UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-23109
NorthStar Real Estate Capital Income Fund
(Exact name of registrant as specified in charter)
399 Park Avenue, 18th Floor | |
New York, New York | 10022 |
(Address of principal executive offices) | (Zip code) |
Daniel R. Gilbert
Chief Executive Officer and President
NorthStar Real Estate Capital
Income Fund
399 Park Avenue, 18th Floor
New York, New York 10022
(Name and address of agent for service)
Copy to:
Sandra Matrick Forman, Esq.
Colony NorthStar, Inc.
399 Park Avenue, 18th Floor
New York, New York 10022
Registrant’s telephone number, including area code: (212) 547-2600
Date of fiscal year end: December 31
Date of reporting period: December 31, 2016
Item 1. Reports to Stockholders.
The annual report (the “Annual Report”) of NorthStar Real Estate Capital Income Fund (the “RE Capital Fund”) for the period from May 6, 2016 (commencement of operations) through December 31, 2016 transmitted to shareholders pursuant to Rule 30e-1 promulgated under the Investment Company Act of 1940, as amended (the “1940 Act”), is as follows:
NorthStar Real Estate Capital Income Fund
Annual Report for the period from May 6, 2016 (commencement of operations) through December 31, 2016:
NorthStar Real Estate Capital Income Master Fund
Annual Report for the period from May 6, 2016 (commencement of operations) through December 31, 2016:
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of NorthStar Real Estate Capital Income Fund
In our opinion, the accompanying statement of assets and liabilities, and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of the NorthStar Real Estate Capital Income Fund (the "RE Capital Fund") as of December 31, 2016, the results of its operations, and the changes in its net assets for the period from May 6, 2016 (commencement of operations) through December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the RE Capital Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, NY
February 28, 2017
1 |
NorthStar Real Estate Capital Income Fund
Statement of Assets and Liabilities
December 31, 2016 | ||||
Assets | ||||
Cash | $ | 110,276 | ||
Receivable for common shares issued | 5,085 | |||
Total assets | 115,361 | |||
Liabilities | ||||
Professional fees payable | 3,030 | |||
Printing fees payable | 2,887 | |||
Administrative services expense payable | 2,790 | |||
Custodian fees payable | 1,667 | |||
Accrued expense and other liabilities | 104 | |||
Total liabilities | 10,478 | |||
Net assets | $ | 104,883 | ||
Commitments and contingencies (Note 7) | ||||
Composition of net assets | ||||
Class A shares, $0.001 par value per share, 300,000,000 shares authorized,11,560 shares issued and outstanding | $ | 12 | ||
Capital in excess of par value | 118,252 | |||
Net investment loss | (13,381 | ) | ||
Net assets | $ | 104,883 | ||
Net asset value per Class A share, at period end | $ | 9.07 |
Refer to accompanying notes to financial statements.
2 |
NorthStar Real Estate Capital Income Fund
Statement of Operations
For the period from | ||||
May 6, 2016* through | ||||
December 31, 2016 | ||||
Investment Income | ||||
Interest income | $ | 12 | ||
Total investment income | 12 | |||
Expenses | ||||
Professional fees | 3,849 | |||
Custodian fees | 3,763 | |||
Printing fees | 2,887 | |||
Administrative services expense | 2,790 | |||
Other expenses | 104 | |||
Total expenses | 13,393 | |||
Net investment loss | (13,381 | ) | ||
Net decrease in net assets resulting from operations | $ | (13,381 | ) |
* Commencement of operations
Refer to accompanying notes to financial statements.
3 |
NorthStar Real Estate Capital Income Fund
Statement of Changes in Net Assets
For the period from | ||||
May 6, 2016* through | ||||
December 31, 2016 | ||||
Decrease in net assets resulting from operations: | ||||
Net investment loss | $ | (13,381 | ) | |
Net decrease in net assets resulting from operations | (13,381 | ) | ||
Capital Transactions | ||||
Issuance of Class A shares (11,560 shares) (Note 3) | 105,085 | |||
Contributions from affiliate (Note 4) | 13,179 | |||
Net increase in net assets resulting from capital transactions | 118,264 | |||
Total increase in net assets | 104,883 | |||
Net assets at beginning of period | - | |||
Net assets at end of period | $ | 104,883 | ||
Net investment loss | $ | (13,381 | ) |
* Commencement of operations
Refer to accompanying notes to financial statements.
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NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
1. | Business and Organization |
NorthStar Real Estate Capital Income Fund (the “RE Capital Fund”) was organized as a Delaware statutory trust on October 2, 2015. The RE Capital Fund’s primary investment objectives are to generate attractive and consistent income through cash distributions and preserve and protect shareholders’ capital, with a secondary objective of capital appreciation. The RE Capital Fund has multiple share classes and intends to invest substantially all of its net assets in NorthStar Real Estate Capital Income Master Fund (the “Master Fund”). The Master Fund’s investment objective and strategies are substantially the same as the RE Capital Fund’s. The RE Capital Fund’s financial statements should be read in conjunction with the attached financial statements for the Master Fund.
The RE Capital Fund commenced operations on May 6, 2016 when, together with NorthStar Real Estate Capital Income Fund-T, which is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), and whose principal investment strategy is to invest substantially all of its assets in the Master Fund, the RE Capital Fund’s registration statement was declared effective by the Securities and Exchange Commission (the “SEC”).
The RE Capital Fund and the Master Fund are externally managed by NSAM B-RECF Ltd., a Bermuda exempt company, (the “Advisor”) and NSAM US-RECF LLC, a Delaware limited liability company (the “Co-Advisor” and collectively, the “Advisors”) which are registered investment advisors under the Investment Advisors Act of 1940, as amended, (the “Advisors Act”). Pursuant to a separate advisory agreement with each of the RE Capital Fund and Master Fund, the Advisor oversees the management of the RE Capital Fund’s and the Master Fund’s activities, respectively, including investment strategies, investment goals, asset allocation, leverage limitations, reporting requirements and other guidelines in addition to the general monitoring of the RE Capital Fund’s and the Master Fund’s portfolios. The Advisor also provides asset management and other administrative services. Pursuant to an agreement with the Advisor and the RE Capital Fund (the “Co-Advisory Agreement”), the Co-Advisor assists the Advisor with the day-to-day activities and the sourcing, management and monitoring of investments for the RE Capital Fund’s and the Master Fund’s portfolios, subject to the oversight of the Advisor. The Co-Advisor also furnishes the RE Capital Fund and the Master Fund with office facilities and equipment, and assists the Advisor with the provisions of clerical and other administrative services, including marketing, investor relations and certain accounting services and maintenance of certain books and records on behalf of the RE Capital Fund and the Master Fund. In addition, the Co-Advisor performs the calculation and publication of the RE Capital Fund and the Master Fund’s net asset value. The Advisor and Co-Advisor are affiliates of NorthStar Asset Management Group Inc. (“NorthStar”), which sponsors other public companies that raise capital through the retail market.
On January 10, 2017, pursuant to a merger agreement between NorthStar, NorthStar Realty Finance Corp. (“NorthStar Realty”), and Colony Capital Inc. (“Colony”), dated as of June 2, 2016 (as amended, supplemented or otherwise modified from time to time, the “Merger Agreement”), NorthStar, NorthStar Realty and Colony merged into Colony NorthStar, Inc. (NYSE: CLNS or “Colony NorthStar”) through a series of merger transactions (the “Mergers”). As a result of the Mergers, Colony NorthStar is a diversified equity REIT with an embedded institutional and retail investment management business. In addition, following the Mergers, the Advisor is a subsidiary of Colony NorthStar.
On January 31, 2017, the Advisor was re-domiciled as a Delaware limited liability company and renamed CNI RCEF Advisors, LLC. On February 23, 2017, the Co-Advisory Agreement was terminated, effective immediately, and the Advisor is now responsible for all the advisory and administrative duties formerly performed by the Co-Advisor.
The RE Capital Fund is registered under the 1940 Act, as a non-diversified, closed-end management investment company that intends to elect to be treated for federal income tax purposes as a C-corporation for the period ended December 31, 2016.
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NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The RE Capital Find intends to qualify annually thereafter, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Refer to Note 2 and Note 5 for further details.
On January 9, 2017, the Master Fund, the RE Capital Fund and NorthStar Real Estate Capital Fund-T entered into an administration agreement (the “Administration Agreement”) with ALPS Fund Services, Inc. (“ALPS” or the “Administrator”). ALPS, and/or its affiliates are responsible for, but not limited to, (i) maintaining financial books and records of the Master Fund and the RE Capital Fund, (ii) providing administration services, and (iii) performing other accounting and clerical services as necessary in connection with the administration of the Master Fund and the RE Capital Fund.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying audited financial statements of the RE Capital Fund have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The RE Capital Fund is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 Financial Services – Investment Companies.
Investment in the Master Fund
The RE Capital Fund’s investment in the Master Fund will be recorded at fair value and will be based upon the RE Capital Fund’s percentage ownership of the common shares of the Master Fund. The performance of the RE Capital Fund will be directly affected by the performance of the Master Fund. As of December 31, 2016, the RE Capital Fund has not made any investment in the Master Fund. On January 17, 2017, the RE Capital Fund purchased 14,375 shares of the Master Fund for a total of $105,085.
Use of Estimates
The preparation of the RE Capital Fund’s audited financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the financial statements and the accompanying notes. Actual results may differ from those estimates.
Cash and cash equivalents
Cash as of December 31, 2016 represents cash held in custody at MUFG Union Bank, N.A. in a bank deposit account that, at times, may exceed federally insured limits.
Valuation of Portfolio Investments
The RE Capital Fund intends to invest substantially all of its net assets in the Master Fund. As such, the RE Capital Fund determines the net asset value (“NAV”) of its common shares of beneficial interest daily during the offering period and quarterly thereafter, based on the value of its interest in the Master Fund (as provided by the Master Fund). The RE Capital Fund calculates NAV per common share by subtracting total liabilities (including accrued expenses or distributions) from the total assets of the RE Capital Fund (the value of its interest in the Master Fund, plus cash or other assets, including interest and distributions accrued but not yet received) and dividing the result by the total number of outstanding common shares of the RE Capital Fund. Refer to Note 2 to the financial statements of the Master Fund for information on the Master Fund’s policies regarding the valuation of its portfolio investments.
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NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Realized gains and losses from Fund transactions will be calculated on the specific identification basis. Fund transactions are recorded on the effective date of the subscription in or the redemption from the Master Fund. Distributions received from the Master Fund will be recorded on ex-dividend date.
Organization and Offering Costs
Organization costs include, among other things, the cost of formation, including the cost of legal services and other fees pertaining to the RE Capital Fund’s organization. Offering costs include, among other things, legal, accounting, printing and other costs pertaining to the preparation of the RE Capital Fund’s Registration Statement on Form N-2 related to the public offering of its common shares.
The Advisor and its affiliates are entitled to receive reimbursement for costs each has paid on behalf of the RE Capital Fund in connection with the offering. The RE Capital Fund will be obligated to reimburse the Advisor and its affiliates, as applicable, for organization and offering costs (“O&O Costs”) to a limit of 1.0% of the aggregate proceeds from the offering, after the payment of selling commissions and dealer manager fees. The RE Capital Fund estimates that it will incur approximately $27.3 million of O&O Costs if the maximum number of shares is sold. The RE Capital Fund records O&O Costs each period based upon an allocation determined by the expectation of total O&O Costs to be reimbursed. In addition, the RE Capital Fund indirectly bears its pro rata portion of O&O Costs incurred by the Master Fund based on its ownership of the Master Fund shares. The offering costs incurred directly by the RE Capital Fund are accounted for as a deferred charge and are amortized over 12 months on a straight-line basis. Organization costs incurred directly by the RE Capital Fund are expensed as incurred. As of December 31, 2016, the Advisor and its affiliates incurred approximately $1.7 million of O&O Costs on behalf of the RE Capital Fund. For the period from May 6, 2016 (commencement of operations) through December 31, 2016, there were no proceeds raised from the offering and no O&O Costs were allocated to the RE Capital Fund.
Income Taxes
The RE Capital Fund intends to elect to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. To maintain qualification as a RIC, the RE Capital Fund must, among other things, meet certain source-of-income and asset diversification requirements and distribute to their respective shareholders, for each taxable year, at least 90% of its “investment company taxable income” and its net tax-exempt interest income. In general, a RIC’s “investment company taxable income” for any taxable year is its taxable income, determined without regard to net capital gains and with certain other adjustments. As a RIC, the RE Capital Fund will not have to pay corporate-level federal income taxes on any income that it distributes to its shareholders. The RE Capital Fund intends to distribute all or substantially all of their “investment company taxable income,” net tax-exempt interest income (if any) and net capital gains (if any) on an annual basis in order to maintain their RIC status each year and to avoid any federal income taxes on income. The RE Capital Fund will also be subject to nondeductible federal excise taxes if it does not distribute at least 98.0% of net ordinary income (if any) and 98.2% of any capital gain net income (if any).
For the taxable period May 6, 2016 (commencement of operations) through December 31, 2016, the RE Capital Fund is qualified to elect RIC status on its federal income tax return, however, it will file as a C corporation. If applicable, the RE Capital Fund will record any applicable income tax expense or benefit on its statement of operations or deferred tax assets and liabilities on its statement of assets and liabilities. Refer to Note 5 for further information regarding income taxes.
Uncertainty in Income Taxes
The RE Capital Fund evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or
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NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. The RE Capital Fund recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statement of Operations. During the period from May 6, 2016 (commencement of operations) through December 31, 2016, the RE Capital Fund did not incur any interest or penalties.
Class Accounting
Investment income, common expenses and realized/unrealized gain or loss on investments in the Master Fund will be allocated to various classes of the RE Capital Fund on the basis of net assets of each class.
Distributions
Distributions to the RE Capital Fund’s shareholders are recorded as of the record date. Subject to the discretion of the RE Capital Fund’s board of trustees (the “Board”) and applicable legal restrictions, the RE Capital Fund intends to authorize and declare ordinary cash distributions on quarterly basis and pay such distributions on a monthly basis beginning no later than the first month after shares are first sold to the public. Such ordinary cash distributions are expected to be paid using ordinary cash distributions received from the Master Fund, net of any Trust operating expenses. From time to time, the RE Capital Fund intends to authorize and declare special cash distributions of net long-term capital gains, if any, and any other income, gains and dividends and other distributions not previously distributed. Such special cash distributions are expected to be paid using special cash distributions received from the Master Fund. During the period from May 6, 2016 (commencement of operations) through December 31, 2016, distributions were neither declared nor paid.
Distribution Reinvestment Plan (“DRP”)
The RE Capital Fund has adopted an “opt in” DRP pursuant to which shareholders may elect to have the full amount of their cash distributions reinvested in additional shares. Participants in the DRP are free to elect to participate or terminate participation in the DRP within a reasonable time as specified in the DRP. If a shareholder does not elect to participate in the DRP, the shareholder will automatically receive any distributions the RE Capital Fund declares in cash. The RE Capital Fund expects to issue shares pursuant to the DRP at the monthly distribution payment date at a price equal to the NAV per share that is used to determine the offering price of the shares on the date of such monthly distribution payment date. Shares issued pursuant to the DRP will have the same voting rights as shares offered pursuant to the prospectus.
New Accounting Standards
In October 2016, the SEC adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Compliance with the requirements of these final rules, as they relate to Form N-CEN must occur by June 1, 2018, with the compliance date for Form N-PORT being June 1, 2018 or June 1, 2019, depending on the net assets of the fund family. Management is currently assessing the impact of this rule to the RE Capital Fund’s financial statements and other filings.
3. | Share Transactions |
Securities Offered
The RE Capital Fund is offering on a continuing basis up to 300,000,000 shares at the offering price disclosed in the RE Capital Fund’s prospectus. The classes of shares (A, D, and I) differ only with respect to
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NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the sales load investors must pay.
Pursuant to the Trustee Share Purchase and Participation Program with the Board of Trustees of the Master Fund, board members can allocate a portion of their trustee fees to investments in the RE Capital Fund. On December 30, 2016, subscriptions of $5,085 were made at an estimated NAV per share of $9.09, resulting in the issuance of 559 Class A shares. The related dealer manager fees and selling commissions were waived.
Since commencing its continuous public offering on May 6, 2016 through December 31, 2016, the RE Capital Fund has not sold any shares to the public.
Capital Contribution by NSAM FV Holdings, LLC (“NSAM”)
Prior to commencement of operations, NSAM, an affiliate of NorthStar, contributed $100,000 to purchase 11,001 common shares of Class A shares of the RE Capital Fund at a price of $9.09 per share. The related dealer manager fees and selling commissions were waived.
Share Repurchase Program
To provide shareholders with limited liquidity, the RE Capital Fund intends to conduct quarterly repurchases of shares. Each repurchase offer will generally be conducted in parallel with similar repurchase offers made by the Master Fund with respect to the Master Fund shares. The first offer to repurchase shares from shareholders is expected to occur in the first full calendar quarter after shares are first sold to the public. In months in which the RE Capital Fund repurchases shares, the RE Capital Fund will conduct repurchases on the same date that the RE Capital Fund holds its first bi-monthly closing for the sale of shares in its offering. Any offer to repurchase shares will be conducted solely through written tender offer materials mailed to each shareholder (and not through this prospectus) in accordance with the requirements under Rule 13e-4 of the Securities Exchange Act of 1934 (the “Exchange Act”).
The RE Capital Fund’s quarterly repurchases will be conducted on such terms as may be determined by the Board in its complete and absolute discretion unless, in the judgment of the independent trustees, such repurchases would not be in the best interests of shareholders or would violate applicable law. The Board also will consider the following factors, among others, in making its determination regarding whether to cause the RE Capital Fund’s to offer to repurchase shares and under what terms:
· | the effect of such repurchases on the RE Capital Fund’s and/or the Master Fund’s qualification as a RIC (including the consequences of any necessary asset sales); |
· | the liquidity of the RE Capital Fund’s assets (including fees and costs associated with disposing of assets); |
· | the Master Fund’s investment plans; |
· | the RE Capital Fund’s and the Master Fund’s working capital requirements; |
· | the RE Capital Fund’s history in repurchasing shares or portions thereof; |
· | the condition of the securities markets. |
The RE Capital Fund currently intends to limit the number of shares to be repurchased on each date of repurchase to the number of shares the RE Capital Fund can repurchase with, in the Board’s sole discretion, (i) the aggregate proceeds it has received from the issuance of shares pursuant to its DRP for the previous calendar quarter, and/or (ii) the aggregate proceeds it has received from the sale of shares other than such shares issued pursuant to the DRP for the previous calendar month, immediately prior to the date upon which the notification to repurchase shares was provided to shareholders. The Board may, in its sole discretion, determine to limit the number of shares to be repurchased to an amount that is greater than or less than the amounts described above. The RE Capital Fund will further limit the number of shares to be repurchased in any calendar quarter to 5.0% of the weighted average number of shares
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NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
outstanding in the previous full calendar quarter prior to the date upon which the notification to repurchase shares was provided to shareholders. In addition, beginning with the RE Capital Fund’s second calendar year of operations, the RE Capital Fund will limit the number of shares to be repurchased in any calendar year to 20.0% of the weighted average number of shares outstanding in the prior calendar year. The RE Capital Fund will offer to repurchase such shares at a price equal to the NAV per share in effect on each date of repurchase.
