cushman & Wakefield, JLL, Eurostat, International Monetary Fund, Bank of England

Investing Strategy

We seek to provide our stockholders with a stable and recurring cash flow for distribution supplemented by capital growth over time. Our business is predominantly focused on prime office properties in key cities within Germany, the United Kingdom and France which are not only the largest economies in Europe, but are the most established, liquid and among the most stable office markets in Europe. We seek to utilize our established local networks to source suitable investment opportunities. We have a long term investment approach and expect to make equity investments, directly or indirectly through joint ventures.

Financing Strategy

We pursue a variety of financing arrangements such as mortgage notes and bank loans available from the commercial mortgage-backed securities market, finance companies and banks. However, we generally seek to limit our reliance on recourse borrowings. We target overall leverage of 40% to 50% over time, although there is no assurance that this will be the case. Borrowing levels for our investments may be dependent upon the nature of the investments and the related financing that is available.

Attractive long-term, non-recourse, non-mark-to-market, financing continues to be available in the European markets. We predominately use floating rate financing and we seek to mitigate the risk of interest rates rising through hedging arrangements including interest rate caps.

In addition, we may use corporate level financing such as credit facilities. In April 2017, we amended and restated our revolving credit facility, or Credit Facility, with a commitment of $35 million and with 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, we amended the Credit Facility, increasing the size to $70 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 million.

In May 2018, we entered into a second amendment and restatement loan agreement on a loan related to the Trias Germany portfolio with a principal balance of $89 million, 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.

In August 2018, we amended and restated its loan agreement on the loans related to the Trias France portfolio, increasing the principal balance to $77 million, reducing the blended margin from 1.85% per annum to 1.65% per annum and extending the maturity by two years from April 8, 2020 to April 8, 2022. 

Risk Management

Risk management is a significant component of our strategy to deliver consistent risk-adjusted returns to our stockholders. Given our need to maintain our qualification as a REIT for U.S. federal income tax purposes, we closely monitor our portfolio and actively seek to manage risks associated with, among other things, our assets, interest rates and foreign exchange rates. In addition, the audit committee of our board of directors, or the Board, in consultation with management, will periodically review our policies with respect to risk assessment and risk management, including key risks to which we are subject, such as credit risk, liquidity

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risk, financing risk, foreign currency risk and market risk, and the steps that management has taken to monitor and control such risks. The audit committee of the Board maintains oversight of financial reporting risk matters.

Underwriting

Prior to making any equity investments, our underwriting team, in conjunction with third-party providers, undertakes a rigorous asset-level due diligence process, involving intensive data collection and analysis, to seek to ensure that we understand fully the state of the market and the risk-reward profile of the asset. In addition, we evaluate material accounting, legal, financial and business matters in connection with such investment. These issues and risks are built into the valuation of an asset and ultimate pricing of an investment.

During the underwriting process, we review the following data, including, but not limited to: property financial data including historic and budgeted financial statements, liquidity and capital expenditure plans, property operating metrics (including occupancy, leasing activity, lease expirations, sales information, tenant credit review, tenant delinquency reports, operating expense efficiency and property management efficiency) and local real estate market conditions including vacancy rates, absorption, new supply, rent levels and comparable sale transactions, as applicable.

In addition to evaluating the merits of any proposed investment, we evaluate the diversification of our portfolio of assets. Prior to making a final investment decision, we determine whether a target asset will cause our portfolio of assets to be too heavily concentrated with, or cause too much exposure to, any one real estate sector, geographic region, source of cash flow such as tenants or borrowers, or other geopolitical issues. If we determine that a proposed investment presents excessive concentration risk, we may decide not to pursue an otherwise attractive investment.

Portfolio Management

Our Manager performs portfolio management services on our behalf. In addition, we rely on the services of local third-party service providers. The comprehensive portfolio management process includes day-to-day oversight by the portfolio management team, regular management meetings and a quarterly investment review process. These processes are designed to enable management to evaluate and proactively identify investment-specific matters and trends on a portfolio-wide basis. Nevertheless, we cannot be certain that such review will identify all potential issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific investments; therefore, potential future losses may also stem from investments that are not identified during these investment reviews.

Our Manager uses many methods to actively manage our risks to seek to preserve income and capital, which includes our ability to manage our investments and our tenants in a manner that preserves cost and income and minimizes credit losses that could decrease income and portfolio value. Frequent re-underwriting, dialogue with tenants/property managers and regular inspections of our properties have proven to be an effective process for identifying issues early. Monitoring tenant creditworthiness is an important component of our portfolio management process, which may include, to the extent available, a review of financial statements and operating statistics, delinquencies, third party ratings and market data. During the quarterly portfolio review, or more frequently if necessary, investments may be put on highly-monitored status and identified for possible asset impairment based upon several factors, including missed or late contractual payments, tenant rating downgrades (where applicable) and other data that may indicate a potential issue in our ability to recover our invested capital from an investment.

We may need to make unplanned capital expenditures in connection with changes in laws and governmental regulations in relation to real estate. Where properties are being repositioned or refurbished, we may also be exposed to unforeseen changes in scope and timing of capital expenditures.

Given our need to maintain our qualification as a REIT for U.S. federal income tax purposes, and in order to maximize returns and manage portfolio risk, we may dispose of an asset earlier than anticipated or hold an asset longer than anticipated if we determine it to be appropriate depending upon prevailing market conditions or factors regarding a particular asset. We can provide no assurances, however, that we will be successful in identifying or managing all of the risks associated with acquiring, holding or disposing of a particular investment or that we will not realize losses on certain dispositions.

Interest Rate and Foreign Currency Hedging

Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. The goal of our interest rate management strategy is to minimize or eliminate the effects of interest rate changes on the value of our assets, to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of financing such assets.

In addition, because we are exposed to foreign currency exchange rate fluctuations, we employ foreign currency risk management strategies, including the use of, among others, currency hedges, and matched currency financing.

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We can provide no assurances, however, that our efforts to manage interest rate and foreign currency exchange rate volatility will successfully mitigate the risks of such volatility on our portfolio.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Our significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies” in our accompanying consolidated financial statements included in Part I Item 1. “Financial Statements.”

Recent Accounting Pronouncements

For recent accounting pronouncements that may potentially impact our business, refer to Note 2, “Summary of Significant Accounting Policies” in our accompanying consolidated financial statements included in Item 1. “Financial Statements.”