The RE Capital Fund’s assets are intended to consist primarily of an interest in the Master Fund shares. Therefore, in order to finance the repurchase of its common shares pursuant to the repurchase offers, the RE Capital Fund may find it necessary to liquidate all or a portion of its interest in Fund shares. As a result, the RE Capital Fund will not conduct a repurchase offer for common shares unless the Master Fund simultaneously conducts a repurchase offer for the Mater Fund shares. The members of the Board also serve on the Master Fund’s Board, and the Master Fund’s Board expects that the Master Fund will conduct repurchase offers for Fund shares as necessary to permit the RE Capital Fund to meet its intentions under its share repurchase program. However, there can be no assurance that the Master Fund’s Board will, in fact, decide to undertake any repurchase offers.
During the period from May 6, 2016 (commencement of operations) through December 31, 2016, there were no repurchases of the RE Capital Fund’s shares.
4. | Related Party Transactions |
Management and Incentive Fees
The RE Capital Fund will not incur a separate management fee or incentive fee under the RE Capital Fund’s Advisory Agreement for so long as the RE Capital Fund has a policy to invest all or substantially all of its net assets in the Master Fund, but the RE Capital Fund and shareholders will be indirectly subject to the management fee and incentive fee. Pursuant to the Master Fund’s Advisory Agreement, and in consideration of the advisory services provided by the Advisor to the Master Fund, the Advisor will be entitled to a fee consisting of two components — the management fee (“Management Fee”) and the incentive fee (“Incentive Fee”). The Management Fee will be calculated and payable quarterly in arrears at the annual rate of 2.0% of the Master Fund’s average gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters (and, in the case of the Master Fund’s first quarter, the gross assets excluding cash and cash equivalents as of such quarter-end). The Incentive Fee will be calculated and payable quarterly in arrears based upon the Master Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter, and is subject to a hurdle rate, measured quarterly and expressed as a rate of return on the Master Fund’s “adjusted capital” at the beginning of the most recently completed quarter, equal to 1.75% per quarter (7.00% annualized), subject to a “catch-up” feature. Refer to Note 4 to the financial statements of the Master Fund attached hereto for a detailed description of the incentive fees payable by the Master Fund to the Advisor.
On February 23, 2017, the Board approved an amendment to the Advisory Agreement for the calculation of the Management Fee. The Management Fee is calculated at an annual rate of 1.25% of the Master Fund’s average net assets. The Management Fee is payable quarterly in arrears and is calculated based on the Master Fund’s average net assets at the end of the two most recently complete calendar quarters (and, in the case of the Master Fund’s first quarter, the net assets of such quarter-end).
On February 23, 2017, the Board also approved an amendment to the Advisory Agreement for the calculation of the Incentive Fee. The Incentive Fee is calculated and payable quarterly in arrears based upon the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The Incentive Fee will be subject to a quarterly fixed preferred return to investors, expressed as a rate of return on the Master Fund’s adjusted capital, at the beginning of the most recently completed calendar quarter, of 1.50% (6.00% annualized), subject to a “catch-up” feature.
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NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reimbursement of Operating Expenses
The Advisor and Co-Advisor are to each be reimbursed by the RE Capital Fund, as applicable, for actual costs incurred in connection with providing administrative services to the RE Capital Fund. Allocation of the cost of such services to the RE Capital Fund may be based on objective factors such as total assets, revenues and/or time allocations. For the period from May 6, 2016 (commencement of operations) through December 31, 2016, the amount of administrative services expense incurred and payable was $2,790.
The Co-Advisory Agreement provides that the Co-Advisor will receive a portion of the Management Fee and Incentive Fee payable to the Advisor under the Master Fund’s Advisory Agreement (the “Fund Advisory Agreement”). On an annualized basis, the Advisor will pay to the Co-Advisor a co-advisory fee at a rate up to 50.0% of all fees payable to the Advisor under the Master Fund Advisory Agreement with respect to each year, which fees are payable to the Advisor quarterly in arrears. On February 23, 2017, the Co-Advisory Agreement was terminated, effective immediately, and the Advisor is now responsible for all the advisory and administrative duties formerly performed by the Co-Advisor.
Selling Commissions and Dealer Manager Fees
Pursuant to a dealer manager agreement (the “Dealer Manager Agreement”) between the RE Capital Fund and the NorthStar Securities, LLC (“NorthStar Securities”), an affiliate of the Advisor, an investor will pay NorthStar Securities:
(i) | selling commissions of up to 6.0% and dealer manager fees of up to 2.0% of the selling price of the Class A shares for which a sale is completed, |
(ii) | dealer manager fees of up to 2.0% of the selling price of Class D shares for which a sale is completed, but no selling commissions, and |
(iii) | no selling commissions or dealer manager fees for the purchase of Class I shares. |
No selling commissions or dealer manager fees will be paid on sales of the RE Capital Fund shares under the DRP. The selling commissions and dealer manager fees may be reduced or waived in connection with certain categories of sales, such as sales eligible for a volume discount, sales through investment advisers or banks acting as trustees or fiduciaries, and sales to affiliates. For the period from May 6, 2016 (commencement of operations) through December 31, 2016, no selling commissions and dealer manager fees were paid to NorthStar Securities because there were no shares sold to the public during this period.
Distributor
On January 9, 2017, the Dealer Manager agreement was terminated and the RE Capital Fund entered into a Distribution Agreement with ALPS Distributors, Inc. (the “Distributor”), pursuant to which ALPS has agreed to serve as the RE Capital Fund's principal underwriter and act as the distributor of the RE Capital Fund's shares. Pursuant to the Distribution Agreement, an investor will pay to the Distributor the same selling commissions and dealer manager fees as would have been paid to NorthStar Securities under the Dealer Management Agreement.
NorthStar Securities has entered into a wholesale marketing agreement with the Distributor in connection with the marketing of the RE Capital Fund’s shares.
Distribution Support Agreement
Pursuant to a distribution support agreement (the “Distribution Support Agreement”) between the Master Fund and NorthStar Realty, a publicly-traded real estate investment trust (“REIT”) managed by an affiliate
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NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of the Advisor, NorthStar Realty, or an affiliate has agreed to purchase up to $10.0 million in Fund shares at the current NAV per Fund share, of which $2.0 million was contributed to the Master Fund as seed capital investment. During any calendar month when the Distribution Support Agreement is effective, if the cash distributions exceed the net investment income for such calendar month (“Distribution Shortfall”), NorthStar Realty will purchase shares required in order to cover the Distribution Shortfall up to an amount equal to a 7.0% cumulative, non-compounded annual return on the Master Fund’s shareholders’ invested capital prorated for such month.
Notwithstanding NorthStar Realty’s obligations pursuant to the Distribution Support Agreement, the Master Fund will not be required to pay distributions to the Master Fund shareholders, including the RE Capital Fund. Distributions funded from offering proceeds pursuant to the Distribution Support Agreement may constitute a return of capital. The Distribution Support Agreement expires at the earlier of: a) two years from the date on which the RE Capital Fund commences the offering; or b) the date upon which neither the Advisor nor its affiliate is serving as the Master Fund’s Advisor. For the period from May 6, 2016 (commencement of operations) through December 31, 2016, there was no distribution support provided by NorthStar Realty.
On February 23, 2017, the Distribution Support Agreement was amended to replace NorthStar Realty with an affiliate of Colony NorthStar. The Distribution Support Agreement was also amended such that during any month when the Distribution Support Agreement is effective, if the cash distributions exceed the net investment income for such month (“Distribution Shortfall”), an affiliate of Colony NorthStar will purchase shares required in order to cover the Distribution Shortfall up to an amount equal to a 6.0% cumulative, non-compounded annual return on the Fund’s shareholders’ invested capital prorated for such month.
Notwithstanding an affiliate of Colony NorthStar’s obligations pursuant to the Distribution Support Agreement, the RE Capital Fund will not be required to pay distributions to the RE Capital Fund shareholders, including the Master Fund and NorthStar Real Estate Capital Income Fund-T.
Capital Contribution by NSAM
Prior to commencement of operations, NSAM, an affiliate of NorthStar, contributed $100,000 to purchase 11,001 common shares of Class A shares of the RE Capital Fund at a price of $9.09 per share. The related dealer manager fees and selling commissions were waived.
In December 2016, NSAM voluntarily contributed permanent capital of approximately $13,000 to the RE Capital Fund. The purpose of the contribution was to reimburse the RE Capital Fund for certain of its ordinary operating expenses. NSAM has no obligation to contribute additional funds or pay any future operating expenses.
5. | Income Tax Information |
The components of the deferred tax asset as of December 31, 2016, for the RE Capital Fund as a C-corporation, consist of the following:
December 31, 2016 | ||||
Deferred tax asset | ||||
Net loss carryforwards | $ | 5,353 | ||
Total deferred tax asset | 5,353 | |||
Less: Valuation allowance | (5,353 | ) | ||
Net deferred taxes | $ | - |
At December 31, 2016, the RE Capital Fund had total net operating and capital loss carry forwards of approximately $0.01 million for federal income tax purposes available to offset future taxable income. The
12 |
NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
loss carry forwards can be carried forward 20 years and will expire in 2036.
A reconciliation of the federal tax rate to the RE Capital Fund’s effective income tax rate is as follows:
December 31, 2016 | ||||
Tax at federal statutory rate | 35.0 | % | ||
State and local rate | 5.0 | % | ||
Total | 40.0 | % | ||
Valuation allowance | (40.0 | )% | ||
Provision for taxes | 0.0 | % |
6. | Financial Highlights |
The following is a schedule of financial highlights for the period from May 6, 2016 (commencement of operations) through December 31, 2016:
For the period from May 6, 2016 (commencement of operations) through December 31, 2016 | ||||
Per Share Data: | Class A | |||
Net asset value, beginning of period | $ | 9.09 | ||
Net investment loss(1) | (1.22 | ) | ||
Net decrease in net assets resulting from operations | (1.22 | ) | ||
Contributions from affiliate(2) | 1.20 | |||
Net increase in net assets resulting from capital transactions | 1.20 | |||
Net asset value, end of period | $ | 9.07 | ||
Shares outstanding, end of period | 11,560 | |||
Total return at net asset value(3)(4) | (0.2 | )% | ||
Ratio/Supplemental Data: | ||||
Net assets, end of period | $ | 104,883 | ||
Ratio of net investment loss to average net assets(5) | (21.4 | )% | ||
Ratio of total expenses to average net assets(5) | 21.4 | % | ||
Portfolio turnover rate (4) | Not applicable |
(1) | The per share data was derived by using the average number of common shares outstanding during the period from May 6, 2016 (commencement of operations) through December 31, 2016. |
(2) | Represents voluntary additional capital contributions from NSAM in December 2016. Refer to Note 4 for further detail. |
(3) | The total return is historical and is calculated by determining the percentage change in net asset value. Total return without contributions from affiliate would have been (13.4)% for the period from May 6, 2016 (commencement of operations) through December 31, 2016. |
(4) | Not annualized. |
(5) | Annualized. Average net assets for the period from May 6, 2016 (commencement of operations) through December 31, 2016 are used for this calculation. |
13 |
NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. | Commitments and Contingencies |
In the normal course of business, the RE Capital Fund may enter into contracts that contain a variety of representations which provide general indemnifications. The RE Capital Fund’s maximum exposure under the arrangements cannot be known; however, the RE Capital Fund expects any risk of loss to be remote.
8. | Subsequent Events |
On January 17, 2017, the RE Capital Fund purchased 14,375 shares of the Master Fund for a total of $105,085.
The management of the RE Capital Fund has evaluated events and transactions through February 28, 2017, the date on which the financial statements were issued, and has determined that there are no material events that would require adjustments to or disclosure in the RE Capital Fund’s financial statements other than previously discussed in Note 1 and Note 4.
14 |
NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Board of Trustees
Information regarding the members of the Board is set forth below. The trustees have been divided into two groups — Interested Trustees and Independent Trustees. The address for each trustee is c/o NorthStar Real Estate Capital Income Fund, 399 Park Avenue, 18th Floor, New York, New York 10022. As set forth in each of the RE Capital Fund's and Master Fund's declaration of trust and bylaws, a trustee's term of office shall continue until his or her death, resignation or removal.
Name |
Position Held |
Trustee |
Principal
Occupation Past 5 |
Number
of |
Trusteeships
Held By Trustees |
Interested Trustee | |||||
Daniel R. Gilbert (46) | Chairman of the Board, CEO, and President | 2015 | Head of Retail Platform of Colony NorthStar; Chairman, CEO and President of RE Capital Fund, NorthStar Real Estate Capital Income Fund-T ("RE Capital Fund-T") and NorthStar Real Estate Capital Income Master Fund (“RE Capital Master Fund”) ; Chairman, CEO and President of NorthStar Corporate Income Master Fund (“Corporate Master Fund”), NorthStar Corporate Income Fund (“Corporate Fund”) and NorthStar Corporate Income Fund-T (“Corporate Fund-T”); Co-Chairman, CEO and President of NorthStar/RXR New York Metro Real Estate, Inc. ("NorthStar/RXR"); Chairman, CEO and President of NorthStar Real Estate Income Trust, Inc. ("NorthStar Income") and NorthStar Real Estate Income II, Inc. ("NorthStar Income II"); Sole Director of NorthStar/Townsend Institutional Real Estate Fund Inc. ("NorthStar/Townsend"); Executive Chairman of NorthStar Healthcare Income, Inc. ("NorthStar Healthcare"); Chief Investment and Operating Officer of NorthStar Asset Management Group, Ltd and NorthStar Realty (2013 – 2017). | 6 | Executive Chairman of NorthStar Healthcare; Chief Executive Officer, Chairman of Corporate Master Fund, Corporate Fund and Corporate Fund-T; Chief Executive Officer, Chairman of RE Capital Master Fund, RE Capital Fund and RE Capital Fund-T; Co-Chairman of NorthStar/RXR; and Sole Director of NorthStar/Townsend; Chairman of NorthStar Income and NorthStar Income II. |
Independent Trustees | |||||
Daniel J. Altobello (75) | Trustee | 2016 | CEO and President of Caterair International Corporation (1989 – 1995); Executive Vice President of Marriott Corporation (1979 – 1989); President of Marriott Airport Operations Group (1979 – 1989). | 3 | Director of NorthStar Healthcare; Chairman of Altobello Family LP; Director of MamaMancini's Holdings, Inc.; Director of Arlington Asset Investment Corp.; Director of DiamondRock Hospitality Co.; Director of Mesa Air Group, Inc.; Trustee of Loyola Foundation, Inc. |
Dianne P. Hurley (53) | Lead Independent | 2016 | Startup consultant to asset management firms including | 3 | Director of NorthStar/ RXR New York Metro Real Estate, Inc.; |
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NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Name |
Position Held |
Trustee |
Principal
Occupation Past 5 |
Number
of |
Trusteeships
Held By Trustees |
Trustee | Stonecourt Capital, Imperial Companies and RedBird Capital Partners; Managing Director of SG Partners (2011-2014); COO, Global Distribution of Credit Suisse Asset Management (2009-2011); Chief Administrative Officer, TPG-Axon (2004-2009). | Director of Griffin-American Healthcare REIT IV, Inc; Director of NorthStar Realty Europe Corp. ("NorthStar Realty Europe"). | |||
Gregory A. Samay (57) | Trustee | 2016 | Previously Chief Investment Officer (previously an Investment Officer) of Fairfax County Retirement Systems (2011-2016); Executive Director and Chief Investment Officer of Arlington County Employees' Retirement System (2005-2010). | 3 | Director of NorthStar Healthcare. |
Executive Officers
The following persons serve as the RE Capital Fund's executive officers in the following capacities:
Name |
Age |
Positions Held | ||
Daniel R. Gilbert | 46 | Chairman of the Board, Chief Executive Officer and President | ||
Frank V. Saracino | 50 | Chief Financial Officer and Treasurer | ||
Brett S. Klein | 38 | Chief Operating Officer | ||
Sandra M. Forman | 50 | Chief Compliance Officer, General Counsel and Secretary |
The address for each executive officer is c/o NorthStar Real Estate Capital Income Fund, 399 Park Avenue, 18th Floor, New York, New York 10022.
Information about Executive Officers
Daniel R. Gilbert. Mr. Gilbert has served as the Head of the Retail Platform of Colony NorthStar since January 10, 2017. Mr. Gilbert has been an Interested Trustee, Chief Executive Officer and President of the RE Capital Fund since October 2, 2015, Chairman since March 3, 2016 and is a member of the Advisor's investment committee. Mr. Gilbert has also been an interested Trustee of RE Capital Master Fund and RE Capital Master Fund’s Chairman, Chief Executive Officer and President since October 5, 2015, Chairman since March 3, 2016. Mr. Gilbert has also been an Interested Trustee, Chief Executive Officer and President of RE Capital Fund-T since December 15, 2015, and Chairman since March 3, 2016. Mr. Gilbert has served as Sole Director of NorthStar/ Townsend since inception. He has been an Interested Trustee, Chief Executive Officer and President of Corporate Fund and Corporate Master Fund since July 2015 and Chairman since January 15, 2016, an Interested Trustee, Chief Executive Officer and President of Corporate Fund-T since November 2015 and Chairman since January 15, 2016. Mr. Gilbert serves as Chairman and Chief Executive Officer and President of NorthStar Income, positions he has held since August 2015, January 2013 and March 2011, respectively and he served as its Chief Investment Officer from January 2009 through January 2013. Mr. Gilbert serves as the Executive Chairman of NorthStar Healthcare, a position he has held since January 2014, and served as its Chief Executive Officer from August 2012 to January 2014 and Chief Investment Officer from October 2010 through February 2012. Mr. Gilbert also serves as Chairman, a position he has held since August 2015, and the Chief Executive
16 |
NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Officer and President, a position he has held since December 2012, of NorthStar Income II. Mr. Gilbert further serves as Co-Chairman, a position he has held since August 2015, the Chief Executive Officer and President, a position he has held since March 2014, of NorthStar/RXR. Mr. Gilbert also served as Chief Investment and Operating Officer of NorthStar Realty from January 2013 to January 2017, a position he maintained as co-employee. Mr. Gilbert has served as Chief Investment and Operating Officer of NorthStar Asset Management Group, Ltd, a wholly owned subsidiary of Colony NorthStar and parent company of the Advisor, from June 2014 to January 2017. Mr. Gilbert served as Co-President of NorthStar Realty from April 2011 until January 2013 and in various other senior management positions since its initial public offering in October 2004. Mr. Gilbert served as an Executive Vice President and Managing Director of Mezzanine Lending of NorthStar Capital Investment Corp., a predecessor company of NorthStar Realty. Prior to that role, Mr. Gilbert was with Merrill Lynch & Co. in its Global Principal Investments and Commercial Real Estate Department and prior to joining Merrill Lynch, held accounting and legal-related positions at Prudential Securities Incorporated. Mr. Gilbert holds a Bachelor of Arts degree from Union College in Schenectady, New York.
Frank V. Saracino. Mr. Saracino joined NorthStar Asset Management Group, Inc. (“NSAM”) in August 2015, and has served as the RE Capital Fund's and RE Capital Master Fund's Chief Financial Officer and Treasurer since inception. Mr. Saracino has also served as the Chief Financial Officer and Treasurer of RE Capital Fund and RE Capital Fund-T since December 2015. Mr. Saracino has served as Chief Financial Officer of NorthStar/Townsend Fund since inception. Mr. Saracino has served as Chief Financial Officer and Treasurer of Corporate Fund and Corporate Master Fund since July 2015 and Chief Financial Officer and Treasurer of Corporate Fund-T since November 2015. In addition, Mr. Saracino has served as Chief Financial Officer and Treasurer of each of NorthStar Income, NorthStar Income II, NorthStar Healthcare and NorthStar/RXR since August 2015. Prior to joining NorthStar, from July 2012 to December 2014, Mr. Saracino was with Prospect Capital Corporation, or Prospect, where he concentrated on portfolio management, strategic and growth initiatives and other management functions. In addition, during his tenure at Prospect, Mr. Saracino served as Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary of each of Priority Income Fund, Inc. and Pathway Energy Infrastructure Fund, Inc., and their respective investment advisers, and served as a Managing Director of Prospect Administration, LLC. Previously, Mr. Saracino was a Managing Director at Macquarie Group, and Head of Finance from August 2008 to June 2012 for its Americas non-traded businesses which included private equity, asset management, lease financing, private wealth, and investment banking. From 2004 to 2008, he served first as Controller and then as Chief Accounting Officer of eSpeed, Inc. (now BGC Partners, Inc.), a publicly-traded subsidiary of Cantor Fitzgerald. Prior to that, Mr. Saracino worked as an investment banker at Deutsche Bank advising clients in the telecom industry. Mr. Saracino started his career in public accounting at Coopers & Lybrand (now PricewaterhouseCoopers) where he earned a CPA and subsequently worked in internal auditing for The Dun & Bradstreet Corporation. He holds a Bachelor of Science degree from Syracuse University.
Brett S. Klein. Mr. Klein has served as the RE Capital Fund's and RE Capital Master Fund's Chief Operating Officer since inception. In addition, Mr. Klein has served as the Chief Operating Officer of RE Capital Fund and RE Capital Fund-T since December 2015. Mr. Klein has served as Chief Operating Officer of Corporate Fund and Corporate Master Fund since July 2015 and Chief Operating Officer of Corporate Fund-T since November 2015. Mr. Klein has also served as the Chief Operating Officer of NorthStar/RXR, a position he has held since June 2014. Mr. Klein currently serves as a Managing Director of Colony NorthStar, the parent company of the Advisor, a position he has held since January 2017, and heads its Alternative Products Group. Mr. Klein's responsibilities include oversight of the operational elements of Colony NorthStar's retail-focused REITs and alternative retail products as well as coordination of sponsor-related activities of Colony NorthStar's broker-dealer, NorthStar Securities, LLC. Mr. Klein continues to be involved with the investment and portfolio management and servicing businesses and works closely with the accounting and legal departments in connection with the operation of the Managed Companies (defined below). Mr. Klein also served as a Managing Director at NorthStar Asset Management Group Ltd, and headed the Alternative Products Group from June 2014 to January 2017. Mr. Klein previously served as a Managing Director at NorthStar Realty and Head of its Structured and
17 |
NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Alternative Products Group between January 2011 and June 2014. In addition, from 2004 to 2011, Mr. Klein held similar roles at NorthStar Realty and was responsible for capital markets execution of NorthStar Realty and its retail-focused REIT businesses, including credit facility sourcing/structuring and securitization as well as investments and portfolio management. Mr. Klein joined NorthStar Realty in October 2004, prior to its initial public offering. From August 2004 to October 2004, Mr. Klein was an analyst at NorthStar Capital Investment Corp., a predecessor company of NorthStar Realty. From 2000 to 2004, Mr. Klein worked in the CMBS group at Fitch Ratings, Inc., as Associate Director, where he focused on commercial real estate related securitization transactions. Mr. Klein holds a Bachelor of Science in Finance, Investment and Banking in addition to Risk Management and Insurance from the University of Wisconsin in Madison, Wisconsin.
Sandra M. Forman. Ms. Forman has served as the RE Capital Fund's, RE Capital Fund-T's and RE Capital Master Fund's Chief Compliance Officer since October 2015 and General Counsel and Secretary since October 2016. Previously, Ms. Forman served as Associate General Counsel and Assistant Secretary of the RE Capital Fund and RE Capital Master Fund from October 2015 to October 2016 and of RE Capital Fund and RE Capital Fund-T from December 2015 to October 2016. Ms. Forman has served as Chief Compliance Officer of Corporate Fund, Corporate Master Fund and Corporate Fund-T since October 2015 and General Counsel and Secretary since January 2017. Previously, Ms. Forman served as Associate General Counsel and Assistant Secretary of Corporate Fund and Corporate Master Fund from October 2015 to January 2017 and Associate General Counsel and Assistant Secretary of Corporate Fund-T from November 2015 to January 2017. Ms. Forman has served as Chief Compliance Officer and Secretary of NorthStar/Townsend Fund since inception. Ms. Forman has also served as Deputy General Counsel at Colony NorthStar since January 2017. Ms. Forman served as Senior Counsel for NorthStar from October 2015 to January 10, 2017. Prior to joining NorthStar, Ms. Forman was Senior Counsel at Proskauer Rose LLP from July 2014 to October 2015, where she represented investment companies, including registered closed-end funds and business development companies, and REITs regarding legal, corporate governance and compliance issues. In addition, from August 2004 to June 2014, she served as General Counsel, Chief Compliance Officer and Director of Human Resources and from January 2009 to June 2014 as Secretary of Harris & Harris Group, Inc., a publicly traded business development company. From January 2012 to June 2014, she served as General Counsel, Chief Compliance Officer and Secretary of H&H Ventures Management, Inc., a wholly owned subsidiary of Harris & Harris Group, Inc. Ms. Forman began her legal career in the Investment Management Group at Skadden, Arps, Slate, Meagher & Flom LLP. She holds a Bachelor of Arts from New York University in New York, New York, and a Juris Doctor from the University of California Los Angeles in Los Angeles, California.
18 |
NORTHSTAR REAL ESTATE CAPITAL INCOME FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The RE Capital Fund has not had any changes in or disagreements with its independent registered public accounting firm on accounting or financial disclosure matters since its inception.
Form N-Q Filings
The RE Capital Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The RE Capital Fund’s Forms N-Q are available on the SEC’s website at http://www.sec.gov. The RE Capital Fund’s Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. Shareholders may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330.
19 |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of NorthStar Real Estate Capital Income Master Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investment, and the related statements of operations, of changes in net assets, and of cash flows present fairly, in all material respects, the financial position of the NorthStar Real Estate Capital Income Master Fund (the "Master Fund") as of December 31, 2016, the results of its operations, the changes in its net assets, and its cash flows for the period from May 6, 2016 (commencement of operations) through December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Master Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of the security as of December 31, 2016 by correspondence with the custodian, provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, NY
February 28, 2017
20 |
NorthStar Real Estate Capital Income Master Fund
Schedule of Investment
As of December 31, 2016
Real Estate Investment Trust ("REIT") - 0.0%
Description | Shares | Cost | Fair Value | |||||||||
NS Capital Income Master Fund REIT, Inc. | 100 | $ | 100 | $ | - | |||||||
Other assets in excess of liabilities - 100.0% | 1,653,952 | |||||||||||
Net assets - 100.0% | $ | 1,653,952 |
Refer to notes to accompanying financial statements.
21 |
NorthStar Real Estate Capital Income Master Fund
Statement of Assets and Liabilities
December 31, 2016 | ||||
Assets | ||||
Cash | $ | 1,781,525 | ||
Affiliated investment, at fair value (Cost $100) (Note 6) | - | |||
Total assets | 1,781,525 | |||
Liabilities | ||||
Professional fee payable | 63,614 | |||
Administrative services expense payable | 55,798 | |||
Accrued expense and other liabilities | 8,161 | |||
Total liabilities | 127,573 | |||
Net assets | $ | 1,653,952 | ||
Commitments and contingencies (Note 8) | ||||
Composition of net assets | ||||
Common shares, $0.001 par value per share, unlimited shares authorized, 222,233 shares issued and outstanding | $ | 222 | ||
Paid-in-capital in excess of par value | 1,999,878 | |||
Net investment loss | (346,048 | ) | ||
Net unrealized depreciation on investment | (100 | ) | ||
Net assets | $ | 1,653,952 | ||
Net asset value per common share, at period end | $ | 7.44 |
Refer to notes to accompanying financial statements.
22 |
NorthStar Real Estate Capital Income Master Fund
Statement of Operations
For the period from | ||||
May 6, 2016* through | ||||
December 31, 2016 | ||||
Investment Income | ||||
Interest income | $ | 259 | ||
Total investment income | 259 | |||
Expenses | ||||
Trustees' fees | 200,273 | |||
Professional fees | 79,977 | |||
Administrative services expense | 55,798 | |||
Other expenses | 10,259 | |||
Total expenses | 346,307 | |||
Net investment loss | (346,048 | ) | ||
Realized and Unrealized Loss: | ||||
Net change in unrealized depreciation on investment | (100 | ) | ||
Total net realized and unrealized loss on investment | (100 | ) | ||
Net decrease in net assets resulting from operations | $ | (346,148 | ) |
* Commencement of operations
Refer to notes to accompanying financial statements.
23 |
NorthStar Real Estate Capital Income Master Fund
Statement of Changes in Net Assets
For the period from | ||||
May 6, 2016* through | ||||
December 31, 2016 | ||||
Decrease in net assets resulting from operations: | ||||
Net investment loss | $ | (346,048 | ) | |
Net change in unrealized depreciation on investment | (100 | ) | ||
Net decrease in net assets resulting from operations | (346,148 | ) | ||
Capital Transactions | ||||
Issuance of common shares (222,233 shares) (Note 4) | 2,000,100 | |||
Net increase in net assets resulting from capital transactions | 2,000,100 | |||
Total increase in net assets | 1,653,952 | |||
Net assets at beginning of period | - | |||
Net assets at end of period | $ | 1,653,952 | ||
Net investment loss | $ | (346,048 | ) |
* Commencement of operations
Refer to notes to accompanying financial statements.
24 |
NorthStar Real Estate Capital Income Master Fund
Statement of Cash Flows
For the period from | ||||
May 6, 2016* through | ||||
December 31, 2016 | ||||
Cash flows from operating activities | ||||
Net decrease in net assets resulting from operations | $ | (346,148 | ) | |
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities: | ||||
Purchase of investment | (100 | ) | ||
Net change in unrealized depreciation on investment | 100 | |||
Increase in operating assets and liabilities: | ||||
Professional fees payable | 63,614 | |||
Administrative services expense payable | 55,798 | |||
Accrued expense and other liabilities | 8,161 | |||
Net cash used in operating activities | (218,575 | ) | ||
Cash flows from financing activities | ||||
Issuance of common shares (Note 4) | 2,000,100 | |||
Net cash provided by financing activities | 2,000,100 | |||
Net increase in cash | 1,781,525 | |||
Cash, beginning of period | - | |||
Cash, end of period | $ | 1,781,525 |
* Commencement of operations
Refer to notes to accompanying financial statements.
25 |
NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS
1. | Business and Organization |
NorthStar Real Estate Capital Income Master Fund (the “Master Fund”) was organized as a Delaware statutory trust on October 2, 2015. The Master Fund’s primary investment objectives are to generate attractive and consistent income through cash distributions and preserve and protect shareholders’ capital, with a secondary objective of capital appreciation.
The Master Fund commenced operations on May 6, 2016, when the registration statements of NorthStar Real Estate Capital Income Fund (the “RE Capital Fund”) and NorthStar Real Estate Capital Income Fund-T (“RE Capital Fund-T”) (collectively, the “Trusts”), whose principal investment strategy is identical to the Master Fund, were declared effective by the Securities and Exchange Commission (the “SEC”).
The Master Fund is externally managed by NSAM B-RECF Ltd., a Bermuda exempt company, (the “Advisor”) and NSAM US-RECF LLC, a Delaware limited liability company (the “Co-Advisor” and collectively, the “Advisors”), which are registered investment advisors under the Investment Advisors Act of 1940, as amended, (the “Advisors Act”). The Advisor oversees the management of the Master Fund’s activities, including investment strategies, investment goals, asset allocation, leverage limitations, reporting requirements and other guidelines in addition to the general monitoring of the Master Fund’s portfolios. The Advisor also provides asset management and other administrative services. The Co-Advisor, pursuant to an agreement with the Advisor (the “Co-Advisory Agreement”), assists the Advisor with the day-to-day activities and the sourcing, management and monitoring of investments for the Master Fund’s portfolios, subject to the oversight of the Advisor. The Co-Advisor also furnishes the Master Fund with office facilities and equipment, and assists the Advisor with the provisions of clerical and other administrative services, including marketing, investor relations and certain accounting services and maintenance of certain books and records on behalf of the Master Fund. In addition, the Co-Advisor performs the calculation and publication of the Master Fund’s net asset value (“NAV”). The Advisor and Co-Advisor are affiliates of NorthStar Asset Management Group Inc. (“NorthStar”), which sponsors other public companies that raise capital through the retail market.
On January 10, 2017, pursuant to a merger agreement between NorthStar, NorthStar Realty Finance Corp. (“NorthStar Realty”) and Colony Capital Inc. (“Colony”), dated as of June 2, 2016 (as amended, supplemented or otherwise modified from time to time, the “Merger Agreement”), NorthStar, NorthStar Realty and Colony merged into Colony NorthStar, Inc. (NYSE: CLNS or “Colony NorthStar”) through a series of merger transactions (the “Mergers”). As a result of the Mergers, Colony NorthStar is a diversified equity REIT with an embedded institutional and retail investment management business. In addition, following the Mergers, the Advisor is a subsidiary of Colony NorthStar.
On January 31, 2017, the Advisor was re-domiciled as a Delaware limited liability company and renamed CNI RCEF Advisors, LLC. On February 23, 2017, the Co-Advisory Agreement was terminated, effective immediately, and the Advisor is now responsible for all the advisory and administrative duties formerly performed by the Co-Advisor.
The Master Fund is registered under the Investment Company Act of 1940, as amended, (the “1940 Act”), as a non-diversified, closed-end management investment company that intends to elect to be treated for federal income tax purposes as a C-corporation for the period ended December 31, 2016. The Master Fund intends to qualify annually thereafter, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Refer to Note 2 and Note 5 for further details on income taxes.
On January 9, 2017, the Master Fund and Trusts entered into an administration agreement (the “Administration Agreement”) with ALPS Fund Services, Inc. (“ALPS” or the “Administrator”). ALPS,
26 |
NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and/or its affiliates are responsible for, but not limited to, (i) maintaining financial books and records of the Master Fund and Trusts, (ii) providing administration services, and (iii) performing other accounting and clerical services as necessary in connection with the administration of the Master Fund and Trusts.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying audited financial statements of the Master Fund have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Master Fund is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 Financial Services – Investment Companies.
Use of Estimates
The preparation of the Master Fund’s audited financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the financial statements and the accompanying notes. Actual results may differ from those estimates.
Cash and cash equivalents
Cash as of December 31, 2016 represent cash held in custody at MUFG Union Bank, N.A. in a bank deposit account that, at times, may exceed federally insured limits.
Valuation of Portfolio Investments
The Master Fund determines the fair value of its investment portfolio as of the close of each regular trading session of the New York Stock Exchange. The Master Fund will calculate the NAV of its common shares of beneficial interest, by subtracting total liabilities (including accrued expenses or distributions) from the total assets of the Master Fund (the value of securities, plus cash or other assets, including interest and distributions accrued but not yet received) and dividing the result by the total number of outstanding common shares of the Master Fund. The Master Fund’s assets and liabilities are valued in accordance with the principles set forth below.
The Master Fund’s board of trustees (the “Board”) has approved the Master Fund’s Valuation Policies and Procedures (the “Valuation Policies and Procedures”) as of October 13, 2016 and the formation of a valuation committee (the “Valuation Committee”) that consists of personnel from the Advisor whose membership on the Valuation Committee was approved by the Board. The Valuation Committee values the Master Fund’s assets in good faith pursuant to the Valuation Policies and Procedures and applies a consistent valuation process, which was developed and approved by the Board. Portfolio securities and other assets for which market quotes are readily available will be valued at market value as provided by an independent pricing source. In circumstances where market quotes are not readily available, the Board has adopted the Valuation Policies and Procedures for determining the fair value of such securities and other assets, and has delegated the responsibility for applying the valuation methods to the Valuation Committee. On a quarterly basis, the audit committee of the Board reviews the valuation determination made with respect to the Master Fund’s investments during the preceding quarter and evaluates whether such determinations were made in a manner consistent with the Master Fund’s Valuation Policies and Procedures. The Board reviews and ratifies such value determinations.
27 |
NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, (“ASC Topic 820”), issued by the FASB clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. Refer to Note 6 for further discussion on fair value measurement. In accordance with ASC Topic 820, when determining the fair value of an asset or liability, the Valuation Committee seeks to determine the price that would be received from the sale of the asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value determinations are based upon all available inputs that the Valuation Committee deems relevant, which may include indicative dealer quotes, independent third party pricing vendors, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third party valuation services. However, determination of fair value involves subjective judgments and estimates. Accordingly, the notes to the Master Fund’s financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on the Master Fund’s financial statements.