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Results of Operations

Comparison of the Three Months EndedSeptember 30, 2018 to September 30, 2017 (dollars in thousands):

	Three Months Ended September 30,					Increase (Decrease)
	2018		2017			Amount
Revenues
Rental income	$	23,920	$	27,747		$	(3,827	)
Escalation income	4,283		5,641			(1,358		)
Interest income	708		704			4
Other income	76		171			(95		)
Total revenues	28,987		34,263			(5,276		)
Expenses
Properties - operating expenses	5,690		7,519			(1,829		)
Interest expense	5,318		6,536			(1,218		)
Transaction costs	1,129		332			797
Management fee, related party	4,011		3,585			426
Other expenses	1,150		1,996			(846		)
General and administrative expenses	1,952		1,723			229
Compensation expense	1,741		2,839			(1,098		)
Depreciation and amortization	11,013		14,396			(3,383		)
Total expenses	32,004		38,926			(6,922		)
Other income (loss)
Other gain (loss), net	627		(3,554		)	4,181
Realized gain on sales, net	2,706		1,763			943
Income (loss) before income tax benefit (expense)	316		(6,454		)	6,770
Income tax benefit (expense)	240		(352		)	592
Net income (loss)	$	556	$	(6,806	)	$	7,362

Revenues

Rental Income

Rental income consists of rental revenue in our real estate equity segment. Rental income decreased $3.8 million, primarily due to the disposal of six properties during 2017, the Maastoren property in April 2018 and a property in Portugal in September 2018 partially offset by leasing activity, such as the completion of the Deutsche Bundesbank lease in the Trianon Tower in the fourth quarter 2017.

Escalation Income

Escalation income consists of tenant recoveries in our real estate equity segment. Escalation income decreased $1.4 million primarily due to the disposal of six properties during 2017, the Maastoren property in April 2018 and a property in Portugal in September 2018 offset by increased recoverability in connection with higher occupancy from 86% as of September 30, 2017 to 97% as of September 30, 2018.

Interest Income

Interest income relates to our preferred equity investment originated in May 2017 in our preferred equity segment.

Other Income

Other income is principally related to insurance refunds and fees from vacating tenants in our real estate equity segment. Other income for the three months endedSeptember 30, 2018 predominantly reflects amounts received from vacating tenants for the demise of the premise. Other income for the three months endedSeptember 30, 2017 predominantly relates to a one-time insurance refund relating to a repair in the third quarter of 2017.

Expenses

Properties - Operating Expenses

Properties - operating expenses decreased $1.8 million due to the disposal of six properties during 2017, the Maastoren property in April 2018 and a property in Portugal in September 2018 and a reduction in non-recoverable operating costs in our portfolio in our real estate equity segment.

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Interest Expense

Interest expense decreased $1.2 million due to the repayments of certain mortgage notes in connection with the disposal of six properties during 2017 and the Maastoren property in April 2018 and the margin reduction associated with the refinancing of certain mortgage notes in our real estate equity segment in the second half of 2017 and in 2018.

Transaction Costs

Transaction costs for the three months endedSeptember 30, 2018 were primarily related to costs associated with the continual work of the strategic review committee, or the Strategic Review Committee, which was established in 2017 and has continued to work to evaluate opportunities to enhance stockholder value in our corporate segment and costs associated with the refinancing of certain mortgage notes in our real estate equity segment. Transaction costs for the three months endedSeptember 30, 2017 were primarily related to the Strategic Review Committee and costs associated with amending the management agreement in our corporate segment.

Management Fee, Related Party

Management fee, related party relates to the management fee incurred to our Manager in our corporate segment. Effective as of January 1, 2018, we entered into a new management agreement which restructured the base management fee to be calculated as a percentage of reported EPRA NAV (refer to “Related Party Arrangements” below for more information).

Other Expenses

Other expenses primarily represent third-party service provider fees such as asset management, accounting, tax, legal fees and other compliance related fees related to portfolio management of our real estate equity segment. The decrease of $0.8 million is due to the internalization of certain third-party accounting, tax and asset management services.

General and Administrative Expenses

General and administrative expenses including external and internal audit, legal fees, public company costs and other corporate expenses are incurred in our corporate segment. General and administrative expenses increased $0.3 million due to the Internalized Service Cost allocated to us from our Manager.

Compensation Expense

Compensation expense is comprised of non-cash amortization of time-based, market-based and performance-based awards in our corporate segment. The decrease for the three months endedSeptember 30, 2018, is mainly due to the adoption of accounting standard update related to stock compensation accounting (ASU 2018-07) which simplified the guidance around share-based payments to recognize compensation expense at fair value at the date of grant rather than revaluing the fair value at the end of each period. Refer to Note 7 “Compensation Expense” and Note 8 “Stockholders’ Equity” in our accompanying consolidated financial statements included in Part I Item 1. “Financial Statements” for further information.

Depreciation and Amortization

Depreciation and amortization expense decreased due to the disposal of six properties during 2017, the Maastoren property in April 2018 and a property in Portugal in September 2018 in our real estate equity segment.

Other Income (Loss)

Other Gain (Loss), net

Other gain (loss), net is primarily related to derivative instruments. The gain on the non-cash change in fair value related to foreign currency forwards used to hedge projected net property level cash flows in our corporate segment was primarily due to the weakening of the Euro against the U.S. dollar. The loss on the non-cash change in fair value related to the interest rate caps in our real estate equity segment is due to the movement in European interest rates in 2018 compared to 2017.

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The following table presents a summary of other gain (loss), net for the three months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Three Months Ended September 30,
	2018									2017
	Real Estate Equity			Corporate			Total			Real Estate Equity			Corporate			Total
Change in fair value: derivatives, at fair value
Interest rate caps	$	(80	)	$	—		$	(80	)	$	(1,235	)	$	—		$	(1,235	)
Foreign currency forwards	—			1,264			1,264			—			(2,737		)	(2,737		)
Subtotal	(80		)	1,264			1,184			(1,235		)	(2,737		)	(3,972		)
Net cash (payments) receipts on derivatives	—			(483		)	(483		)	—			232			232
Foreign currency translations	(29		)	(45		)	(74		)	203			44			247
Write-off of deferred financing costs(1)	—			—			—			(17		)	—			(17		)
Total other gain (loss), net	$	(109	)	$	736		$	627		$	(1,049	)	$	(2,461	)	$	(3,510	)

_____________________________

(1) Due to the repayment of certain mortgage and other notes payable.

Realized Gain on Sales, net

Realized gain on sales, net is primarily related to the sales of operating real estate including the subsequent sale costs relating to prior period sales, receipt of escrow arrangements entered into for specific indemnification obligations in relation to prior period sales and the reclassification of the currency translation adjustment, or CTA, from a component of accumulated other comprehensive income, or OCI, to realized gain on sales, net, in our real estate equity segment.

The following table presents a summary of realized gain on sales, net for the three months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Three Months Ended September 30,
	2018			2017
Gain (loss):
Sale of operating real estate	$	2,479		$	1,063
Receipt of escrows	541			597
Prior period sale adjustments	52			15
CTA release	(366		)	44
Total realized gain on sales, net	$	2,706		$	1,719

Income Tax Benefit (Expense)

The income tax benefit for the three months endedSeptember 30, 2018 reflects a net benefit of $0.2 million related to our real estate equity segment. The income tax expense for the three months endedSeptember 30, 2017 reflects a net expense of $0.4 million related to our real estate equity segment.