The Master Fund expects that its portfolio will primarily consist of investments that are not actively traded in the market and for which quotation may not be available. For purposes of calculating NAV, the Valuation Committee will use the following valuation methods:
Investments where a market price is readily available:
Generally, the value of any equity interests in public companies for which market quotations are readily available will be based upon the most recent closing public market price. Securities that carry certain restrictions on sale will typically be valued at a discount from the market value of the security. Loans or investments traded over the counter and not listed on an exchange are valued at a price obtained from third-party pricing services, including, where appropriate, multiple broker dealers, as determined by the Valuation Committee.
Investments where a market price is not readily available:
For investments for which no active secondary market exists and, therefore, no bid and ask prices can be readily obtained, the Master Fund will value such investments at fair value as determined in good faith by the Board, with assistance from the Valuation Committee, in accordance with the Master Fund’s Valuation Policies and Procedures.
In making its determination of fair value, the Valuation Committee may retain and rely upon valuations obtained from independent valuation firms; provided that the Valuation Committee shall not be required to determine fair value in accordance with the valuation provided by any single source, and the Valuation Committee shall retain the discretion to use any relevant data, including information obtained from any independent third-party valuation or pricing service, that the Valuation Committee deems to be reliable in determining fair value under the circumstances.
Revenue Recognition
Security transactions will be accounted for on their trade date. For commercial real estate (“CRE”) related debt investments, including first mortgage loans, subordinate mortgage and mezzanine loans, participations in such loans and interest income on such investments 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 statement of operations. For CRE related securities which include commercial mortgage-back securities (“CMBS”), unsecured debt of publicly-traded REITs, interest income on such investments is recognized using the effective interest method with any premium or discount
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NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expected cash flow may result in a change to the yield which is then applied retrospectively for high-credit quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment or prospectively for all other securities to recognize interest income. The Master Fund will record dividend income on the ex-dividend date. The Master Fund will not accrue interest or dividends on loans and securities as a receivable if there is reason to doubt the collectability of such income. Loan origination fees, original issue discount, and market discount (market premium) will be capitalized and such amounts will be accreted (amortized) as interest income (interest expense) over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issuance discount will be recorded as interest income. The Master Fund will record prepayment premiums on loans and securities as interest income when it receives such amounts.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
Gains or losses on the sale of investments will be calculated by using the specific identification method. The Master Fund will measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment including any unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period.
Organization and Offering Costs
Organization costs include, among other things, the cost of formation, including the cost of legal services and other fees pertaining to the Master Fund’s organization. Offering costs include, among other things, legal, accounting, printing and other costs pertaining to the preparation of the Master Fund’s Registration Statement on Form N-2 related to the public offering of its common shares.
Pursuant to the Master Fund’s advisory agreement (“Advisory Agreement”), the Advisor and its affiliates are entitled to receive reimbursement for costs each has paid on behalf of the Master Fund in connection with the offering. The Master Fund will be obligated to reimburse the Advisor and its affiliates, as applicable, for organization and offering costs (“O&O Costs”) to a limit of 1.0% of the aggregate proceeds from the offering, after the payment of selling commissions and dealer manager fees. The Master Fund estimates that the O&O Costs of the Master Fund will be de minimis as Master Fund shares are not being offered directly to the public. The Master Fund records O&O Costs each period based upon an allocation determined by the expectation of total O&O Costs to be reimbursed. The offering costs incurred directly by the Master Fund are accounted for as a deferred charge and are amortized over 12 months on a straight-line basis. Organization costs incurred directly by the Master Fund are expensed as incurred. As of December 31, 2016, the Advisor incurred approximately $0.3 million of O&O Costs on behalf of the Master Fund. For the period from May 6, 2016 (commencement of operations) through December 31, 2016, there were no proceeds raised from the offering and no O&O Costs were allocated to the Master Fund.
Income Taxes
The Master Fund intends to elect to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. To maintain qualification as a RIC, the Master Fund must, among other things, meet certain source-of-income and asset diversification requirements and distribute to their respective shareholders, for each taxable year, at least 90% of its “investment company taxable income” and its net tax-exempt interest income. In general, a RIC’s “investment company taxable income” for any taxable year is its taxable income, determined without regard to net capital gains and with certain other adjustments. As a RIC, the Master Fund will not have to pay corporate-level federal income taxes on any income that it distributes to its
29 |
NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
shareholders. The Master Fund intends to distribute all or substantially all of their “investment company taxable income,” net tax-exempt interest income (if any) and net capital gains (if any) on an annual basis in order to maintain their RIC status each year and to avoid any federal income taxes on income. The Master Fund will also be subject to nondeductible federal excise taxes if it does not distribute at least 98.0% of net ordinary income (if any) and 98.2% of any capital gain net income (if any).
For the taxable period May 6, 2016 (commencement of operations) through December 31, 2016, the Master Fund is qualified to elect RIC status on its federal income tax return, however, it will file as a C corporation. If applicable, the Master Fund will record any applicable income tax expense or benefit on its statement of operations or deferred tax assets and liabilities on its statement of assets and liabilities. Refer to Note 5 for further information regarding income taxes.
Uncertainty in Income Taxes
The Master Fund evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. The Master Fund recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statement of Operations. During the period from May 6, 2016 (commencement of operations) through December 31, 2016, the Master Fund did not incur any interest or penalties.
Distributions
Distributions to the Master Fund’s shareholders are recorded as of the record date. Subject to the discretion of the Board and applicable legal restrictions, the Master Fund intends to authorize and declare ordinary cash distributions on a quarterly basis and pay such distributions on a monthly basis. From time to time, the Master Fund intends to authorize and declare special cash distributions of net long-term capital gains, if any, and any other income, gains and dividends and other distributions not previously distributed. During the period from May 6, 2016 (commencement of operations) through December 31, 2016, distributions were neither declared nor paid.
New Accounting Standards
In October 2016, the SEC adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Compliance with the requirements of these final rules, as they relate to Form N-CEN must occur by June 1, 2018, with the compliance date for Form N-PORT being June 1, 2018 or June 1, 2019, depending on the net assets of the fund family. Management is currently assessing the impact of this rule to the Master Fund’s financial statements and other filings.
3. | Share Transactions |
Prior to commencement of operations, an affiliate of NorthStar Realty purchased shares of the Master Fund. Refer to Note 4 for further detail.
The Master Fund will repurchase common shares held by the RE Capital Fund and RE Capital Fund-T to the extent necessary to accommodate repurchase requests under each Trust’s share repurchase program. During the period from May 6, 2016 (commencement of operations) through December 31, 2016, the Master Fund did not repurchase any of its common shares in connection with the Trusts’ share repurchase programs.
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NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. | Related Party Transactions |
Management Fee
Pursuant to the Master Fund’s Advisory Agreement, and in consideration of the advisory services provided by the Advisor to the Master Fund, the Advisor is entitled to a fee consisting of two components — the management fee (“Management Fee”) and the incentive fee (“Incentive Fee”).
The Trusts will not incur a separate Management Fee or Incentive Fee under the Trusts’ Advisory Agreements for so long as the Trusts have a policy to invest all or substantially all of their net assets in the Master Fund, but the Trusts and shareholders will be indirectly subject to the Management Fee and Incentive Fee incurred by the Master Fund.
The Management Fee is calculated and payable quarterly in arrears at the annual rate of 2.0% of the Master Fund’s average gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters (and, in the case of the Master Fund’s first quarter, the gross assets excluding cash and cash equivalents as of such quarter-end). The Management Fee may or may not be taken in whole or in part at the discretion of the Advisor. All or any part of the Management Fee not taken as to any quarter will be deferred without interest and may be taken in any such other quarter as the Advisor may determine. The Management Fee for any partial quarter will be appropriately prorated. The Co-Advisory Agreement provides that the Co-Advisor will receive a portion of the Management Fee and Incentive Fee payable to the Advisor under the Fund’s advisory agreement (the “Advisory Agreement”). On an annualized basis, the Advisor will pay to the Co-Advisor a co-advisory fee at a rate up to 50.0% of all fees payable to the Advisor under the Fund’s Advisory Agreement with respect to each year, payable to the Co-Advisor quarterly in arrears. As discussed in Note 1, on February 23, 2017, the Co-Advisory Agreement was terminated, effective immediately, and the Advisor is now responsible for all the advisory and administrative duties formerly performed by the Co-Advisor. For the period from May 6, 2016 (commencement of operations) through December 31, 2016, no management fee was incurred.
On February 23, 2017, the Board approved an amendment to the Advisory Agreement for the calculation of the Management Fee. The Management Fee is calculated at an annual rate of 1.25% of the Master Fund’s average net assets. The Management Fee is payable quarterly in arrears and is calculated based on the Master Fund’s average net assets at the end of the two most recently complete calendar quarters (and, in the case of the Master Fund’s first quarter, the net assets of such quarter-end).
Incentive Fee
As of December 31, 2016, the Incentive Fee was calculated and payable quarterly in arrears based upon the Master Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter, and will be subject to a hurdle rate, measured quarterly and expressed as a rate of return on the Master Fund’s “adjusted capital” at the beginning of the most recently completed quarter, equal to 1.75% per quarter (7.00% annualized), subject to a “catch-up” feature. For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income accrued during the calendar quarter, minus the Master Fund’s operating expenses for the quarter (including the Management Fee, expenses reimbursed to the Advisor under the Master Fund’s Advisory Agreement and any interest expense and distributions paid on any issued and outstanding preferred shares, but excluding the offering and organization expenses and the Incentive Fee). Pre-incentive fee net investment income will include, in the case of investments with a
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NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
deferred interest feature (such as original issue discount, debt instruments with payment-in-kind (“PIK”) interest and zero coupon securities), accrued income that the Master Fund has not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. “Adjusted capital” means the cumulative gross proceeds received by the Master Fund from the sale of Fund shares (including pursuant to the Master Fund’s distribution reinvestment plan), reduced by distributions to investors that represent a return of capital and amounts paid in connection with repurchases of Fund shares pursuant to the Master Fund’s share repurchase program. The calculation of the Incentive Fee for each quarter will be as follows:
· | No Incentive Fee will be payable in any calendar quarter in which the Master Fund’s pre-incentive fee net investment income does not exceed the quarterly hurdle rate of 1.75%; |
· | 100.0% of the Master Fund’s pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.1875% in any calendar quarter (8.75% annualized) will be payable to the Advisor. This portion of the Master Fund’s pre-incentive fee net investment income which exceeds the hurdle rate but is less than or equal to 2.1875% is referred to as the “catch-up.” The “catch-up” provision is intended to provide the Advisor with an incentive fee of 20.0% on all of the Master Fund’s pre-incentive fee net investment income when the Master Fund’s pre-incentive fee net investment income reaches 2.1875% in any calendar quarter; and |
· | 20.0% of the Master Fund’s pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized) is payable to the Advisor once the hurdle rate is reached and the catch-up is achieved (20.0% of all the Master Fund’s pre-incentive fee net investment income thereafter is allocated to the Advisor). |
For the period from May 6, 2016 (commencement of operations) through December 31, 2016, no incentive fee was incurred.
On February 23, 2017, the Board approved an amendment to the Advisory Agreement for the calculation of the Incentive Fee. The Incentive Fee is calculated and payable quarterly in arrears based upon the Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. The Incentive Fee will be subject to a quarterly fixed preferred return to investors, expressed as a rate of return on the Master Fund’s adjusted capital, at the beginning of the most recently completed calendar quarter, of 1.50% (6.00% annualized), subject to a “catch-up” feature.
As a result of the amendment, the calculation of the Incentive Fee for each quarter will be as follows:
· | No Incentive Fee will be payable in any calendar quarter in which the Master Fund’s pre-incentive fee net investment income does not exceed the quarterly hurdle rate of 1.50%; |
· | 100.0% of the Master Fund’s pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 1.715% in any calendar quarter (6.86% annualized) will be payable to the Advisor. This portion of the Master Fund’s pre-incentive fee net investment income which exceeds the hurdle rate but is less than or equal to 1.715% is referred to as the “catch-up.” The “catch-up” provision is intended to provide the Advisor with an incentive fee of 12.5% on all of the Master Fund’s pre-incentive fee net investment income when the Master Fund’s pre-incentive fee net investment income reaches 1.715% in any calendar quarter; and |
· | 12.5% of the Master Fund’s pre-incentive fee net investment income, if any, that exceeds 1.715% in any calendar quarter (6.86% annualized) is payable to the Advisor once the hurdle rate is reached and the catch-up is achieved (12.5% of all the Master Fund’s pre-incentive fee net investment income |
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NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
thereafter is allocated to the Advisor).
Reimbursement of Operating Expenses
The Advisor is to be reimbursed by the Master Fund, as applicable, for actual costs incurred in connection with providing administrative services to the Master Fund. Allocation of the cost of such services to the Master Fund may be based on objective factors such as total assets, revenues and/or time allocations. For the period from May 6, 2016 (commencement of operations) through December 31, 2016, the amount of administrative services expense incurred and payable was $55,798.
The Co-Advisory Agreement provides that the Co-Advisor will receive a portion of the Management Fee and Incentive Fee payable to the Advisor under the Master Fund’s Advisory Agreement (the “Fund Advisory Agreement”). On an annualized basis, the Advisor will pay to the Co-Advisor a co-advisory fee at a rate up to 50.0% of all fees payable to the Advisor under the Master Fund Advisory Agreement with respect to each year, which fees are payable to the Advisor quarterly in arrears. On February 23, 2017, the Co-Advisory Agreement was terminated, effective immediately, and the Advisor is now responsible for all the advisory and administrative duties formerly performed by the Co-Advisor.
Distribution Support Agreement
Pursuant to a distribution support agreement (the “Distribution Support Agreement”) between the Master Fund and NorthStar Realty, a publicly-traded real estate investment trust managed by an affiliate of the Advisor, NorthStar Realty or an affiliate has agreed to purchase up to $10.0 million in Master Fund shares, at the current NAV per Master Fund share, of which $2.0 million was contributed to the Master Fund as seed capital investments. During any month when the Distribution Support Agreement is effective, if the cash distributions exceed the net investment income for such month (“Distribution Shortfall”), NorthStar Realty will purchase shares required in order to cover the Distribution Shortfall up to an amount equal to a 7.0% cumulative, non-compounded annual return on the Master Fund’s shareholders’ invested capital prorated for such month.
Notwithstanding NorthStar Realty’s obligations pursuant to the Distribution Support Agreement, the Master Fund will not be required to pay distributions to the Master Fund shareholders, including the Trusts. Distributions funded from offering proceeds pursuant to the Distribution Support Agreement may constitute a return of capital. The Distribution Support Agreement expires at the earlier of: a) two years from the date on which the Trust, or another investment company registered under the 1940 Act which has a principal investment strategy of investing substantially all of its assets in the Master Fund, first commences an offering; or b) the date upon which neither the Advisor nor its affiliate is serving as the Master Fund’s Advisor. For the period from May 6, 2016 (commencement of operations) through December 31, 2016, there was no distribution support provided by NorthStar Realty.
On February 23, 2017, the Distribution Support Agreement was amended to replace NorthStar Realty with an affiliate of Colony NorthStar. The Distribution Support Agreement was also amended such that during any month when the Distribution Support Agreement is effective, if the cash distributions exceed the net investment income for such month (“Distribution Shortfall”), an affiliate of Colony NorthStar will purchase shares required in order to cover the Distribution Shortfall up to an amount equal to a 6.0% cumulative, non-compounded annual return on the Fund’s shareholders’ invested capital prorated for such month.
Notwithstanding an affiliate of Colony NorthStar’s obligations pursuant to the Distribution Support Agreement, the Master Fund will not be required to pay distributions to the Master Fund shareholders, including the Trusts.
33 |
NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Capital Contribution by NorthStar Realty Finance Limited Partnership (“NRFLP”)
Prior to commencement of operations, NRFLP, an affiliate of NorthStar Realty, contributed $2,000,100 to purchase 222,233 common shares of the Master Fund at $9.00 per share.
5. | Income Tax Information |
The components of the deferred tax asset as of December 31, 2016, for the Master Fund as a C-corporation, consist of the following:
December 31, 2016 | ||||
Deferred Tax Asset | ||||
Net loss carryforwards | $ | 138,459 | ||
Total Deferred Tax Asset | 138,459 | |||
Less: Valuation Allowance | (138,459 | ) | ||
Net Deferred Taxes | $ | - |
At December 31, 2016, the Master Fund had total net operating and capital loss carry forwards of approximately $0.3 million for federal income tax purposes available to offset future taxable income. The loss carry forwards can be carried forward 20 years and will expire in 2036.
A reconciliation of the federal tax rate to the Master Fund’s effective income tax rate is as follows:
December 31, 2016 | ||||
Tax at Federal Statutory Rate | 35.0 | % | ||
State and Local Rate | 5.0 | % | ||
Total | 40.0 | % | ||
Valuation Allowance | (40.0 | )% | ||
Provision for Taxes | 0.0 | % |
At December 31, 2016, the cost basis of investments for Federal income tax purposes was substantially the same as the basis per U.S. GAAP. At December 31, 2016, gross unrealized appreciation and depreciation on investments for Federal income tax purposes were $0 and $100, respectively.
6. | Investment in NS Capital Income Master Fund REIT, Inc. ( the “REIT Subsidiary”) |
On March 31, 2016, the Master Fund invested $100 in the REIT Subsidiary to fund its initial capitalization. The REIT Subsidiary was formed on February 3, 2016 as a Maryland corporation and intends to qualify as a REIT. The REIT Subsidiary, an affiliate of NorthStar Realty, intends to invest, through wholly owned special purpose vehicles, in certain direct and indirect equity investments in CRE properties and it may also invest in CRE debt and securities. As of December 31, 2016, the REIT Subsidiary is a Level 3 investment in accordance with ASC 820 and was valued at $0 as a result of the accrual of certain operating expenses for the period May 6, 2016 (commencement of operations) through December 31, 2016.
34 |
NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. | Financial Highlights |
The following is a schedule of financial highlights:
For the period from May 6, 2016 (commencement of operations) through December 31, 2016 | ||||
Per Share Data: | ||||
Net asset value, beginning of period | $ | 9.00 | ||
Net investment loss(1) | (1.56 | ) | ||
Net decrease in net assets resulting from operations | (1.56 | ) | ||
Net asset value, end of period | $ | 7.44 | ||
Shares outstanding, end of period | 222,233 | |||
Total return at net asset value(2)(3) | (17.3 | )% | ||
Ratio/Supplemental Data: | ||||
Net assets, end of period | $ | 1,653,952 | ||
Ratio of net investment loss to average net assets(4) | (28.4 | )% | ||
Ratio of total expenses to average net assets(4) | 28.4 | % | ||
Portfolio turnover rate | Not applicable |
(1) | The per share data was derived by using the average number of common shares outstanding during the period from May 6, 2016 (commencement of operations) through December 31, 2016. |
(2) | Total return is historical and is calculated by determining the percentage change in net asset value. |
(3) | Not annualized. |
(4) | Annualized. Average net assets for the period from May 6, 2016 (commencement of operations) through December 31, 2016 are used for this calculation. |
8. | Commitments and Contingencies |
In the normal course of business, the Master Fund may enter into contracts that contain a variety of representations which provide general indemnifications. The Master Fund’s maximum exposure under the arrangements cannot be known; however, the Master Fund expects any risk of loss to be remote.