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Same Store Analysis

The following table presents our same store analysis for the real estate equity and preferred equity segments which comprises 23 properties (281,636 square meters) and our preferred equity investment adjusted for currency movement and excludes properties that were acquired or sold at any time during the three months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Same Store(4)
	Three Months Ended September 30,						Increase (Decrease)
	2018			2017(1)			Amount			%
Occupancy (end of period)	97		%	83		%
Same store
Rental income(2)	$	23,841		$	22,645		$	1,196
Escalation income	4,532			4,258			274
Interest income	708			688			20
Other income	105			170			(65		)
Total revenues	29,186			27,761			1,425			5.1	%
Utilities	1,262			1,192			70
Real estate taxes and insurance	1,280			1,166			114
Management fees	481			438			43
Repairs and maintenance	1,954			2,195			(241		)
Other(2)(3)	540			1,094			(554		)
Properties - operating expenses	5,517			6,085			(568		)	(9.3	)%
Same store net operating income	$	23,669		$	21,676		$	1,993		9.2	%

_____________________________

(1) Three months ended September 30, 2017 is translated using the average exchange rate for the three months endedSeptember 30, 2018.

(2) Adjusted to exclude amortization of above/below market leases and ground leases.

(3) Includes non-recoverable VAT, bad debt expense, ground rent, administrative costs and other non-reimbursable expenses.

(4) We believe same store net operating income, a non-GAAP metric, is a useful metric for evaluating the operating performance as it reflects the operating performance of the real estate portfolio excluding the effects of non-cash adjustments and provides a better measure of operational performance for a quarter-over-quarter comparison. Same store net operating income is presented for the same store portfolio, which reflects all properties that were owned by us in the end of the reporting period. We define same store net operating income as NOI excluding (i) properties that were acquired or sold during the period, (ii) impact of foreign currency changes and (iii) amortization of above/below market leases. We consider same store net operating income to be an appropriate and useful supplemental performance measure. Same store net operating income should not be considered as an alternative to net income (loss), determined in accordance with U.S. GAAP, as an indicator of operating performance.  In addition, our methodology for calculating same store net operating income involves subjective judgment and discretion and may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.  Refer below for a reconciliation of same store NOI to net income (loss) attributable to common stockholders calculated in accordance with U.S. GAAP.

Same Store Revenue

Same store rental income increased driven primarily due to leases that commenced in the fourth quarter 2017 and early 2018. Same store escalation income increased due the increased recoverability of operating expenses due to leasing.

Same Store Expense

Same store properties - operating expenses decreased due to timing of certain repairs and maintenance and non-recoverable operating expenses such as bad debt expense and non-recoverable VAT.

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Reconciliation of Net Income to Same Store NOI

The following table presents a reconciliation from net income (loss) to same store net operating income for the real estate equity and preferred equity segments for the three months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Same Store Reconciliation
	Three Months Ended September 30,
	2018		2017
Net income (loss)	$	556	$	(6,806	)
Corporate segment net (income) loss(1)	7,525		11,023
Other (income) loss(2)	15,416		21,738
Net operating income	23,497		25,955
Sale of real estate investments and other(3)(4)	172		(4,279		)
Same store net operating income	$	23,669	$	21,676

_____________________________

(1) Includes management fees, general and administrative expense, compensation expense, corporate interest expense and corporate transaction costs.

(2) Includes realized gain on sales offset by depreciation and amortization expense, loss on interest rate caps, and other expenses in the real estate equity segment.

(3) Primarily reflects the impact of net operating income of sold assets.

(4) Three months ended September 30, 2017 is translated using the average exchange rate for the three months endedSeptember 30, 2018.

Comparison of the Nine Months EndedSeptember 30, 2018 to September 30, 2017 (dollars in thousands):

	Nine Months Ended September 30,						Increase (Decrease)
	2018			2017			Amount
Revenues
Rental income	$	75,744		$	79,308		$	(3,564	)
Escalation income	15,186			16,360			(1,174		)
Interest income	2,143			1,001			1,142
Other income	497			708			(211		)
Total revenues	93,570			97,377			(3,807		)
Expenses
Properties - operating expenses	19,422			22,521			(3,099		)
Interest expense	17,280			19,641			(2,361		)
Transaction costs	1,986			1,565			421
Management fee, related party	12,391			10,716			1,675
Other expenses	3,847			6,604			(2,757		)
General and administrative expenses	5,631			5,875			(244		)
Compensation expense	3,292			20,094			(16,802		)
Depreciation and amortization	34,640			39,479			(4,839		)
Total expenses	98,489			126,495			(28,006		)
Other income (loss)
Other gain (loss), net	(15		)	(10,833		)	10,818
Realized gain on sales, net	42,020			7,397			34,623
Income (loss) before income tax benefit (expense)	37,086			(32,554		)	69,640
Income tax benefit (expense)	277			(316		)	593
Net income (loss)	$	37,363		$	(32,870	)	$	70,233

Revenues

Rental Income

Rental income consists of rental revenue in our real estate equity segment. Rental income decreased $3.6 million, primarily due to the disposal of six properties during 2017, the Maastoren property in April 2018 and a property in Portugal in September 2018 offset by leasing activity such as the completion of the Deutsche Bundesbank lease in the Trianon Tower in the fourth quarter of 2017 and the increase in foreign currency movements.

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Escalation Income

Escalation income consists of tenant recoveries in our real estate equity segment. Escalation income decreased $1.2 million due to the disposal of six properties during 2017, the Maastoren property in April 2018 and a property in Portugal in September 2018 offset by increased recoverability in connection with higher occupancy.

Interest Income

Interest income relates to our preferred equity investment originated in May 2017 in our preferred equity segment.

Other Income

Other income is principally related to insurance refunds and fees from vacating tenants in our real estate equity segment. Other income for the nine months endedSeptember 30, 2018 predominantly reflects amounts received from vacating tenants for the demise of the premise. Other income for the nine months ended September 30, 2017 predominantly relates to a one-time insurance refund relating to a repair in the third quarter of 2017 and other dilapidation income received from vacating tenants.

Expenses

Properties - Operating Expenses

Properties - operating expenses decreased $3.1 million due to the disposal of six properties during 2017, the Maastoren property in April 2018 and a property in Portugal in September 2018 and a reduction in non-recoverable operating costs in our portfolio in our real estate equity segment.

Interest Expense

Interest expense decreased $2.4 million due to the repayments of certain mortgage notes in connection with the disposal of six properties during 2017 and the disposal of the Maastoren property in April 2018 and the margin reduction associated with the refinancing of certain mortgage notes in our real estate equity segment in the second half of 2017 and in 2018.

Transaction Costs

Transaction costs for the nine months endedSeptember 30, 2018 were primarily related to costs associated with the continual work of the Strategic Review Committee which was established in 2017 and continues to work to evaluate opportunities to enhance stockholder value in our corporate segment and costs associated with the refinancing of certain mortgage notes in our real estate equity segment. Transaction costs for the nine months endedSeptember 30, 2017 were primarily related to the Strategic Review Committee and costs associated with amending the management agreement in our corporate segment and transaction fees related to our preferred equity investment.

Management Fee, Related Party

Management fee, related party relates to the management fee incurred to our Manager in our corporate segment. Effective as of January 1, 2018, we entered into a new management agreement which restructured the base management fee to be calculated as a percentage of reported EPRA NAV (refer to “Related Party Arrangements” below for more information).

Other Expenses

Other expenses primarily represent third-party service provider fees such as asset management, accounting, tax, legal fees and other compliance related fees related to portfolio management of our real estate equity segment. The decrease of $2.8 million is due to the internalization of certain third-party accounting, tax and asset management services.

General and Administrative Expenses

General and administrative expenses including external and internal audit, legal fees, public company costs and other corporate expenses incurred in our corporate segment. General and administrative expenses decreased $0.2 million due to the one-time payroll tax in the first quarter 2017 associated with the acceleration of substantially all of our equity awards due to the Mergers and lower audit and other corporate expenses in 2018 partially offset by the Internalized Service Cost allocated to us from our Manager.

Compensation Expense

Compensation expense is comprised of non-cash amortization of time-based, market-based and performance-based awards in our corporate segment. The decrease for the nine months endedSeptember 30, 2018, is mainly due to the acceleration of a material portion of our time-based equity awards due to the Mergers, which occurred in the first quarter of 2017. Refer to Note 7 “Compensation Expense” and Note 8 “Stockholders’ Equity” in our accompanying consolidated financial statements included in Part I Item 1. “Financial Statements” for further information.

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Depreciation and Amortization

Depreciation and amortization expense decreased due to the disposal of six properties during 2017, the Maastoren property in April 2018 and a property in Portugal in September 2018 in our real estate equity segment.

Other Income (Loss)

Other Gain (Loss), Net

Other gain (loss), net is primarily related to the derivative instruments. The gain on the non-cash change in fair value related to foreign currency forwards used to hedge projected net property level cash flows in our corporate segment was primarily due to the weakening of the Euro against the U.S. dollar. The loss on the non-cash change in fair value related to the interest rate caps in our real estate equity segment is due to the movement in European interest rates in 2018 compared to 2017.

The following table presents a summary of other gain (loss), net for the nine months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Nine Months Ended September 30,
	2018									2017
	Real Estate Equity			Corporate			Total			Real Estate Equity			Corporate			Total
Change in fair value: derivatives, at fair value
Interest rate caps	$	(2,079	)	$	—		$	(2,079	)	$	(1,949	)	$	—		$	(1,949	)
Foreign currency forwards	—			7,758			7,758			—			(10,309		)	(10,309		)
Subtotal	(2,079		)	7,758			5,679			(1,949		)	(10,309		)	(12,258		)
Net cash (payments) receipts on derivatives	—			(4,854		)	(4,854		)	—			1,688			1,688
Foreign currency translations	17			75			92			(205		)	(13		)	(218		)
Write-off of deferred financing costs(1)	(932		)	—			(932		)	(45		)	—			(45		)
Total other gain (loss), net	$	(2,994	)	$	2,979		$	(15	)	$	(2,199	)	$	(8,634	)	$	(10,833	)

_____________________________

(1) Due to the repayment of certain mortgage and other notes payable.

Realized Gain on Sales, net

Realized gain on sales, net is primarily related to the sales of operating real estate including the subsequent sale costs relating to prior period sales, receipt of escrow arrangements entered into for specific indemnification obligations in relation to prior period sales and the reclassification of the currency translation adjustment, or CTA, from a component of accumulated other comprehensive income, or OCI, to realized gain on sales, net, in our real estate segment.

The following table presents a summary of realized gain on sales, net for the nine months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Nine Months Ended September 30,
	2018		2017
Gain (loss):
Sale of operating real estate	$	32,439	$	6,243
Receipt of escrows	1,644		581
Prior period sale adjustments	321		937
CTA release	7,616		(364		)
Total realized gain on sales, net	$	42,020	$	7,397

Income Tax Benefit (Expense)

The income tax expense for the nine months endedSeptember 30, 2018 reflects a net benefit of $0.3 million related to our real estate equity segment. The income tax expense for the nine months endedSeptember 30, 2017 reflects a net expense of $0.3 million related to our real estate equity segment.

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Same Store Analysis

The following table presents our same store analysis for the real estate equity segment which comprises 23 properties (281,636 square meters) adjusted for currency movement and excludes properties that were acquired or sold at any time during the nine months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Same Store(4)
	Nine Months Ended September 30,				Increase (Decrease)
	2018		2017(1)		Amount			%
Occupancy (end of period)	97%		83%
Same store
Rental income(2)	$	71,981	$	69,346	$	2,635
Escalation income	14,548		13,027		1,521
Other income	404		457		(53		)
Total revenues	86,933		82,830		4,103			5.0	%
Utilities	3,872		4,024		(152		)
Real estate taxes and insurance	3,999		3,702		297
Management fees	1,511		1,392		119
Repairs and maintenance	6,204		6,459		(255		)
Other(2)(3)	2,253		3,922		(1,669		)
Properties - operating expenses	17,839		19,499		(1,660		)	(8.5	)%
Same store net operating income	$	69,094	$	63,331	$	5,763		9.1	%

_____________________________

(1) Nine months ended September 30, 2017 is translated using the average exchange rate for the nine months endedSeptember 30, 2018.

(2) Adjusted to exclude amortization of above/below market leases and ground leases.

(3) Includes non-recoverable VAT, bad debt expense, ground rent, administrative costs and other non-reimbursable expenses.

(4) We believe same store net operating income, a non-GAAP metric, is a useful metric for evaluating the operating performance as it reflects the operating performance of the real estate portfolio excluding the effects of non-cash adjustments and provides a better measure of operational performance for a quarter-over-quarter comparison. Same store net operating income is presented for the same store portfolio, which reflects all properties that were owned by us in the end of the reporting period. We define same store net operating income as NOI excluding (i) properties that were acquired or sold during the period, (ii) impact of foreign currency changes and (iii) amortization of above/below market leases. We consider same store net operating income to be an appropriate and useful supplemental performance measure. Same store net operating income should not be considered as an alternative to net income (loss), determined in accordance with U.S. GAAP, as an indicator of operating performance.  In addition, our methodology for calculating same store net operating income involves subjective judgment and discretion and may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.  Refer below for a reconciliation of same store NOI to net income (loss) attributable to common stockholders calculated in accordance with U.S. GAAP.

Same Store Revenue

Same store rental income increased driven primarily due to leases commenced during the second half of 2017 and early 2018. Same store escalation income increased due the increased recoverability of operating expenses due to leasing.

Same Store Expense

Same store properties - operating expenses decreased due to timing of certain non-recoverable operating expenses such as bad debt expense and non-recoverable VAT.

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Reconciliation of Net Income to Same Store NOI

The following table presents a reconciliation from net income (loss) to same store net operating income for the real estate equity segment for the nine months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Same Store Reconciliation
	Nine Months Ended September 30,
	2018			2017
Net income (loss)	$	37,363		$	(32,870	)
Corporate segment net (income) loss(1)	19,405			46,735
Other (income) loss(2)	18,152			60,734
Net operating income	74,920			74,599
Sale of real estate investments and other(3)(5)	(7,969		)	(12,269		)
Interest income(4)	2,143			1,001
Same store net operating income	$	69,094		$	63,331

_____________________________

(1) Includes management fees, general and administrative expense, compensation expense, corporate interest expense and corporate transaction costs.

(2) Includes realized gain on sales offset by depreciation and amortization expense, loss on interest rate caps, and other expenses in the real estate equity segment.

(3) Primarily reflects the impact of net operating income of sold assets.