9. | Subsequent Events |
On January 17, 2017, the Master Fund received subscriptions of $105,085 and $100,000 from the Multi Class and the T-Fund, respectively, which resulted in the issuance of 28,055 additional shares.
The Master Fund made investments totaling $114,715 with total par value of $150,000 during the period from January 1, 2017 to February 28, 2017.
The management of the Master Fund has evaluated events and transactions through February 28, 2017, the date on which the financial statements were issued, and has determined that there are no material events that would require adjustments to or disclosure in the Master Fund’s financial statements, other than previously discussed in Note 1, Note 4 and above.
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NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Board of Trustees
Information regarding the members of the Board is set forth below. The trustees have been divided into two groups — Interested Trustees and Independent Trustees. The address for each trustee is c/o NorthStar Real Estate Capital Income Master Fund, 399 Park Avenue, 18th Floor, New York, New York 10022. As set forth in each of the Trust's and Master Fund's declaration of trust and bylaws, a trustee's term of office shall continue until his or her death, resignation or removal.
Name |
Position Held |
Trustee |
Principal
Occupation Past 5 |
Number of |
Trusteeships
Held By Trustees |
Interested Trustee | |||||
Daniel R. Gilbert (46) | Chairman of the Board, CEO, and President | 2015 | Head of Retail Platform of Colony NorthStar; Chairman, CEO and President of NorthStar Real Estate Capital Income Fund (“RE Capital Fund”), NorthStar Real Estate Capital Income Fund-T (the "RE Capital Fund-T") and NorthStar Real Estate Capital Income Master Fund (“RE Capital Master Fund”); Chairman, CEO and President of NorthStar Corporate Income Master Fund (Corporate Master Fund”), NorthStar Corporate Income Fund (“Corporate Fund”) and NorthStar Corporate Income Fund-T (“Corporate Fund-T”) ; Co-Chairman, CEO and President of NorthStar/RXR New York Metro Real Estate, Inc. ("NorthStar/RXR"); Chairman, CEO and President of NorthStar Real Estate Income Trust, Inc. ("NorthStar Income") and NorthStar Real Estate Income II, Inc. ("NorthStar Income II"); Sole Director of NorthStar/Townsend Institutional Real Estate Fund Inc. ("NorthStar/Townsend"); Executive Chairman of NorthStar Healthcare Income, Inc. ("NorthStar Healthcare"); Chief Investment and Operating Officer of NorthStar Asset Management Group, Ltd and NorthStar Realty (2013 – 2017). | 6 | Executive Chairman of NorthStar Healthcare; Chief Executive Officer, Chairman of Corporate Master Fund, Corporate Fund and Corporate Fund-T; Chief Executive Officer, Chairman of the Master Fund, RE Capital Fund and RE Capital Fund-T; Co-Chairman of NorthStar/RXR; and Sole Director of NorthStar/Townsend; Chairman of NorthStar Income and NorthStar Income II. |
Independent Trustees | |||||
Daniel J. Altobello (75) | Trustee | 2016 | CEO and President of Caterair International Corporation (1989 – 1995); Executive Vice President of Marriott Corporation (1979 – 1989); President of Marriott Airport Operations Group (1979 – 1989). | 3 | Director of NorthStar Healthcare; Chairman of Altobello Family LP; Director of MamaMancini's Holdings, Inc.; Director of Arlington Asset Investment Corp.; Director of Diamond Rock Hospitality Co.; Director of Mesa Air Group, Inc.; Trustee of Loyola Foundation, Inc. |
Dianne P. Hurley (53) | Lead Independent | 2016 | Startup consultant to asset management firms including | 3 | Director of NorthStar/ RXR New York Metro Real Estate, |
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NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Name |
Position Held |
Trustee |
Principal
Occupation Past 5 |
Number of |
Trusteeships
Held By Trustees |
Trustee | Stonecourt Capital, Imperial Companies and RedBird Capital Partners; Managing Director of SG Partners (2011-2014); COO, Global Distribution of Credit Suisse Asset Management (2009-2011); Chief Administrative Officer, TPG-Axon (2004-2009). | Inc.; Director of Griffin-American Healthcare REIT IV, Inc.; Director of NorthStar Realty Europe Corp. ("NorthStar Realty Europe"). | |||
Gregory A. Samay (57) | Trustee | 2016 | Previously Chief Investment Officer (previously an Investment Officer) of Fairfax County Retirement Systems (2011-2016); Executive Director and Chief Investment Officer of Arlington County Employees' Retirement System (2005-2010). | 3 | Director of NorthStar Healthcare. |
Executive Officers
The following persons serve as the Trust's executive officers in the following capacities:
Name | Age | Positions Held | ||
Daniel R. Gilbert | 46 | Chairman of the Board, Chief Executive Officer and President | ||
Frank V. Saracino | 50 | Chief Financial Officer and Treasurer | ||
Brett S. Klein | 38 | Chief Operating Officer | ||
Sandra M. Forman | 50 | Chief Compliance Officer, General Counsel and Secretary |
The address for each executive officer is c/o NorthStar Real Estate Capital Income Master Fund, 399 Park Avenue, 18th Floor, New York, New York 10022.
Information about Executive Officers
Daniel R. Gilbert. Mr. Gilbert has served as the Head of the Retail Platform of Colony NorthStar since January 10, 2017. Mr. Gilbert has been an Interested Trustee, Chief Executive Officer and President of the Trust and the Master Fund since October 2, 2015, Chairman since March 3, 2016 and is a member of the Advisor's investment committee. Mr. Gilbert has also been an Interested Trustee of the Trusts, the Trusts’ Chief Executive Officer and President of RE Capital Fund and RE Capital Fund-T since December 15, 2015, and Chairman since March 3, 2016. Mr. Gilbert has served as Sole Director of NorthStar/Townsend since inception. He has been an Interested Trustee, Chief Executive Officer and President of Corporate Fund and Corporate Master Fund since July 2015 and Chairman since January 15, 2016, an Interested Trustee, Chief Executive Officer and President of NorthStar Corporate Income Fund-T since November 2015 and Chairman since January 15, 2016. Mr. Gilbert serves as Chairman, Chief Executive Officer and President of NorthStar Income, positions he has held since August 2015, January 2013 and March 2011, respectively and he served as its Chief Investment Officer from January 2009 through January 2013. Mr. Gilbert serves as the Executive Chairman of NorthStar Healthcare, a position he has held since January 2014, and served as its Chief Executive Officer from August 2012 to January 2014 and Chief Investment Officer from October 2010 through February 2012. Mr. Gilbert also serves as Chairman, a position he has held since August 2015, and the Chief Executive
37 |
NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Officer and President, a position he has held since December 2012, of NorthStar Income II. Mr. Gilbert further serves as Co-Chairman, a position he has held since August 2015, the Chief Executive Officer and President, a position he has held since March 2014, of NorthStar/RXR. Mr. Gilbert also served as Chief Investment and Operating Officer of NorthStar Realty from January 2013 to January 2017, a position he maintained as co-employee. Mr. Gilbert has served as Chief Investment and Operating Officer of NorthStar Asset Management Group, Ltd, a wholly owned subsidiary of Colony NorthStar and parent company of the Advisor, from June 2014 to January 2017. Mr. Gilbert served as Co-President of NorthStar Realty from April 2011 until January 2013 and in various other senior management positions since its initial public offering in October 2004. Mr. Gilbert served as an Executive Vice President and Managing Director of Mezzanine Lending of NorthStar Capital Investment Corp., a predecessor company of NorthStar Realty. Prior to that role, Mr. Gilbert was with Merrill Lynch & Co. in its Global Principal Investments and Commercial Real Estate Department and prior to joining Merrill Lynch, held accounting and legal-related positions at Prudential Securities Incorporated. Mr. Gilbert holds a Bachelor of Arts degree from Union College in Schenectady, New York.
Frank V. Saracino. Mr. Saracino joined NorthStar Asset Management Group, Inc. (“NSAM”) before the Mergers in August 2015, and has served as the Trust's and the Master Fund's Chief Financial Officer and Treasurer since inception. Mr. Saracino has also served as the Chief Financial Officer and Treasurer of the RE Capital Fund and RE Capital Fund-T since December 2015. Mr. Saracino has served as Chief Financial Officer of NorthStar/Townsend Fund since inception. Mr. Saracino has served as Chief Financial Officer and Treasurer of Corporate Fund and Corporate Master Fund since July 2015 and Chief Financial Officer and Treasurer of Corporate Fund-T since November 2015. In addition, Mr. Saracino has served as Chief Financial Officer and Treasurer of each of NorthStar Income, NorthStar Income II, NorthStar Healthcare and NorthStar/RXR since August 2015. Prior to joining NorthStar, from July 2012 to December 2014, Mr. Saracino was with Prospect Capital Corporation, or Prospect, where he concentrated on portfolio management, strategic and growth initiatives and other management functions. In addition, during his tenure at Prospect, Mr. Saracino served as Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary of each of Priority Income Fund, Inc. and Pathway Energy Infrastructure Fund, Inc., and their respective investment advisers, and served as a Managing Director of Prospect Administration, LLC. Previously, Mr. Saracino was a Managing Director at Macquarie Group, and Head of Finance from August 2008 to June 2012 for its Americas non-traded businesses which included private equity, asset management, lease financing, private wealth, and investment banking. From 2004 to 2008, he served first as Controller and then as Chief Accounting Officer of eSpeed, Inc. (now BGC Partners, Inc.), a publicly-traded subsidiary of Cantor Fitzgerald. Prior to that, Mr. Saracino worked as an investment banker at Deutsche Bank advising clients in the telecom industry. Mr. Saracino started his career in public accounting at Coopers & Lybrand (now PricewaterhouseCoopers) where he earned a CPA and subsequently worked in internal auditing for The Dun & Bradstreet Corporation. He holds a Bachelor of Science degree from Syracuse University.
Brett S. Klein. Mr. Klein has served as the Trust's and the Master Fund's Chief Operating Officer since inception. In addition, Mr. Klein has served as the Chief Operating Officer of RE Capital Fund and RE Capital Fund-T since December 2015. Mr. Klein has served as Chief Operating Officer of Corporate Fund and Corporate Master Fund since July 2015 and Chief Operating Officer of Corporate Fund-T since November 2015. Mr. Klein has also served as the Chief Operating Officer of NorthStar/RXR, a position he has held since June 2014. Mr. Klein currently serves as a Managing Director of Colony NorthStar, the parent company of the Advisor, a position he has held since January 2017, and heads its Alternative Products Group. Mr. Klein's responsibilities include oversight of the operational elements of Colony NorthStar's retail-focused REITs and alternative retail products as well as coordination of sponsor-related activities of Colony NorthStar's broker-dealer, NorthStar Securities, LLC. Mr. Klein continues to be involved with the investment and portfolio management and servicing businesses and works closely with the accounting and legal departments in connection with the operation of the Managed Companies (defined below). Mr. Klein also served as a Managing Director at NorthStar Asset Management Group Ltd, and headed the Alternative Products Group from June 2014 to January 2017. Mr. Klein previously served as a Managing Director at NorthStar Realty and Head of its
38 |
NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Structured and Alternative Products Group between January 2011 and June 2014. In addition, from 2004 to 2011, Mr. Klein held similar roles at NorthStar Realty and was responsible for capital markets execution of NorthStar Realty and its retail-focused REIT businesses, including credit facility sourcing/structuring and securitization as well as investments and portfolio management. Mr. Klein joined NorthStar Realty in October 2004, prior to its initial public offering. From August 2004 to October 2004, Mr. Klein was an analyst at NorthStar Capital Investment Corp., a predecessor company of NorthStar Realty. From 2000 to 2004, Mr. Klein worked in the CMBS group at Fitch Ratings, Inc., as Associate Director, where he focused on commercial real estate related securitization transactions. Mr. Klein holds a Bachelor of Science in Finance, Investment and Banking in addition to Risk Management and Insurance from the University of Wisconsin in Madison, Wisconsin.
Sandra M. Forman. Ms. Forman has served as the Trust's and the Master Fund's Chief Compliance Officer since October 2015 and General Counsel and Secretary since October 2016. Previously, Ms. Forman served as Associate General Counsel and Assistant Secretary of the Trust and the Master Fund from October 2015 to October 2016 and of RE Capital Fund and RE Capital Fund-T from December 2015 to October 2016. Ms. Forman has served as Chief Compliance Officer of Corporate Fund, Corporate Master Fund, and Corporate Fund-T since October 2015 and General Counsel and Secretary since January 2017. Previously, Ms. Forman served as Associate General Counsel and Assistant Secretary of Corporate Fund and Corporate Master Fund from October 2015 to January 2017 and Associate General Counsel and Assistant Secretary of Corporate Fund-T from November 2015 to January 2017. Ms. Forman has served as Chief Compliance Officer and Secretary of NorthStar/Townsend Fund since inception. Ms. Forman has also served as Deputy General Counsel at Colony NorthStar since January 2017. Ms. Forman served as Senior Counsel for NorthStar from October 2015 to January 10, 2017. Prior to joining NorthStar, Ms. Forman was Senior Counsel at Proskauer Rose LLP from July 2014 to October 2015, where she represented investment companies, including registered closed-end funds and business development companies, and REITs regarding legal, corporate governance and compliance issues. In addition, from August 2004 to June 2014, she served as General Counsel, Chief Compliance Officer and Director of Human Resources and from January 2009 to June 2014 as Secretary of Harris & Harris Group, Inc., a publicly traded business development company. From January 2012 to June 2014, she served as General Counsel, Chief Compliance Officer and Secretary of H&H Ventures Management, Inc., a wholly owned subsidiary of Harris & Harris Group, Inc. Ms. Forman began her legal career in the Investment Management Group at Skadden, Arps, Slate, Meagher & Flom LLP. She holds a Bachelor of Arts from New York University in New York, New York, and a Juris Doctor from the University of California Los Angeles in Los Angeles, California.
39 |
NORTHSTAR REAL ESTATE CAPITAL INCOME MASTER FUND
Supplemental Information (UNAUDITED)
December 31, 2016
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The Master Fund has not had any changes in or disagreements with its independent registered public accounting firm on accounting or financial disclosure matters since its inception.
Form N-Q Filings
The Master Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Master Fund’s Forms N-Q are available on the SEC’s website at http://www.sec.gov. The Master Fund’s Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. Shareholders may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330.
40 |
Item 2. Code of Ethics.
The RE Capital Fund, as of the end of the period covered by the report, has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. This code of ethics is included as Exhibit (a)(1).
During the period covered by the report, there have been no amendments to, nor any waivers granted from, any provision of this code of ethics.
Item 3. Audit Committee Financial Expert.
(a)(1) | The RE Capital Fund’s Board of Trustees has determined that the RE Capital Fund has at least one “audit committee financial expert” serving on its audit committee, as such term is defined for purposes of Item 3 of Form N-CSR. |
(a)(2) | The RE Capital Fund’s Board of Trustees has determined that Dianne P. Hurley, is an “audit committee financial expert” and “independent,” as such term is defined for purposes of Item 3 of Form N-CSR. |
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. The aggregate fees billed to the RE Capital Fund for the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP (“PwC”) for the audit of the RE Capital Fund’s financial statements were less than $1,000. Audit fees were incurred for the audit of the RE Capital Fund’s financial statements for the reporting period ended March 31, 2016.
(b) Audit-Related Fees. The aggregate fees billed to the RE Capital Fund for the last two fiscal years for assurance and related services by PwC that were reasonably related to the performance of the audit of the Company’s financial statements and not reported in Item 4(a) above were less than $1,000. Audit-related fees were incurred for the review of the RE Capital Fund’s semi-annual report for the reporting period ended June 30, 2016.
(c) Tax Fees. Not applicable.
(d) All Other Fees. Not applicable.
(e) Audit Committee Pre-Approval Policies and Procedures
(1) | The Audit Committee has adopted, and the Board has approved, an Audit Committee Pre-Approval Policy (the “Policy”), which is intended to comply with Rule 2-01 of Regulation S-X and sets forth guidelines and procedures to be followed by the Master Fund when retaining an auditor to perform audit, audit related, tax and other services for the Master Fund. The Policy provides that the Audit Committee (or the Chairman pursuant to delegated authority) must pre-approve all auditing services and permitted non-audit services and that all such requests to provide services must be submitted to the Audit Committee or the Chairman, as the case may be, by both the independent auditor and the Chief Financial Officer. |
(2) | In 2016, the Audit Committee pre-approved all audit and non-audit services provided to the Master Fund by PwC. |
(f) Not applicable.
(g) Not applicable.
(h) Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) | The Master Fund’s audited schedule of investment as of December 31, 2016 is included as part of the Annual Report included in Item 1 of Form N-CSR. |
(b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
The RE Capital Fund has delegated the responsibility for voting proxies relating to its voting securities to the Advisor. The Advisor’s proxy voting policies and procedures are attached hereto as Exhibit (a)(4).
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) Information regarding the portfolio managers primarily responsible for the day-to-day management of the Master Fund’s portfolio as of the date hereof is set forth below.
The Advisor’s investment committee is responsible for approving any potential investments. The committee consists of Daniel R. Gilbert, Richard B. Saltzman, Mark M. Hedstrom, Kevin P. Traenkle, Robert C. Gatenio, Brett S. Klein and Sujan S. Patel. All investments, with the exception of certain CMBS investments at or below $10 million, which may only require the approval of Mr. Gatenio, require the approval of Mr. Gilbert, with investments in excess of $25 million requiring the further approval of Mr. Saltzman. See “Supplemental Information- Information about Executive Officers” for biographical information pertaining to Mr. Gilbert and Mr. Klein. Below is biographical information pertaining to the other members of the Advisor’s investment committee:
Richard B. Saltzman. Mr. Saltzman has served as the Chief Executive Officer and President of Colony NorthStar since January 2017, having previously held the positions of Chief Executive Officer, President and a member of the Board of Directors of Colony, the predecessor to Colony NorthStar. Prior to joining the Colony business in 2003, Mr. Saltzman spent 24 years in the investment banking business primarily specializing in real estate-related businesses and investments. Mr. Saltzman served as the Managing Director and Vice Chairman of Merrill Lynch’s investment banking division. As a member of the investment banking operating committee, he oversaw the firm’s global real estate, hospitality and restaurant businesses. Previously, he also served as Chief Operating Officer of Investment Banking and had responsibility for Merrill Lynch’s Global Leveraged Finance business. Mr. Saltzman was also responsible for various real estate-related principal investments, including the Zell/Merrill Lynch series of funds which acquired more than $3.0 billion of commercial real estate assets and where he was a member of the investment committee. Mr. Saltzman currently serves on the Board of Directors of Kimco Realty Corporation (NYSE: KIM) and the Board of Trustees of Colony Starwood Homes (NYSE: SFR). He has also served as a member of the Board of Governors of the National Association of Real Estate Investment Trusts, on the board of directors of the Real Estate Roundtable and a member of the Board of Trustees of the Urban Land Institute, Treasurer of the Pension Real Estate Association, a Director of the Association of Foreign Investors in Real Estate and a past Chairman of the Real Estate Capital Policy Advisory Committee of the National Realty Committee. Mr. Saltzman received his Bachelor of Arts from Swarthmore College in 1977 and a Master of Science in Industrial Administration from Carnegie Mellon University in 1979.