(4) Reflects interest income earned in the preferred equity segment.

(5) Nine months ended September 30, 2017 is translated using the average exchange rate for the nine months endedSeptember 30, 2018.

Liquidity and Capital Resources

Our financing strategy is to employ investment-level financing to prudently leverage our investments and deliver attractive risk-adjusted returns to our stockholders through a wide range of secured and unsecured debt and public and private equity capital sources to fund our investment activities. In addition to investment-specific financings, we may use and have used credit facilities and repaid facilities on a shorter term basis and public and private, secured and unsecured debt issuances on a longer term basis.

Our current primary liquidity needs are to fund:

• our operating expenses and investment activities;

• acquisitions of our target assets and related ongoing commitments;

• capital improvements

• distributions to our stockholders;

• principal and interest payments on our borrowings; and

• income tax liabilities of taxable REIT subsidiaries and we are subject to limitations as a REIT.

Our current primary sources of liquidity are:

• cash flow generated from our investments, both from operations and return of capital

• net proceeds from asset disposals;

• financings secured by our assets such as mortgage notes, longer term senior and subordinate corporate capital such as revolving credit facilities; and

• cash on hand.

We seek to meet our long-term liquidity requirements, including the repayment of borrowings and our investment funding needs, through existing cash resources, issuance of debt or equity capital, return of capital from investments and the liquidation or refinancing of assets. Nonetheless, our ability to meet a long-term (beyond one year) liquidity requirement may be subject to obtaining additional debt and equity financing. Any decision by our lenders and investors to provide us with financing will depend upon a number of factors, such as our compliance with the terms of our existing credit arrangements, our financial performance, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders’ and investors’ resources and policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities.

As a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where we do not receive corresponding cash, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Internal Revenue Code and to avoid federal income tax and the

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non-deductible excise tax. On a quarterly basis, our Board determines an appropriate common stock dividend based upon numerous factors, including CAD, REIT qualification requirements, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our business or prospects. Future dividend levels are subject to adjustment based upon our evaluation of the factors described above, as well as other factors that our Board may, from time-to-time, deem relevant to consider when determining an appropriate common stock dividend.

In March 2018, our board of directors authorized the repurchase of up to $100 million of our outstanding common stock. The authorization expires in March 2019, unless otherwise extended by our board of directors. For the three months endedSeptember 30, 2018, we repurchased 1.0 million shares of our common stock for approximately $13.8 million. From the authorization in March 2018 through September 30, 2018, we repurchased 6.1 million shares of our common stock for approximately $83.4 million. We did not repurchase any shares subsequent to September 30, 2018.

In March 2018, we amended the Credit Facility, increasing the size to $70 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 million.

In May 2018, we entered into a second amendment and restatement loan agreement on the loan with Trias Germany, 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.

In August 2018, we amended and restated its loan agreement on the loans related to the Trias France portfolio, increasing the principal balance to $77 million, reducing the blended margin from 1.85% per annum to 1.65% per annum and extending the maturity by two years from April 8, 2020 to April 8, 2022.

We believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs. We expect our contractual rental income to be sufficient to meet our expected capital expenditures, interest expense, property operating and general and administrative expenses as well as common dividends declared by us. We may seek to raise additional capital in order to finance new acquisitions. As of November 2, 2018, total liquidity was $135 million, comprised of $65 million of unrestricted cash and $70 million of availability under our Credit Facility.

Cash Flows

The following presents a summary of our activity for the nine months endedSeptember 30, 2018 and 2017:

	Nine Months Ended   September 30,
Cash flow provided by (used in):	2018			2017
Operating activities	$	20,336		$	19,540
Investing activities	194,416			(420		)
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	)

Nine Months EndedSeptember 30, 2018 Compared to September 30, 2017

Net cash provided by operating activities was $20.3 million for the nine months endedSeptember 30, 2018 compared to $19.5 million for the nine months endedSeptember 30, 2017. The increase was primarily due to a decrease in the change in operating assets and liabilities due to the timing of payments and collection of receivables.

Net cash provided by investing activities was $194.4 million for the nine months endedSeptember 30, 2018 compared to net cash used in $0.4 million for the nine months endedSeptember 30, 2017. Cash flow provided by investing activities for the nine months endedSeptember 30, 2018 was primarily due to proceeds from the sale of real estate $204.6 million offset by and improvements of our operating real estate $12.2 million. Cash flow used in by the nine months endedSeptember 30, 2017 was primarily due to the origination of our preferred equity investment $35.1 million and improvements of our operating real estate $10.1 million offset by proceeds from the sale of real estate $48.6 million.

Net cash used in financing activities was $215.6 million for the nine months endedSeptember 30, 2018 compared to $43.6 million for the nine months endedSeptember 30, 2017. Cash flow used in financing activities for the nine months endedSeptember 30, 2018 was primarily due to repayment of mortgage notes and other notes payable of $122.4 million, retirement of shares of common stock of $83.4 million, and dividend payments of $23.7 million offset by borrowings of mortgage notes of $23.9 million. Net cash flow used in financing activities for the nine months endedSeptember 30, 2017 was primarily due to the net cash payment

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on tax withholding of $11.0 million, repayment of mortgage notes and other notes payable of $12.9 million and dividend payments of $25.1 million offset $5.6 million from the borrowing from mortgage and other notes payable.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

Related Party Arrangements

Colony Capital Inc.

We entered into a management agreement with an affiliate of the Manager in November 2015, or the Original Management Agreement. On November 9, 2017, we entered into an amended and restated management agreement, or the Amended and Restated Management Agreement, with an affiliate of Colony Capital, effective as of January 1, 2018. As asset manager, the Manager is responsible for our day-to-day operations, subject to the supervision and management of our 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 us and our subsidiaries. The management agreement with the Manager provides for a base management fee, incentive fee and expense reimbursement.

Term: Renewals

The Amended and Restated Management Agreement provides for an initial term (beginning January 1, 2018) of five years, or 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 defined in the Amended and Restated Management Agreement).

If we elect not to renew the Amended and Restated Management Agreement at the end of a term, we will be obligated to pay the Manager a termination fee, or 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, we undergo a “change of control” (as defined in the Amended and Restated Management Agreement), we 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, we will consider such assignment in good faith and not unreasonably withhold, condition or delay our consent. The Amended and Restated Management Agreement further provides that we anticipate 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 us 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, we are obligated to pay, quarterly, in arrears, in cash, the Manager a base management fee per annum equal to:

• 1.50% of our reported EPRA NAV (as defined in the Amended and Restated Management Agreement) for EPRA NAV amounts up to and including $2.0 billion; plus

• 1.25% of our 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 our interpretation of the European Public Real Estate Association, or 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 us 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 us and shall not reduce EPRA NAV.

For the three and nine months endedSeptember 30, 2018, we incurred $4.0 million and $12.4 million, respectively, related to the base management fee.

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Incentive Fee

In addition to the base management fees, we are obligated to pay the Manager an incentive fee, if any, or the Incentive Fee, with respect to each measurement period equal to twenty percent (20%) of: (i) the excess of (a) our Total Stockholder Return (as defined in the Amended and Restated Management Agreement, which includes stock price appreciation 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) our 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, we 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 us in the open market or a combination thereof. Any shares of common stock delivered by us 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 our 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) our EPRA NAV per share, based on our 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 endedSeptember 30, 2018, we did not record an incentive fee.

Costs and Expenses

We are responsible to pay (or reimburse the Manager) for all of our direct, out of pocket costs and expenses as a stand alone company incurred by or on behalf of us and our 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.

We are 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 us 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 us 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 our 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 we 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 our 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, or 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.

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, is referred to as the Quarterly Cap Excess Amount we are 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 endedSeptember 30, 2018, the Manager allocated $0.3 million and $0.8 million, respectively, of Internalized Service Costs to us.

Equity Based Compensation

In addition, we expect to make annual equity compensation grants to our management 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 our compensation committee. The Manager will have discretion in allocating the aggregate grant among our management and other employees of the Manager.

Under the Amended and Restated Management Agreement, beginning with our 2018 annual stockholders’ meeting, the Manager has the right to nominate one individual to be included in the slate of nominees nominated by our board of directors for election at each annual meeting.

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Colony Capital Ownership Waiver and Voting Agreement

In connection with the entry into the Amended and Restated Management Agreement, we provided Colony Capital with an ownership waiver under our Articles of Amendment and Restatement, allowing Colony Capital to purchase up to 45% of our stock. The waiver provides that if the Amended and Restated Management Agreement is terminated, Colony Capital may not purchase any shares of our common stock to the extent Colony Capital owns (or would own as a result of such purchase) more than 9.8% of our capital stock. In connection with the waiver, Colony Capital also agreed that for all matters submitted to a vote of our stockholders, to the extent Colony Capital owns more than 25% of our common stock (such shares owned by Colony Capital in excess of the 25% threshold, refer to as the Excess Shares, it will vote the Excess Shares in the same proportion that our remaining shares 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 our common stock, or approximately 11.3% of the total outstanding common stock.

Recent Developments

Dividends

On November 2, 2018, we declared a dividend of $0.15 per share of common stock. The common stock dividend will be paid on November 16, 2018 to stockholders of record as of the close of business on November 12, 2018.

Trianon

On November 6, 2018, we executed a definitive sale and purchase agreement to sell the Trianon Tower in Frankfurt, Germany, our largest asset, for €670 million, or approximately $762 million. We expect to release approximately $360 million of net equity after repayment of financing and transaction costs. Completion is subject to customary conditions, including the Purchasers’ closing on a €390 million mortgage facility.

Inflation

Virtually all of our assets and liabilities are interest rate and foreign currency exchange rate sensitive in nature. As a result, interest rates, foreign currency exchange rates and other factors influence our performance significantly more than inflation does. A change in interest rates and foreign currency exchange rates may correlate with changes in inflation rates. With the exception of the United Kingdom, rent is generally adjusted annually based on local consumer price indices. In the United Kingdom, rent is typically subject to an upward only rent review approximately every three to five years.

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

Non-GAAP Financial Measures

We use CAD and NOI, each a non-GAAP measure, to evaluate our profitability.

Cash Available for Distribution

We believe that CAD provides investors and management with a meaningful indicator of operating performance. We also believe that CAD is useful because it adjusts for a variety of items that are consistent with presenting a measure of operating performance (such as transaction costs, depreciation and amortization, equity-based compensation, realized gain on sales, net, asset impairment and non-recurring bad debt expense). We adjust for transaction costs because these costs are not a meaningful indicator of our operating performance. For instance, these transaction costs include costs such as professional fees associated with new investments, which are expenses related to specific transactions. Management also believes that quarterly distributions are principally based on operating performance and our board of directors includes CAD as one of several metrics it reviews to determine quarterly distributions to stockholders. The definition of CAD may be adjusted from time to time for our reporting purposes in our discretion, acting through our audit committee or otherwise. CAD may fluctuate from period to period based upon a variety of factors, including, but not limited to, the timing and amount of investments, new leases, repayments and asset sales, capital raised, use of leverage, changes in the expected yield of investments and the overall conditions in commercial real estate and the economy generally.

We calculate CAD by subtracting from or adding to net income (loss) attributable to common stockholders, noncontrolling interests and the following items: depreciation and amortization items including straight-line rental income or expense (excluding amortization of rent free periods), amortization of above/below market leases, amortization of deferred financing costs, amortization of discount on financings and other and equity-based compensation; other gain (loss), net (excluding any realized gain (loss) on the settlement on foreign currency derivatives); realized gain on sales, net; impairment on depreciable property; acquisition gains

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or losses; transaction costs; foreign currency gains (losses) related to sales; impairment on goodwill and other intangible assets; the incentive fee relating to the Amended and Restated Management Agreement and one-time events pursuant to changes in U.S. GAAP and certain other non-recurring items. These items, if applicable, include any adjustments for unconsolidated ventures.

CAD should not be considered as an alternative to net income (loss) attributable to common stockholders, determined in accordance with U.S. GAAP, as an indicator of operating performance. In addition, our methodology for calculating CAD involves subjective judgment and discretion and may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.

The following table presents a reconciliation of net income (loss) attributable to common stockholders to CAD for the three and nine months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net income (loss) attributable to common stockholders	$	552		$	(6,770	)	$	37,138		$	(32,567	)
Noncontrolling interests	4			(36		)	225			(303		)
Adjustments:
Depreciation and amortization items(1)(2)	13,719			17,096			40,914			61,656
Other (gain) loss, net(3)(4)	(1,110		)	3,742			(2,895		)	12,521
Realized (gain) on sales, net	(2,706		)	(1,719		)	(42,020		)	(7,397		)
Transaction costs and other(5)(6)	1,068			438			2,396			2,480
CAD	$	11,527		$	12,751		$	35,758		$	36,390

_____________________________

(1) Three months ended September 30, 2018 reflects an adjustment to exclude depreciation and amortization of $11.0 million, amortization expense of capitalized above/below market leases of $0.2 million, amortization of deferred financing costs of $0.8 million and amortization of equity-based compensation of $1.7 million. Three months ended September 30, 2017 reflects an adjustment to exclude depreciation and amortization of $14.4 million, amortization of above/below market leases of $(0.8) million, amortization of deferred financing costs of $0.7 million and amortization of equity-based compensation of $2.8 million.

(2) Nine months ended September 30, 2018 reflects an adjustment to exclude depreciation and amortization of $34.6 million, amortization expense of capitalized above/below market leases of $0.6 million, amortization of deferred financing costs of $2.4 million and amortization of equity-based compensation of $3.3 million. Nine months ended September 30, 2017 reflects an adjustment to exclude depreciation and amortization of $39.5 million, amortization expense of capitalized above/below market leases of $(0.3) million, amortization of deferred financing costs of $2.3 million and amortization of equity-based compensation of $20.1 million.

(3) Three months ended September 30, 2018 CAD includes a $0.5 million net loss related to the settlement of foreign currency derivatives. Three months ended September 30, 2017 CAD includes a $0.2 million net gain related to the settlement of foreign currency derivatives.