Mark M. Hedstrom. Mr. Hedstrom has served as the Executive Vice President and Chief Operating Officer of Colony NorthStar since January 2017. Mr. Hedstrom previously served as Executive Director and Chief Operating Officer of Colony from April 2015 to January 2017. Prior to becoming the Executive Director and Chief Operating Officer of Colony, Mr. Hedstrom served as Vice President of Colony Finance, Inc. and as Principal and Chief Financial Officer of Colony Capital, LLC (“CCLLC”), where he was responsible for all of
CCLLC’s financial and treasury functions and had primary responsibility for CCLLC’s risk management and investor reporting. Prior to joining the Colony business in 1993, Mr. Hedstrom served in senior financial roles with The Koll Company and Castle Pines Land Company and served as a Senior Manager of Ernst & Young. Mr. Hedstrom is a Certified Public Accountant (license inactive) and received a B.S. in Accounting from the University of Colorado in 1980.
Kevin P. Traenkle. Mr. Traenkle has served as the Executive Vice President and Chief Investment Officer of Colony NorthStar since January 2017, the same position he has held since June 2009 at the preceding company, Colony, prior to the Mergers. Mr. Traenkle served as an Executive Director of Colony from April 2015 to January 2017. Mr. Traenkle also served as a Principal of CCLLC, where he was involved in many facets of the firm’s activities including: distressed debt initiatives, investment and divestment decisions, business development and global client relations. Prior to becoming a Principal at CCLLC in January 2005, Mr. Traenkle served as a Vice President of Acquisitions at CCLLC and was responsible for the identification, evaluation, consummation, and management of investments. Before rejoining the Colony business in 2002, Mr. Traenkle worked for a private equity investment firm, where he was responsible for real estate-related investment and management activities. Prior to joining the Colony business in 1993, Mr. Traenkle worked for an investment bank, First Albany Corporation, in its Municipal Finance department. Mr. Traenkle received a B.S. in Mechanical Engineering in 1992 from Rensselaer Polytechnic Institute in Troy, New York.
Robert C. Gatenio. Mr. Gatenio has served as the Managing Director & Co-Head of US Investment Management of Colony NorthStar, positions he has held since June 2014 at the preceding company, NSAM, prior to the Mergers. Mr. Gatenio is primarily responsible for Colony NorthStar’s investments in CRE securities, private equity real estate secondaries, and NorthStar Healthcare investments. Mr. Gatenio has previously served as Managing Director of NorthStar Realty since 2010, as well as successive management positions since joining NorthStar Realty in 2006. Mr. Gatenio continues to serve as Vice Chairman of the Board at NorthStar Healthcare. Since his engagement at NorthStar Realty, Mr. Gatenio has overseen the acquisition of over $4.0 billion in commercial real estate securities, $3.0 billion in private equity real estate secondaries and has had a leading role in building the healthcare platform across the Managed Companies (defined below), which currently include a diversified portfolio of equity and debt healthcare real estate investments in excess of $9.0 billion. Prior to joining NorthStar Realty, Mr. Gatenio was with Goldman Sachs, in its Commercial Mortgage origination and distribution group, and previous to that with Goldman Sachs Asset Management, with its Fixed Income Portfolio Management Team. Mr. Gatenio holds a Bachelor of Science in Finance from Syracuse University and a Master of Business Administration from Fordham University Business School.
Sujan S. Patel. Mr. Patel has served as the Managing Director and Co-Head of U.S. Investment Management at Colony NorthStar since January 2017. He is responsible for overseeing the sourcing, structuring and execution of Colony NorthStar’s opportunistic equity, debt and strategic investments across all asset types and geographies. Prior to the Mergers, Mr. Patel was Managing Director and Co-Head of Investments at NSAM where he was directly involved in or oversaw over $21.0 billion of closed transactions. Prior to joining NSAM in 2007, Mr. Patel was with Thayer Lodging Group, a lodging dedicated private equity firm, focusing on all aspects of sourcing, acquiring, financing and disposing of over $2.0 billion of hotel investments. Mr. Patel began his career at Morgan Stanley in their investment banking division based in New York. He currently serves on the Advisory Board of the NYU Schack Institute of Real Estate and is a member of the Board of Advisors of the Graaskamp Center for Real Estate at the Wisconsin School of Business. Mr. Patel also sits on the Major Decision Committee of Island Hospitality Management and on the Board of SteelWave, a San Francisco Bay Area-based full-service commercial real estate management and operating company. In addition, Mr. Patel is involved in several real estate industry organizations including being a Member of the ULI Global Exchange Council and is a frequent speaker at industry conferences and seminars. Mr. Patel was named by the Commercial Observer in March 2014 as a member of its “Power 100” list honoring top commercial real estate professionals. Mr. Patel received a Bachelor of Arts in Engineering Sciences modified with Economics from Dartmouth College.
(a)(2) The Portfolio Managers primarily responsible for the day-to-day management of the Master Fund also manage other registered investment companies, other pooled investment vehicles and other accounts, as indicated below. The following table identifies, estimated as of December 31, 2016: (i) the number of other registered investment companies, other pooled investment vehicles and other accounts managed by each portfolio manager; (ii) the total assets of such companies, vehicles and accounts; and (iii) the number and total assets of such companies, vehicles and accounts that are subject to an advisory fee based on performance.
Number of Accounts | Assets of Accounts | Number of Accounts Subject to a Performance Fee | Assets Subject to a Performance Fee | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Daniel R. Gilbert | ||||||||||||||||
Registered Investment Companies | 6 | $3,963 | 2 | $3,667 | ||||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies | 4 | $6,542,231 | 4 | $6,542,231 | ||||||||||||
Other Accounts. | 0 | $0 | 0 | $0 | ||||||||||||
Richard B. Saltzman | ||||||||||||||||
Registered Investment Companies | 6 | $3,963 | 2 | $3,667 | ||||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies | 48 | $15,550,198 | 48 | $15,550,198 | ||||||||||||
Other Accounts | 1 | $1,846,841 | 1 | $1,846,841 | ||||||||||||
Mark M. Hedstrom | ||||||||||||||||
Registered Investment Companies | 6 | $3,963 | 2 | $3,667 | ||||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies | 48 | $15,550,198 | 48 | $15,550,198 | ||||||||||||
Other Accounts | 0 | $0 | 0 | $0 | ||||||||||||
Kevin P. Traenkle | ||||||||||||||||
Registered Investment Companies | 6 | $3,963 | 2 | $3,667 | ||||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies | 48 | $15,550,198 | 48 | $15,550,198 | ||||||||||||
Other Accounts | 1 | $1,846,841 | 1 | $1,846,841 | ||||||||||||
Robert C. Gatenio | ||||||||||||||||
Registered Investment Companies | 6 | $3,963 | 2 | $3,667 | ||||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies | 4 | $6,542,231 | 4 | $6,542,231 | ||||||||||||
Other Accounts | 0 | $0 | 0 | $0 | ||||||||||||
Brett S. Klein | ||||||||||||||||
Registered Investment Companies | 6 | $3,963 | 2 | $3,667 | ||||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies | 4 | $6,542,231 | 4 | $6,542,231 | ||||||||||||
Other Accounts | 0 | $0 | 0 | $0 | ||||||||||||
Sujan S. Patel | ||||||||||||||||
Registered Investment Companies | 6 | $3,963 | 2 | $3,667 | ||||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies | 4 | $6,542,231 | 4 | $6,542,231 | ||||||||||||
Other Accounts | 0 | $0 | 0 | $0 |
Potential Conflicts of Interest
The Advisor and certain of its affiliates may experience conflicts of interest in connection with the management of the Master Fund and the RE Capital Fund, including, but not limited to, the following:
· | The officers and other personnel of the Advisor, allocate their time between advising the Master Fund, the RE Capital Fund-T and managing other investment activities and business activities in which they may be involved, including managing and operating NorthStar Realty Europe Corp, NorthStar Income, NorthStar Income II, NorthStar Healthcare, NorthStar/RXR, NorthStar/Townsend and NorthStar Corporate Income Master Fund and its two feeder funds (collectively, “NorthStar Corporate Fund”), and other funds or vehicles managed by Colony NorthStar or its affiliates, (the “Managed Companies”); |
· | The Master Fund may compete with the Managed Companies for investments, subjecting the |
Advisor and its affiliates to certain conflicts of interest in evaluating the suitability of investment opportunities and making or recommending acquisitions on the Master Fund’s behalf;
· | Regardless of the quality of the assets acquired by the Master Fund, the services provided to the Master Fund or whether the Master Fund makes distributions to its shareholders, the Advisor will receive a management fee in connection with the management of the Master Fund’s portfolio and may receive an incentive fee to the extent the Master Fund’s “pre-incentive fee net investment income” exceeds the hurdle rate; |
· | The personnel of Colony NorthStar allocate their time between assisting the Advisor in identifying investment opportunities and making investment recommendations and performing similar functions for other business activities in which they may be involved, including in connection with the Managed Companies; |
· | The Master Fund may compete with other Managed Companies for investment opportunities, subjecting Colony NorthStar and its affiliates to certain conflicts of interest in evaluating the suitability of investment opportunities and recommending investments to the Advisor; |
· | From time to time, to the extent consistent with the 1940 Act and the rules and regulations promulgated thereunder, the Master Fund and other clients for which Colony NorthStar provides investment management services or carries on investment activities may make investments at different levels of an investment entity’s capital structure or otherwise in different classes of an issuer’s securities, as may be permitted by law and subject to compliance with appropriate procedures. These investments may give rise to inherent conflicts of interest or perceived conflicts of interest between or among the various classes of securities that may be held by the Master Fund and such other clients; |
· | Colony NorthStar and its affiliates may give advice and recommend securities to other clients, in accordance with the investment objectives and strategies of such other clients, which may differ from advice given to, or the timing or nature of the action taken with respect to, the Master Fund so long as it is their policy, to the extent practicable, to recommend for allocation and/or allocate investment opportunities to the Master Fund on a fair and equitable basis relative to their other clients, even though their investment objectives may overlap with those of the Master Fund. A dedicated mandate may cause the other Managed Companies to have priority over certain other Managed Companies (including the Master Fund, as applicable) with respect to certain investment opportunities. For example, Colony NorthStar manages a global real estate credit fund (the “Global Credit Fund”), which is a real estate private equity fund focused on investment opportunities primarily consisting of direct or indirect exposure to debt or preferred equity instruments secured by real estate or issued by real estate-related entities and real estate assets being divested by government institutions, commercial banks, other financial entities, or distressed sellers or through bankruptcy, foreclosure, short sales, or similar proceedings, as well as certain distressed real estate-related investments. The Global Credit Fund has a priority right with respect to such investment opportunities that are expected to achieve a gross internal rate of return of at least 15%. This priority right may result in fewer of such investment opportunities being made available to the Master Fund. As of the date hereof, no other Managed Company other than the Global Credit Fund has priority over the Master Fund with respect to investment opportunities; |
· | Colony NorthStar, and its affiliates are not restricted from forming additional investment funds, from entering into other investment advisory relationships or from engaging in other business activities, even though such activities may compete with the Master Fund and/or may involve substantial time and resources of Colony NorthStar and its affiliates. These activities could be viewed as creating a conflict of interest in that the time and effort of the members of Colony NorthStar and its affiliates’ officers and personnel will not be devoted exclusively to the business of the Master Fund but will be allocated between the business of the Master Fund and the management of the monies of other advisees of affiliates of Colony NorthStar. Affiliates of Colony NorthStar may engage in investment advisory business with accounts that compete with the Master Fund and have no obligation to make their investment opportunities available to the Master Fund; |
· | To the extent permitted by the 1940 Act and interpretations of the staff of the SEC, and subject to the allocation policies of the Advisor and its affiliates, the Advisor may determine it appropriate for the Master Fund and one or more Managed Companies to co-invest in an investment opportunity. The Fund may seek exemptive relief from the SEC to engage in co-investment opportunities with Colony NorthStar and its affiliates, including NorthStar Income and NorthStar Income II or other future vehicles. However, there can be no assurance that the Master Fund will obtain such exemptive relief. Any of these co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among the Master Fund and the other participating accounts. To mitigate these |
conflicts, Colony NorthStar will seek to execute such transactions for all of the participating investment accounts, including the Master Fund, on a fair and equitable basis and in accordance with its allocation policies, taking into account such factors as the relative amounts of capital available for new investments and the investment programs and portfolio positions of the Master Fund, the clients for which participation is appropriate and any other factors deemed appropriate; and
· | The 1940 Act prohibits certain “joint” transactions with certain of the Master Fund’s affiliates, which could include investments in the same portfolio company (whether at the same or different times), without the prior approval of the SEC. If a person, directly or indirectly, acquires more than 5% of the voting securities of the Master Fund, or the Advisor, the Master Fund will be prohibited from buying any securities or other property from or selling any securities or other property to such person or certain of that person’s affiliates, or entering into joint transactions with such persons, absent the availability of an exemption or prior approval of the SEC. Similar restrictions limit the Master Fund’s ability to transact business with its officers or trustees or their affiliates. The SEC has interpreted the 1940 Act rules governing transactions with affiliates to prohibit certain “joint transactions” involving entities that share a common investment adviser. As a result of these restrictions, the scope of investment opportunities that would otherwise be available to the Fund may be limited. |
(a)(3) Colony NorthStar’s compensation and incentive structure covers investment personnel who render services to the Master Fund on behalf of the Advisor and is designed to align the interests of the investment personnel serving the Master Fund with those of Fund shareholders.
Each of Colony NorthStar’s senior executives, including each of the investment personnel who render services to the Master Fund on behalf of the Advisor receives a base salary and is eligible for a discretionary cash bonus and incentive compensation in the form of long term incentive equity grants in Colony NorthStar. Cash bonuses are determined, in part, by applying objective corporate financial metrics that encompass meaningful components of Colony NorthStar’s business and, in part, based on a subjective evaluation of pre-established personal performance targets applicable to the responsibilities of the individual executive as set by Colony NorthStar’s Compensation Committee or senior executives of Colony NorthStar.
Mr. Gilbert’s base salary for 2017 consists of $1 and he will not be entitled to receive any incentive compensation.
(a)(4) Securities Ownership of Portfolio Managers
The following table shows the dollar range of equity securities in the RE Capital Fund beneficially owned by each member of the Advisor’s investment committee as of February 28, 2017.
Name of Investment Committee Member |
Dollar Range of Equity Securities in the RE Capital Fund(1) | |
Daniel R. Gilbert | None | |
Richard B. Saltzman | None | |
Mark M. Hedstrom | None | |
Kevin P. Traenkle | None | |
Robert C. Gatenio | None | |
Brett S. Klein | None | |
Sujan S. Patel | None |
(1) Dollar ranges are as follows: None, $1 – $10,000, $10,001 – $50,000, $50,001 – $100,000, $100,001 – $500,000, $500,001 – $1,000,000 or over $1,000,000.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There were no material changes to the procedures by which the RE Capital Fund’s shareholders may recommend nominees to the RE Capital Fund’s board of trustees during the period covered by this annual report on Form N-CSR.
Item 11. Controls and Procedures.
(a) | The RE Capital Fund’s principal executive officer and principal financial officer have evaluated the RE Capital Fund’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act) as of a date within 90 days of the filing date of this annual report on Form N-CSR and have concluded that the RE Capital Fund’s disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the RE Capital Fund in this annual report on Form N-CSR was recorded, processed, summarized and reported timely. |
(b) | There was no change in the RE Capital Fund’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this annual report on Form N-CSR that has materially affected, or is reasonably likely to materially affect, the RE Capital Fund’s internal control over financial reporting. |
Item 12. Exhibits.
(a)(1) | The code of ethics, or any amendment thereto, that is the subject of the disclosure required by Item 2 is attached hereto. |
(a)(2) | The certifications of the RE Capital Fund’s Chief Executive Officer and Chief Financial Officer required by Rule 30a-2(a) under the 1940 Act are attached hereto. |
(a)(3) | Not applicable. |
(a)(4) | The Proxy Voting Policies and Procedures of the RE Capital Fund are attached hereto in response to Item 7. |
(b) | The certifications of the RE Capital Fund’s Chief Executive Officer and Chief Financial Officer required by Rule 30a-2(b) under the 1940 Act are attached hereto. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NorthStar Real Estate Capital Income Fund | ||
By: | /s/ Daniel R. Gilbert | |
Daniel R. Gilbert | ||
Chief Executive Officer and President | ||
Date: February 28, 2017 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/ Daniel R. Gilbert | |
Daniel R. Gilbert | ||
Chief Executive Officer and President | ||
(Principal Executive Officer) | ||
Date: February 28, 2017 | ||
By: | /s/ Frank V. Saracino | |
Frank V. Saracino | ||
Chief Financial Officer and Treasurer | ||
(Principal Financial Officer) | ||
Date: February 28, 2017 |
Exhibit (a)(1)
NorthStar Real Estate Capital Income Master Fund
NorthStar Real Estate Capital Income Fund
NorthStar Real Estate Capital Income Fund-T
CNI RECF Advisors, LLC
CNI TCEF Advisors, LLC
Joint Code of Ethics
Background
Rule 204A-1 under the Advisers Act requires each registered investment adviser to adopt and implement a written code of ethics. Additionally, Rule 17j-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), requires each investment adviser to a registered investment company (“RIC”) to adopt and implement a written code of ethics. An investment adviser’s code of ethics must contain provisions regarding:
· | The adviser’s fiduciary duty to its clients; |
· | Compliance with all applicable Federal Securities Laws; |
· | Reporting and review of personal securities transactions and holdings; |
· | Reporting of violations of the code; and |
· | The provision of the code to all supervised persons and acknowledgement of reciprocity |
by supervised persons.