(4) Nine months ended September 30, 2018 CAD includes a $2.9 million net loss related to the settlement of foreign currency derivatives. Nine months ended September 30, 2017 CAD includes a $1.7 million net gain related to the settlement of foreign currency derivatives.

(5) Three months ended September 30, 2018 reflects an adjustment to exclude $1.1 million of transaction costs. Three months ended September 30, 2017 reflects an adjustment to exclude $0.4 million of transaction costs. 

(6) Nine months ended September 30, 2018 reflects an adjustment to exclude $2.0 million of transaction costs and $0.4 million taxes related to sales and other one-time items. Nine months ended September 30, 2017 reflects an adjustment to exclude $1.6 million of transaction costs and $0.9 million of payroll taxes associated with the acceleration of equity awards due to the Mergers. 

Net Operating Income (NOI)

We believe NOI is a useful metric for evaluating the operating performance of our real estate portfolio in the aggregate. Portfolio results and performance metrics represent 100% for all consolidated investments. Net operating income reflects total property and related revenues, adjusted for: (i) amortization of above/below market leases; (ii) straight-line rent (except with respect to rent free period); (iii) other items such as adjustments related to joint ventures and non-recurring bad debt expense and less property operating expenses. However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, transaction costs, depreciation and amortization expense, realized gains on sales, net and other items under U.S. GAAP and capital expenditures and leasing costs, all of which may be significant economic costs. NOI may fail to capture significant trends in these components of U.S. GAAP net income (loss) which further limits its usefulness.

NOI should not be considered as an alternative to net income (loss), determined in accordance with U.S. GAAP, as an indicator of operating performance. In addition, our methodology for calculating NOI involves subjective judgment and discretion and may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.

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The following table presents a reconciliation of NOI of our real estate equity and preferred equity segments to property and other related revenues less property operating expenses for the three and nine months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018		2017
Rental income	$	23,920	$	27,747		$	75,744	$	79,308
Escalation income	4,283		5,641			15,186		16,360
Other income	76		171			497		708
Total property and other income	28,279		33,559			91,427		96,376
Properties - operating expenses	5,690		7,519			19,422		22,521
Adjustments:
Interest income	708		704			2,143		1,001
Amortization and other items(1)(2)	200		(789		)	772		(257		)
NOI(3)	$	23,497	$	25,955		$	74,920	$	74,599

_____________________________

(1) Three months endedSeptember 30, 2018 primarily excludes $0.2 million of amortization of above/below market leases. Three months ended September 30, 2017 primarily excludes $(0.8) million of amortization of above/below market leases.

(2) Nine months ended September 30, 2018 primarily excludes $0.6 million of amortization of above/below market leases and $0.1 million of other one-time items. Nine months ended September 30, 2017 primarily excludes $(0.3) million of amortization of above/below market leases.

(3) The following table presents a reconciliation of net income (loss) to NOI of our real estate equity and preferred equity segment for the three and nine months endedSeptember 30, 2018 and 2017 (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net income (loss)	$	556		$	(6,806	)	$	37,363		$	(32,870	)
Remaining segments(i)	7,525			11,023			19,405			46,735
Real estate equity and preferred equity segment adjustments:
Interest expense	5,055			6,325			16,611			18,896
Other expenses	1,150			1,996			3,847			6,604
Depreciation and amortization	11,013			14,396			34,640			39,479
Other (gain) loss, net	109			1,049			2,994			2,199
Realized (gain) on sales, net	(2,706		)	(1,719		)	(42,020		)	(7,397		)
Income tax (benefit) expense	(240		)	352			(277		)	316
Other items	1,035			(661		)	2,357			637
Total adjustments	15,416			21,738			18,152			60,734
NOI	$	23,497		$	25,955		$	74,920		$	74,599

_____________________________

(i) Reflects the net (income) loss in our corporate segment to reconcile to net operating income.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

Changes in interest rates affect our net income primarily related to the impact to interest expense incurred in connection with our borrowings and derivatives.

Substantially all of our investments are financed with non-recourse mortgage notes. We predominately use floating rate financing and we seek to generally mitigate the risk of interest rates rising through derivative instruments including interest rate caps. As of September 30, 2018, a hypothetical 100 basis point increase in GBP LIBOR and EURIBOR applied to our liabilities would result in a decrease in net income of approximately $6.4 million annually.

A change in interest rates could affect the value of our properties, which may be influenced by changes in interest rates and credit spreads (as discussed below) because value is typically derived by discounting expected future cash flow generated by the property using interest rates plus a risk premium based on the property type and creditworthiness of the tenants. A lower risk-free rate generally results in a lower discount rate and, therefore, a higher valuation, and vice versa; however, an increase in the risk-free rate would not impact our net income.

As of September 30, 2018, none of our derivatives qualified for hedge accounting treatment, therefore, gains (losses) resulting from their fair value measurement at the end of each reporting period are recognized as an increase or decrease in other gain (loss), net in our consolidated statements of operations. In addition, we are, and may in the future be, subject to additional expense based on the notional amount of the derivative and a specified spread over the applicable index. Because the fair value of these instruments can vary significantly between periods, we may experience significant fluctuations in the amount of our unrealized gain (loss) in any given period.

The objective of our interest rate management strategy is to minimize or eliminate the effects of interest rate changes on the value of our assets, to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of financing such assets.

We can provide no assurances, however, that our efforts to manage interest rate volatility will successfully mitigate the risks of such volatility on our portfolio.

Credit Risk

We are subject to the credit risk of the tenants of our properties. We seek to undertake a credit evaluation of each tenant prior to acquiring properties. This analysis includes due diligence of each tenant’s business as well as an assessment of the strategic importance of the underlying real estate to the tenant’s core business operations. Where appropriate, we may seek to augment the tenant’s commitment to the property by structuring various credit enhancement mechanisms into the underlying leases. These mechanisms could include security deposit requirements, letters of credit or guarantees from entities we deem creditworthy. Additionally, we perform ongoing monitoring of creditworthiness of our tenants which is an important component of our portfolio management process. Such monitoring may include, to the extent available, a review of financial statements and operating statistics, delinquencies, third party ratings and market data. In addition, our preferred equity investment is subject to credit risk based on the borrower’s ability to make required interest payments on scheduled due dates and value of collateral. We seek to manage credit risk through our Manager’s comprehensive credit analysis prior to making an investment, actively monitoring our investment and the underlying credit quality, including subordination and diversification of our investment. Our analysis is based on a broad range of real estate, financial, economic and borrower-related factors, which we believe are critical to the evaluation of credit risk inherent in a transaction. For the nine months endedSeptember 30, 2018, our preferred equity investment contributed all of our interest income.

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

Foreign Currency Exchange Rate Risk

We are subject to risks related to changes in foreign currency exchange rates as a result of our ownership of, or commitments to acquire, properties within Europe, predominantly the U.S. dollar/Euro and U.S. dollar/U.K. Pounds Sterling exchange rate. As a result, changes in exchange rate fluctuations may positively or negatively affect our consolidated revenues and expenses (as expressed in U.S. dollars) from our business.

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In addition, because we are exposed to foreign currency exchange rate fluctuations, we employ foreign currency risk management strategies, including the use of, among others, currency hedges, and matched currency financing.