Definitions
The following defined terms are used throughout this Manual, while other terms are defined within specific policies and procedures:
1. | “Access Persons” – Any Colony Capital Supervised Person who (1) has access to Non-Public Information1 regarding any Clients’ purchase or sale of Securities, or Non-Public Information regarding the portfolio holdings of any Reportable Fund, or (2) who is involved in making Securities recommendations to Clients, or who has access to such recommendations that are non-public. |
2. | “Advisers Act” – Investment Advisers Act of 1940, as amended from time to time. |
3. | “Automatic Investment Plan” – A program that allows an individual to have a set amount electronically transferred from one account to another at a specified frequency. Examples include stock and mutual fund reinvestment programs, defined contribution plans, mutual fund contribution programs, and automatic withdrawal plans. |
4. | “Beneficial Ownership” – As set forth under Rule 16a-1(a)(2), determines whether a person is subject to the provision of Section 16 of the Exchange Act, and the rules and regulations thereunder, which generally encompasses those situations in which the beneficial owner has the right to enjoy some direct or indirect “pecuniary interest” (i.e., some economic benefit) from the ownership of a Security. This may also include Securities held by members of a Colony Capital Supervised Person’s Immediate Family sharing the same household; provided however, this presumption may be rebutted. Any report of beneficial ownership required thereunder shall not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the Securities to which the report relates. |
5. | “CAO” – Neale W. Redington, Chief Accounting Officer of Colony NorthStar, Inc. |
6. | “CLNS” – Colony NorthStar, Inc., a New York Stock Exchange listed real estate investment trust. |
7. | “CCO” – Leon Schwartzman, Chief Compliance Officer of Colony Capital Investment Advisors, LLC. References in the Manual to the CCO shall be deemed to include any designee appointed by and under the direction of the CCO. |
8. | “CFO” – Darren J. Tangen, Executive Director and Chief Financial Officer of Colony NorthStar, Inc. |
9. | “Client Restricted List” – A list of issuers as set forth in the Relationship with Colony Capital Investment Activities policy. |
10. | “Clients” – Colony Capital Private Funds, RICs, and NTRs. |
11. | “CLO” – Ronald M. Sanders, Executive Director and Chief Legal Officer of Colony NorthStar, Inc. |
12. | “Colony Capital” – Colony Capital Investment Advisors, LLC, a registered investment adviser, together with the following affiliates of Colony Capital Investment Advisors, LLC: Colony NorthStar Advisors, LLC; Colony Realty Partners, LLC; ColInvest Italy Srl; CDCF IV Investment Advisor, LLC; Colony Industrial Investment Advisor, LLC; Colony NorthStar US, LLC; NSAM J-NRE Ltd; NSAM J-NSHC Ltd; NSAM J-NSI Ltd; NSAM J-NSII Ltd; NSAM J-NS/RXR Ltd; Colony NorthStar Bermuda, Ltd; Colony NorthStar-N Luxembourg S.à r.l.; Colony NorthStar UK, Ltd.; Healthcare Opportunity JV, LP.; CNI CCEF Advisors, LLC; CNI RECF Advisors, LLC; CNI TCEF Advisors, LLC; NSAM D-FCVP, LLC. |
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13. | “Colony Capital Private Funds” – Colony Capital’s private pooled investment vehicles and co-investment vehicles. |
14. | “Colony Capital Supervised Person” – Any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of Colony Capital, or other person who provides investment advice on behalf of Colony Capital and is subject to the supervision and control of Colony Capital. |
15. | “COO” – Mark M. Hedstrom, Executive Director and Chief Operating Officer of Colony NorthStar, Inc. |
16. | “Covered Associate” – Any of the following: (i) President or CEO of Colony Capital; (ii) Vice-Presidents in charge of principal Colony Capital business units, divisions or functions; (iii) any other officer or individual who performs a policy-making function for Colony Capital; (iv) Managing Member, General Partner, and any other individual with similar status or function as a Managing Member or General Partner, or individual described in (i)-(iii) above); (v) Colony Capital Supervised Persons who solicit a Government Entity for the purpose of obtaining or retaining a government client for investment advisory services business for Colony Capital, and Colony Capital Supervised Persons who, directly or indirectly, supervise such solicitors; and (vi) any PAC controlled by any person identified above, or by Colony Capital. |
17. | “Exchange Act” – Securities Exchange Act of 1933, as amended from time to time. |
18. | “Federal Securities Laws” – Means the Securities Act, Exchange Act, Sarbanes-Oxley Act of 2002, as amended from time to time, 1940 Act, Advisers Act, Title V of the Gramm-Leach-Bliley Act, as amended from time to time, Dodd-Frank Act of 2010, as amended from time to time, any rules adopted by the SEC under any of these statutes, the Bank Secrecy Act, as amended from time to time, as it applies to funds and investment advisers, and any rules adopted thereunder by the SEC or the U.S. Department of the Treasury. |
19. | “FINRA” – The Financial Industry Regulatory Authority. |
20. | “Front-Running” – A practice generally understood to be investment advisory personnel personally trading ahead of Client accounts. |
21. | “Immediate Family” – Include children, step-children, grand-children, parents, step-parents, grandparents, spouses, domestic partners, siblings, parents-in-law, and children-in-law, as well as adoptive relationships that meet these criteria. |
22. | “Investors” – Limited partners, non-managing members and/or shareholders in the Clients. |
23. | “IPO” – Any public offering of securities under the Securities Act, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act. |
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24. | “Limited Offering” – A private offering of Securities that are not required to be registered under the Securities Act because the offering meets an exemption pursuant to Section 4(2) or Section 4(6) or pursuant to Rules 504, 505, or 506 of Regulation D. |
25. | “Manual” – This Code of Conduct and Regulatory Compliance Manual. |
26. | “NRE” – NorthStar Realty Europe Corp. (NYSE: NRE). |
27. | “NTR” – Non-traded REITs managed and/or advised by Colony NorthStar, Inc. |
28. | “PAC” – A political action committee. |
29. | “Portfolio Managers” – Colony Capital Supervised Persons who manage Clients’ investments. |
30. | “PPM” – A Private Placement Memorandum. |
31. “Prospects” – Prospective investors with whom Colony Capital is discussing a possible investment in a Client.
32. | “RIC CCO” – Sandra M. Forman, the Chief Compliance Officer for any investment companies, managed by Colony Capital affiliated entities, that registered under the 1940 Act. |
33. | “RIC Client” – A RIC which is a Client of Colony Capital or an affiliate either in an advisory or sub-advisory capacity. |
34. | “Schwab CT” – Schwab Compliance Technologies, Colony’s web-based compliance software system. |
35. | “SEC” – The U.S. Securities and Exchange Commission. |
36. | “Securities Act” – Securities Act of 1933, as amended from time to time. |
37. | “Security” – Any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, or warrant or right to subscribe to or purchase any of the foregoing; all forms of limited partnership and limited liability company interests, including interests in private investment funds (such as hedge funds), and interests in investment clubs; foreign |
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unit trusts and foreign mutual funds; all derivative instruments; or all shares in all exchange-traded funds.
38. | “Service Provider” – A person or entity that receives, stores, maintains, processes, or otherwise is permitted access to Protected Information through its provision of services directly to Colony Capital. |
39. | “Subscription Documents” – The subscription agreement, limited partnership agreement, Form W-9 and other documents required to be completed by each Investor to invest in a Client. |
40. | “Supervised Person Restricted List” – A list of issuers as set forth in the Personal Security Transaction Policy. |
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This Code of Ethics is predicated on the principle that Colony Capital owes a fiduciary duty to its Clients and Investors. Accordingly, Colony Capital Supervised Persons must avoid activities, interests and relationships that run contrary (or appear to run contrary) to the best interests of its Clients and Investors. At all times, Colony Capital and all Colony Capital Supervised Persons will:
· | Place Client and Investor interests ahead of Colony Capital’s – As a fiduciary, Colony Capital will serve in its Clients’ and Investors’ best interests. In other words, Colony Capital Supervised Persons may not benefit personally at the expense of Clients or Investors. This concept is particularly relevant when Colony Capital Supervised Persons are making personal investments in Securities that are part of the universe of Securities being considered by a Portfolio Manager for inclusion, or have already been placed, into the Client’s portfolio. |
· | Engage in personal investing that is in full compliance with Colony Capital’s Code of Ethics – All Colony Capital Supervised Persons must review and abide by Colony Capital’s Personal Securities Transaction policies and Insider Trading policy. |
· | Avoid taking advantage of a Colony Capital position – All Colony Capital Supervised Persons must not accept investment opportunities, gifts or other gratuities from individuals seeking to conduct business with Colony Capital, unless in compliance with the gift policy below. |
· | Maintain full compliance with the Federal Securities Laws – All Colony Capital Supervised Persons must abide by all applicable federal securities laws, including the standards set forth in Rule 204A-1 under the Advisers Act and Rule 17j-1 under the 1940 Act. |
Any questions with respect to Colony Capital’s Code of Ethics should be directed to the CCO or designee. As discussed in greater detail below, Colony Capital Supervised Persons must promptly report any violations of the Code of Ethics to the CCO or designee. All reported Code of Ethics violations will be treated as though made on an anonymous basis.
Guiding Principles & Standards of Conduct
All Colony Capital Supervised Persons will act with competence, dignity, integrity, and in an ethical manner when dealing with Clients, Investors, the public, Prospects, third-party Service Providers and each other. The following set of principles frame the professional and ethical conduct that Colony Capital expects from Colony Capital Supervised Persons:
· | Act with integrity, competence, diligence, respect, and in an ethical manner; |
· | Place the interests of Clients, Investors, and Colony Capital above one’s own personal interests; |
· | Adhere to the standard that Colony Capital Supervised Persons should not take inappropriate advantage of their position; |
· | Avoid any actual or potential conflict of interest; |
· | Conduct all personal Securities transactions in a manner consistent with this policy; |
· | Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities; and |
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· | Comply with applicable provisions of the Federal Securities Laws. |
Use of Colony Capital or Client Funds or Property
No Colony Capital Supervised Person shall appropriate, or permit any other Colony Capital Supervised Person to appropriate for his or her personal use, any funds or property belonging to Colony Capital or to Clients. Misappropriation of funds or property is theft and, in addition to subjecting a Colony Capital Supervised Person to possible criminal and civil penalties, will result in disciplinary action.
No payment by or on behalf of Colony Capital shall be approved or made if any part of the payment is to be used for any purpose other than that described in the documents supporting the payment. Records shall be maintained that in reasonable detail accurately and fairly reflect the transactions they describe and the disposition of any funds or property of Colony Capital. Any questions regarding the propriety of any use of Colony Capital funds or property should be directed to the CCO, CFO or CAO.
The identity of each Client and all other protected information are firm property, and Clients may not be solicited by Colony Capital Supervised Persons for any services other than those offered by Colony Capital.
Confidentiality
Colony Capital generates, maintains and possesses information that it views as proprietary, and it must be held strictly confidential by Colony Capital Supervised Persons. This information includes, but is not limited to: PPMs; limited partnership and limited liability company agreements; agreements governing managed accounts; Investor lists and information about Colony Capital’s Investors generally; investment positions; research analyses and trading strategies; investment performance; internal communications; legal advice; and computer access codes. Colony Capital Supervised Persons may not use proprietary information for their own benefit or for the benefit of any person other than Colony Capital. In addition, Colony Capital Supervised Persons may not disclose proprietary information to anyone outside Colony Capital, except in connection with the business of Colony Capital and in a manner consistent with Colony Capital’s interests or as required by applicable law, regulation or legal process after notice to the CCO provided, however, that nothing herein shall be interpreted to prohibit personnel from reporting possible violations of federal or state law or regulation to or otherwise responding to or cooperating with an investigation by, or communicating with, any governmental agency or entity, including the SEC, or making other disclosures that are protected under the whistleblower provisions of federal, state or local law or regulation. Failure to maintain the confidentiality of this information may have serious detrimental consequences for Colony Capital, its Clients and the Colony Capital Supervised Person who breached the confidence.
In order to safeguard Colony Capital’s confidential information, Colony Capital Supervised Persons are expected to abide by the following:
· | Never remove any confidential information from Colony Capital’s premises, unless absolutely necessary for business purposes (and, if so, the information must be kept in |
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the possession of the Colony Capital Supervised Person or in a secure place at all times and returned promptly to Colony Capital’s premises); |
· | Exercise caution in displaying documents or discussing confidential information in public places such as in elevators, restaurants, or on public transportation, or in the presence of outside vendors or others not employed by Colony Capital; |
· | Exercise caution when using e-mail, cellular telephones, facsimile machines or messenger services; |
· | Never leave documents containing confidential information in conference rooms, wastebaskets, or desks, or anywhere else where the information could be seen or retrieved; |
· | Never disclose computer or voicemail passwords or website access codes to anyone else at Colony Capital or outside Colony Capital; and |
· | Never share confidential information with anyone at Colony Capital except on a need-to-know basis. |
Colony Capital’s restrictions on the use of confidential information continue in effect after termination of a Colony Capital Supervised Person’s employment with Colony Capital, unless specific written permission is obtained from the CCO. Any questions regarding Colony Capital’s policies and procedures on the use of confidential information should be brought to the CCO.
Distribution of the Code and Acknowledgement of Receipt
Colony Capital will distribute the Manual, which contains the Code of Ethics among other policies and procedures, to each Colony Capital Supervised Person upon the commencement of employment, annually, upon any material change to the Code and upon any material change to any other portion of the Manual. All Supervised Persons must acknowledge that they have received, read, understood and agree to comply with Colony Capital’s policies and procedures described in the Manual, including this Code. In addition, Supervised Persons will be required to fill out the Compliance Questionnaire annually. The Manual may also be accessed at any time through Schwab CT or Colony Capital’s intranet.
Conflicts of Interest
Conflicts of interest may exist between various individuals and entities, including Colony Capital, Colony Capital Supervised Persons and current or prospective Clients and Investors. Any failure to identify or properly address a conflict can have severe negative repercussions for Colony Capital, its Supervised Persons and/or Clients and Investors. In some cases, the improper handling of a conflict could result in litigation and/or disciplinary action and even criminal penalties.
Colony Capital’s policies and procedures have been reasonably designed to identify and properly disclose, mitigate and/or eliminate applicable conflicts of interest. However, written policies and procedures cannot address every potential conflict, so Supervised Persons must use good judgment in identifying and responding appropriately to actual or apparent conflicts. Conflicts of interest that involve Colony Capital and/or its Supervised Persons on one hand and Clients and/or Investors on the other hand will generally be appropriately disclosed and/or resolved in a way that the interests of Colony Capital and its Supervised Persons are not placed ahead of
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Clients’ or Investors’ interests. If a Supervised Person believes that a conflict of interest has not been identified or appropriately addressed, that Supervised Person should bring the issue to the CCO’s or designee’s attention.
In some instances, the interests of one or more Clients, Investors or groups of Clients or Investors may come into conflict. Responding appropriately to these types of conflicts can be challenging and may require disclosures if there is any appearance that one or more Clients or Investors have been unfairly disadvantaged. Colony Capital Supervised Persons should notify the CCO or designee if it appears that any such actual or apparent conflict of interest has not been appropriately addressed.
Disclosure
Colony Capital shall describe its Code of Ethics to Investors in Part 2A, Item 11 of Form ADV and, upon request, will furnish current or prospective Clients or certain Investors with a copy of the Code of Ethics. All such requests for Colony Capital’s Code of Ethics shall be directed to the CCO or designee.
Responsibility
The CCO will be responsible for administering the Code of Ethics. All questions regarding the policy should be directed to the CCO.
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1.1 | Personal Security Transaction Policy |
Colony Capital Supervised Persons may not purchase or sell any Security in which such person has or would have a Beneficial Ownership unless the transaction occurs in an exempted Security or such person has complied with the policy set forth below.
Colony Capital’s Personal Security Transaction Policy extend to all Colony Capital Supervised Persons, which includes all “access persons” as that term is defined in the Advisers Act and the rules thereunder; however, application of this policy to any particular person shall not be deemed an admission by Colony Capital that such person is an Access Person under the Advisers Act. Colony Capital reserves the right to grant exceptions to this policy to persons who are not “access persons” when appropriate and if consistent with the Advisers Act and the rules thereunder.
Review Procedures for Reportable Securities
All Colony Capital Supervised Persons must provide the CCO or designee for review duplicate copies of all trade confirmations for all personal Securities transactions and monthly statements for all personal Securities accounts in which such person is a Beneficial Owner. In order to help ensure that duplicate trade confirmations and monthly statements are received for all accounts pertaining to a particular Colony Capital Supervised Person, such person must complete and provide to CCO or designee (either in a hard copy format or on Schwab CT) detailing each bank, broker or dealer maintaining an account on behalf of the person or in which such person is a Beneficial Owner. Colony Capital reserves the right to disapprove any transaction that may have the appearance of improper conduct and may require the Colony Capital Supervised Person to reverse the transaction and disgorge any profits.
Supervised Person Restricted List
The CCO maintains a confidential Supervised Person Restricted List relating to personal trading by Colony Capital Supervised Persons, used to track companies and to monitor trades made by Colony Capital Supervised Persons to ensure compliance with this Manual and applicable law. This list will be compiled and regularly updated by the CCO, with input from the Colony Capital investment team and the Colony Capital legal team. Colony Capital Supervised Persons may access the Supervised Person Restricted List via the Colony Capital portal or Schwab CT but may not disclose any of the Securities on the Supervised Person Restricted List to a person who is not a Colony Capital Supervised Person.
The Supervised Person Restricted List contains the list of companies of which Colony Capital (a) may be in a position to receive Material Non-Public Information (as described below) or (b) has plans to take a position in Client accounts or in which Colony Capital has recently taken a position in Client accounts. Companies will typically be removed from this list five business days after the Securities of such companies have been added to or removed from Client portfolios, or longer at the discretion of the CCO.
Securities or issuers may be placed on the Supervised Person Restricted List if Colony Capital may be in a position to receive Material Non-Public Information. This includes, but is not limited
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to, the following: companies on whose creditor committee a Colony Capital Supervised Person serves; companies with which Colony Capital has significant affiliations, such as through directorships; companies with which Colony Capital has contractually agreed not to trade (e.g., pursuant to a “lock-up” provision); companies with which Colony Capital has entered into a non-disclosure agreement; and any other company that the CCO in his sole discretion may determine to list. In addition, the CCO may place a company or its Securities on the Supervised Person Restricted List in order to avoid the appearance of misuse of Material Non-Public Information. Restrictions with regard to Securities on the Supervised Person Restricted List also extend to options, rights or warrants relating to those Securities and any Securities convertible into those Securities.