The following chart represents the change in the Euro/U.S. dollar and U.K. Pounds Sterling/U.S. dollar exchange rate during the nine months endedSeptember 30, 2018 and 2017:

Source: Oanda

Our properties and the rent payments under our leases for these properties are denominated predominantly in Euro and U.K. Pounds Sterling and we expect substantially all of our future leases for properties we may acquire in Europe to be denominated in the local currency of the country in which the underlying property is located. Additionally, our non-recourse mortgage borrowings are denominated in the same currency as the assets securing the borrowing. A majority portion of our operating expenses and borrowings with respect to such European properties are also transacted in local currency, however we do have corporate expenses, such as our dividend, that are paid in U.S. dollar. We report our results of operations and consolidated financial information in the U.S. dollars. Consequently, our results of operations as reported in U.S. dollars are impacted by fluctuations in the value of the local currencies in which we conduct our European business.

In an effort to mitigate the risk of fluctuations in foreign currency exchange rates, we, and our Operating Partnership, seek to actively manage our revenues and expenses so that we incur a significant portion of our expenses, including our operating costs and borrowings, in the same local currencies in which we receive our revenues. In addition, subject to satisfying the requirements for qualification as a REIT, we engage in various hedging strategies, which may include currency futures, swaps, forwards and options. We expect that these strategies and instruments may allow us to reduce, but not eliminate, the risk of fluctuations in foreign currency exchange rates. The counterparties to these arrangements are major financial institutions with which we may also have other financial relationships. In January 2018, we entered into additional foreign currency forwards with respect to the projected net property level cash flows which are hedged for the Euro through November 2019.

Based on our portfolio, a hypothetical 10% appreciation or depreciation in the applicable exchange rate to the U.S dollar, adjusting for our foreign currency forwards, applied to our assets and liabilities would result in an increase or decrease of stockholders’ equity of approximately $51.1 million, respectively. Such amount would be recorded in OCI. In addition, we enter into derivative instruments to manage foreign currency exposure of our operating income. A hypothetical 10% increase or decrease in applicable exchange rate to the U.S dollar applied to our assets and liabilities, adjusting for foreign currency forwards would result in an increase or decrease of net operating income adjusted for interest and other expenses of approximately $2.4 million annually, respectively.

We can provide no assurances, however, that our efforts to manage foreign currency exchange rate volatility will successfully mitigate the risks of such volatility on our portfolio.

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Item 4.  Controls and Procedures

Disclosure Controls and Procedures

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

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

Internal Control over Financial Reporting

Changes in internal control over financial reporting.

Our Manager has substantially completed the process of integrating the systems, processes and internal controls of Colony Capital, NSAM and NorthStar Realty Finance. The Company leverages these systems, processes and internal controls to conduct its operations. We will continue to review our internal control practices, in conjunction with our Manager, in consideration of future integration and post merger activities.

Except as described above in the preceding paragraph, during the quarter ended September 30, 2018, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

We are involved in various litigation matters arising in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations. Refer to Note 12, “Commitments and Contingencies” in Part I, Item 1. “Financial Statements” for further disclosure regarding legal proceedings.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2017.

You should carefully consider all information contained in this interim report on Form 10-Q, including our interim consolidated financial statements and the related notes thereto before making a decision to purchase our securities. The risks and uncertainties described are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.

Item 2. Purchases of Equity Securities by Issuer

The following table provides the information with respect to purchases made by us of our common stock during the three months ended September 30, 2018:

Period(1)(2)	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)
July 1 - July 31	789,408	$	13.69	789,408	$	19,598,732
August 1 - August 31	216,995	$	13.78	216,995	$	16,609,126

_____________________________

(1) In March 2018, we announced that our board of directors authorized the repurchase of up to $100 million of our outstanding common stock. The authorization expires in March 2019, unless otherwise extended by our board of directors.

(2) There were no repurchases made during September 2018.

Item 4. Mine Safety Disclosures

None.

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Item 5. Other Events

On November 6, 2018, Symbol I - T S.à r.l., Symbol II - T  S.à r.l., Symbol III - T S.à r.l., Symbol IV - T S.à r.l., Symbol Holdco C-T S.à.r.l., and Symbol V - T S.à r.l., each indirect subsidiaries of the Company entered into a definitive Share Sale and Purchase Agreement (the “Purchase Agreement”) with Platin 1680 GmbH and Luxembourg Investment Company 271 S.á r.l. (the “Purchasers”) with respect to the sale of the Company’s Trianon Tower property located at Mainzer Landstraße 16, Frankfurt, Germany, for a gross sales price of approximately $762 million (based on the November 5, 2018 exchange rate). Since acquiring the asset in July 2015, the Company has completed numerous of value enhancing initiatives including a 10 year lease with Deutsche Bundesbank and obtaining a LEED Platinum certification following an extensive refurbishment program.

Closing is expected to occur prior to December 31, 2018 and is subject to customary closing conditions, including the Purchasers’ closing on a €390 million (or $445 million based on the November 5, 2018 exchange rate) mortgage facility. The Agreement contains representations, warranties and covenants that are customary and typical for an agreement and transaction of this nature. The Company plans to repay a $383 million first mortgage loan that is secured by the property upon closing. The Company expects to release approximately $360 million of net equity from the sale after the repayment of financing and transaction costs and a $6 million retained interest in Symbol Holdco C-T S.à. r.l in the form of preferred equity certificates with a 7% yield.

The foregoing description of the Purchase Agreement does not purport to describe all of the terms of such agreement and is qualified by reference to the Purchase Agreement, which is filed as Exhibit 10.1 hereto, and is incorporated herein by reference.

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Item 6.   Exhibits

Exhibit Number		Description of Exhibit
3.1		Articles of Amendment, dated August 3, 2018 (incorporated by reference to Exhibit 3.1 to NorthStar Realty Europe’s Current Report on Form 8-K filed on August 6, 2018)
3.2		Amended and Restated Bylaws, effective as of August 3, 2018 (incorporated by reference to Exhibit 3.2 to NorthStar Realty Europe’s Current Report on Form 8-K filed on August 6, 2018)
10.1	*	Share Sale and Purchase Agreement dated November 5, 2018 by and among Symbol I - T S.á r.l., Symbol II - T  S.á r.l., Symbol III - T S.á r.l., Symbol IV - T S.á r.l., Symbol Holdco C-T S.á r.l., and Symbol V - T S.á r.l., Platin 1680 GmbH and Luxembourg Investment Company 271 S.á r.l.
31.1	*	Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	*	Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	*	Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	*	Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0	*	The following materials from the NorthStar Realty Europe Corp. Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017; (ii) Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2018 and 2017; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2018 and 2017; (iv) Consolidated Statements of Equity (unaudited) for the nine months ended September 30, 2018 and 2017; (v) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2018 and 2017; and (vi) Notes to Consolidated Financial Statements (unaudited)

_____________________________

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		NorthStar Realty Europe Corp.
Date:	November 6, 2018		By:	/s/ MAHBOD NIA
				Mahbod Nia
				Chief Executive Officer and President
			By:	/s/ KEITH A. FELDMAN
				Keith A. Feldman
				Chief Financial Officer and Treasurer

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