Prior to effecting a transaction in any Reportable Security, a Colony Capital Supervised Person will confirm that such Security is not on the Supervised Person Restricted List. A Colony Capital Supervised Person is forbidden from trading (for his or her account or for any account in which he or she has any Beneficial Ownership) in Securities on the Supervised Person Restricted List unless pre-clearance is granted by the CCO or designee.
Pre-clearance Procedures
Colony Capital Supervised Persons must submit requests to, and obtain pre-clearance approval from, the CCO or designee prior to investing in any IPOs, Limited Offerings, or investments in Securities or companies on the Supervised Person Restricted List. All requests should be submitted through Schwab CT. For investments in Securities or companies on the Supervised Person Restricted List, a Colony Capital Supervised Person has two (2) days from the date of approval to purchase or sell such security.
Investments in Initial Public Offerings
Colony Capital Supervised Persons that have the authority to buy and sell securities for any Client are precluded under FINRA rules from purchasing shares of IPOs. Colony Capital Supervised Persons that serve as officers or directors of public companies and certain covered non-public companies may be precluded under FINRA rules from purchasing IPOs in any account in which such persons have any Beneficial Ownership.
Investments in Limited Offerings
No Colony Capital Supervised Person shall acquire, directly or indirectly, any Beneficial Ownership in any Limited Offering without first obtaining prior approval of the CCO or designee. The CCO or designee shall (a) obtain from such person the full details of the proposed transaction (including written certification that the investment opportunity did not arise by virtue of such person’s activities on behalf of a Client); and (b) conclude, after consultation with a Portfolio Manager (who has no personal interest in the issuer of the limited offering), that no Clients are participating in the offering or have any foreseeable interest in purchasing such Security. The CCO or designee shall keep a record of such approval and the reasons supporting such conclusion. The CCO or designee may request a copy of any offering materials (subscription agreement, etc.) associated with the Limited Offering.
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With regard to a Colony Capital Supervised Person’s investment in a Limited Offering sponsored by Colony Capital or an affiliate of Colony Capital, such person shall not be required to obtain pre-approval for an “initial” investment or subscription to such affiliated limited offering. Rather, the acceptance of a subscription document shall serve as evidence of pre-approval of such person’s investment in the affiliated limited offering. All subsequent investments in such affiliated limited offering(s) that do not require the execution of additional Subscription Documents will require pre-approval. For the avoidance of doubt, capital contributions under an existing Limited Offering to satisfy obligations under such limited offering is not a subsequent investment for the purposes of this policy.
Investments in Securities or Companies on the Supervised Person Restricted List
No Colony Capital Supervised Person shall acquire any Beneficial Ownership in any Security or company on the Supervised Person Restricted List without first obtaining prior approval of the CCO or designee. The CCO or designee shall obtain from such person the full details of the proposed transaction including confirmation that the Supervised Person does not possess any Material Non-Public Information about such Security or company. The CCO or designee shall keep a record of such approval and the reasons supporting such conclusion.
Reportable and Exempt Securities
Colony Capital requires Colony Capital Supervised Persons to provide for post-transaction review and provide periodic reports (see Reporting section below) regarding transactions and holdings in any Security (i.e., a Reportable Security), including:
· | Any note, stock, or bond; |
· | Limited partnership and limited liability company interests, including interests in private investment funds (such as private equity funds and hedge funds); |
· | All derivative instruments; |
· | Shares in all exchange-traded funds. |
Transactions and holdings which are exempt from reporting include:
· | Direct obligations of the Government of the United States; |
· | Bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; |
· | Shares issued by money market funds; |
· | Shares issued by open-end mutual funds other than Reportable Funds; and |
· | Shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are Reportable Funds. |
A “Reportable Fund” means any registered fund for which Colony Capital serves as the investment adviser as defined in Section 2(a)(20) of the 1940 Act, or any registered fund whose investment adviser or principal underwriter controls Colony Capital, is controlled by Colony Capital, or is under common control with Colony Capital. For purposes of the preceding sentence, “control” means the power to exercise a controlling influence over the management or
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policies of a company and is presumed to exist if a person beneficially owns directly or indirectly more than 25% of a company’s outstanding voting Securities.
A “Reportable Security” means any Security, with five (5) exceptions: (1) transactions and holdings in direct obligations of the Government of the United States; (2) money market instruments, bankers’ acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments; (3) shares of money market funds; (4) transactions and holdings in shares of other types of mutual funds, unless Colony Capital or a control affiliate acts as the investment adviser or principal underwriter for the fund; and (5) transactions in units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated mutual funds.
Commodities, futures and options traded on a commodities exchange, including currency futures are not considered Securities. However, Securities purchased in an initial public offering, swaps, futures and options on any single Security or group or index of Securities and other derivatives relating to Securities shall be considered Securities.
Beneficial Ownership
Beneficial Ownership of a Security means any interest in securities whereby a person directly or indirectly, through any contract, arrangement, understanding or otherwise has or shares a direct or indirect “pecuniary interest” in securities. The definition of “pecuniary interest” is complex but generally includes an interest held by a person that provides the person the opportunity to profit or share in any profit derived from a transaction in the securities.
Beneficial ownership includes, but is not limited to:
· | Securities held in a person’s own name. |
· | Securities held with another in joint ownership arrangements (such as a joint account with a spouse). |
· | Securities held by members of such person’s Immediate Family sharing the same household. Immediate Family means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law. Adoptive relationships are included. |
· | Securities owned by a legal entity that is directly or indirectly controlled by, or under common control with, such person, such as a person’s interests as a general partner in Securities held by a general or limited partnership or interests as a manager/member in the Securities held by a limited liability company. |
Generally, Securities held in accounts that are managed by an unaffiliated third party on a fully discretionary basis are exempt from the reporting requirements. In addition, Colony Capital Supervised Persons are not considered to have an indirect pecuniary interest in Securities held by entities in which they hold an equity interest unless they are a controlling equity holder or they share investment control over the Securities held by the entity.
The following circumstances constitute Beneficial Ownership of Securities held by a trust:
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· | Ownership of Securities as a trustee where either the Colony Capital Supervised Person or members of such person’s Immediate Family have a vested interest in the principal or income of the trust; |
· | Ownership of a vested beneficial interest in a trust; and |
· | A Colony Capital Supervised Person with the status as a settlor/grantor of a trust, unless the consent of all of the beneficiaries is required in order for such person to revoke the trust. |
Permissible Trades Subject to Trading Plans
Directors, officers and employees of Colony Capital (collectively, “Eligible Insiders”) are permitted to trade in CLNS, NRE, NTR and RIC Securities, regardless of their awareness of inside information if the transaction is made pursuant to a pre-arranged trading plan (a “Trading Plan”) that was entered into when the Eligible Insider was not in possession of Material Non-Public Information. This policy requires Trading Plans to be written and to specify the amount of, date on and price at which the CLNS, NRE, NTR and RIC Securities are to be traded or establish a formula for determining such. An Eligible Insider who wishes to enter into a Trading Plan must submit the Trading Plan to the CCO and/or CLO for approval prior to the adoption of the Trading Plan. Trading Plans may not be adopted when the Eligible Insider is in possession of Material Non-Public Information about CLNS, NRE, NTR and RIC Securities. An Eligible Insider may amend or replace his or her Trading Plan only during periods when trading is permitted in accordance with this policy.
Trading Windows
In order to ensure compliance with U.S. laws prohibiting trading on inside information, Colony Capital Supervised Persons are prohibited from trading in CLNS, NRE, NTR or RIC Securities except: (i) during the period beginning after the close of trading two business days following CLNS, NRE, NTR or RIC Securities widespread public release of quarterly or year-end earnings and ending at the close of trading on the last day of the third calendar month of each quarter; (ii) pursuant to a Trading Plan; or (iii) as approved by the CLO or CCO.
Quarter | Blackout Period Begins | Blackout Period Ends |
1Q | March 31 | Two business days after Q1 earnings are publicly released (typically early May) |
2Q | June 30 | Two business days after Q2 earnings are publicly released (typically early August) |
3Q | September 30 | Two business days after Q3 earnings are publicly released (typically early November) |
4Q | December 31 | Two business days after annual earnings are publicly released (typically mid-February) |
Investment Personnel Blackout Period
Colony Capital Supervised Persons who, in connection with their regular duties, make, participate in, or obtain information regarding the purchase of Securities by a RIC Client or whose functions relate to the making of any recommendations with respect to the purchase or
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sales of Securities for any RIC Client may not purchase or sell, directly or indirectly, any Security in which they have (or by reason of any such transaction acquire) any beneficial ownership on the same day or for 15 days after the Security is being purchased or sold by a RIC Client.
Reporting
Transaction Reports
Colony Capital Supervised Persons are required to instruct their broker-dealers to send to the CCO or designee or to such Service Provider engaged by Colony Capital duplicate broker trade confirmations as trades are executed and account statements of such person which shall be received quarterly. If such person’s trades do not occur through a broker-dealer (i.e., purchase of a private investment fund), such transactions shall be reported separately via Schwab CT to the CCO or designee or to such Service Provider with all pertinent transaction details. The transaction reports shall contain at least the following information for each transaction in a Reportable Security:
(a) the date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Reportable Security involved;
(b) the nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(c) the price of the Reportable Security at which the transaction was effected;
(d) the name of the broker, dealer or bank with or through which the transaction was effected; and
(e) the date that the report is submitted.
Colony Capital Supervised Persons shall also report on a quarterly basis, the name of any account established by such person during the quarter in which any Securities were held during the quarter for the direct or indirect benefit of such person, the date the account was established, and the date the report was submitted.
Initial and Annual Holdings Reports
At or before the time a person becomes a Colony Capital Supervised Person, such person is required to report all of their personal Securities holdings not later than 10 days after the commencement of their becoming a Colony Capital Supervised Person (usually their date of employment or date or affiliation with Colony Capital) by completing forms on Schwab CT or forms given by the compliance department. The initial holdings report must be current as of a date not more than 45 days prior to the date the person becomes subject to this policy.
All Colony Capital Supervised Persons are required to provide the CCO or designee or such Service Provider with a complete list of Securities holdings on an annual basis, on or before February 14th of each year by completing forms on Schwab CT. The report shall be current as of December 31st, which is a date no more than 45 days from the final date the report is due to be submitted.
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Both the initial and annual holding report should contain, at a minimum:
(a) the date account opened, title and type of Security, and as applicable the exchange ticker symbol or CUSIP number, number of shares, and principal amount of each Reportable Security in which such person has any direct or indirect Beneficial Ownership;
(b) the name of any broker, dealer or bank with which such person maintains an account in which any Securities are held for such person’s direct or indirect benefit; and
(c) the date such person submits the report.
Exceptions from Reporting Requirements
A Colony Capital Supervised Person is not required to submit: 1) a transaction or initial and annual holdings report with respect to Securities held in accounts over which such person had no direct or indirect influence or control (i.e., any transactions occurring in an account that is managed on a fully-discretionary basis by an unaffiliated money manager and over which such Colony Capital Supervised Person has no direct or indirect influence or control and 2) a transaction report with respect to transactions effected pursuant to an Automatic Investment Plan. The CCO will determine on a case-by-case basis whether an account qualifies for either of these exceptions. In making this determination, the CCO may ask for supporting documentation, such as a copy of the Automatic Investment Plan or a copy of the discretionary account management agreement, and/or a written certification from an unaffiliated investment adviser.
Prohibition on Front-Running
Colony Capital strictly forbids Front-Running Client accounts, which is a practice generally understood to be personally trading ahead of Client accounts.
Monitoring and Testing
The CCO or designee will monitor Colony Capital Supervised Persons and periodically test for Colony Capital Supervised Persons’ compliance with Colony Capital’s policies and procedures, including personal securities trading. A different member of the Compliance Department will monitor the CCO’s personal Securities transactions for compliance with this policy.
The reason for the development of monitoring and testing of transactions is to ensure that Colony Capital has developed procedures to supervise the activities of its associated persons. The comparison of trades made by Colony Capital Supervised Persons to those of advisory Clients will identify potential conflicts of interest or the appearance of a potential conflict.
If Colony Capital discovers that a Colony Capital Supervised Person is personally trading contrary to these policies, then such person shall meet with the CCO to review the facts surrounding the transactions. This meeting will help Colony Capital to determine the appropriate course of action.
Reporting Violations and Remedial Actions
Colony Capital takes the potential for conflicts of interest caused by personal investing very seriously. As such, Colony Capital requires Colony Capital Supervised Persons to promptly
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report any violations of the Code of Ethics to the CCO or designee. Colony Capital’s management is aware of the potential matters that may arise as a result of this requirement, and shall take action against any Colony Capital Supervised Person that seeks retaliation against another for reporting violations of the Code of Ethics.
If any violation of this policy is determined to have occurred, the CCO may impose sanctions and take such other actions as he deems appropriate, including, without limitation, requiring that the trades in question be reversed, requiring the disgorgement of profits or gifts, issuing a letter of caution or warning, issuing a suspension of personal trading rights or suspension of employment (with or without compensation) of a Colony Capital Supervised Person, imposing a fine, making a civil referral to the SEC, making a criminal referral, and/or terminating employment for cause or any combination of the foregoing. All sanctions and other actions taken shall be in accordance with applicable employment laws and regulations. Any profits or gifts forfeited shall be paid to the applicable Client(s), if any, or given to a charity, as the CCO shall determine is appropriate.
No person shall participate in a determination of whether he or she has committed a violation of this policy or in the imposition of any sanction against himself or herself.
If the CCO determines that a material violation of the Code has occurred, the CCO will promptly report the violation, and any associated action(s), to the CLO and/or COO. Material violations of the Code will be reported to the RIC CCO on a quarterly basis (or more frequently at the CCO’s discretion). If senior management determines that the material violation may involve a fraudulent, deceptive or manipulative act, Colony Capital will report its findings to one or more of the RIC Clients’ board of directors or trustees pursuant to Rule 17j-1 of the 1940 Act.
Annual Reports to RIC Client Boards
No less frequently than annually, Colony Capital must furnish a report to the board of directors/trustees of each RIC Client. The written report must (i) describe any issues arising under the Code since the last report to the board, including, but not limited to, information about material violations of the Code and sanctions imposed in response to the material violations; and (ii) certify that Colony Capital has adopted procedures reasonably necessary to prevent Colony Capital Supervised Persons from violating the Code.
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1.2 | Insider Trading Policy |
Section 204A of the Advisers Act requires every investment adviser to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser’s business, to prevent the misuse of Material Non-Public Information by such investment adviser or any person associated with such investment adviser. In accordance with Section 204A, Colony Capital has instituted procedures to prevent the misuse of Non-Public Information. This policy applies to all Colony Capital Supervised Persons and any transactions in Securities participated in by family members, trusts or corporations directly or indirectly controlled by such persons.
Insider Trading – Tipper Liability
Insiders are prohibited from trading on information or tipping information to others that:
· | Insider has a duty to keep secret |
· | Is Material |
· | Is Non-public |
· | Insider gave the information to get a personal benefit (or himself traded) |
· | Trader knowingly had the information when trade was made |
· | Was provided with bad or at least reckless intent – insider knew or had reason to know the tippee would trade on the information |
Insider Trading – Tippee Liability
Trading or tipping on the basis of information that is:
· | Obtained from an insider/tipper who breached a duty to keep the information secret |
· | Material |
· | Non-public |
· | From an insider who got a personal benefit by tipping |
· | Trader knowingly had the information when trade was made |
· | Tippee had bad or at least reckless intent/knowledge – knew the information was obtained from the insider in breach of a duty or had reason to know |
Breach of a Duty
Traditional insiders at a company, such as officers and directors, have a duty to keep that company’s confidential information secret. Temporary insiders, such as lawyers and accountants, also have such a duty. Others are also often bound by a duty to the “owner” of information to keep it confidential, usually because of a written or unwritten understanding. Usually this is a Colony Capital Supervised Person, consultant, IR firm, bond rating firm, non-disclosure agreement signatory, etc. In additional, government officials have a duty to keep certain official information confidential, and breach of that duty could be a predicate for insider trading. Sometimes even a friend or family member owes such a duty.
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What Information is Material?
Information is “Material” if it would be substantially likely to influence the decisions of a reasonable investor, if that investor had knowledge of the information. Examples of potentially “material” information include a significant event that, when revealed, could affect investor perceptions about the company, such as:
· | Dividend or earnings announcements |
· | Write-downs or write-offs of assets |
· | Additions to reserves for bad debts or contingent liabilities |
· | Expansion or curtailment of company or major division operations |
· | Merger, joint venture announcements |
· | New product/service announcements |
· | Discovery or research developments |
· | Criminal, civil and government investigations and indictments |
· | Pending labor disputes |
· | Debt service or liquidity problems |
· | Bankruptcy or insolvency problems |
· | Tender offers, stock repurchase plans, etc. |
· | Recapitalization |
Information provided by a company could be material because of its expected effect on a particular class of a company’s Securities, all of the company’s Securities, the Securities of another company, or the Securities of several companies. The misuse of Material Non-Public Information applies to all types of Securities, including equity, debt, commercial paper, government Securities and options. Securities regulators will view the value of any information with a critical eye and with the benefit of hindsight. You should consult with the CLO or CCO before deeming any information as not “material.”
Material Information does not have to relate to a company’s business. For example, Material Information about the contents of an upcoming newspaper column may affect the price of a Security, and therefore be considered material.
What Information is Non-Public Information?
In order for issues concerning Insider Trading to arise, information must not only be material, but must also be “Non-Public Information”.
Once material non-public information has been effectively distributed to the investing public, it is no longer classified as material non-public information, (“Material Non-Public Information”). However, the distribution of Non-Public Information must occur through commonly recognized channels for the classification to change. In addition, the information must not only be publicly disclosed but also there must be adequate time for the public to receive and digest the information. Lastly, Non-Public Information does not change to public information solely by selective dissemination.
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Colony Capital Supervised Persons must be aware that even where there is no expectation of confidentiality, a person may become an insider upon receiving Material Non-Public Information.
Colony Capital Supervised Persons may also become insiders or tippees if they obtain Material Non-Public Information by happenstance, at social gatherings, by overhearing conversations, etc.
Benefit to the Tipper
The benefit to the tipper could be a monetary payment to the tipper or other tangible benefit. The “benefit” is not limited to a present or future monetary gain; it could be a reputational benefit or an expectation of a quid pro quo from the recipient by a gift of the information. For planning purposes, one should assume there was a benefit.
Trading “on the basis of” inside information involves:
· | Trading (i.e., purchase or sale, not simply holding) |
· | “On the basis of,” not just “knowing possession” of, the information when making the trade is enough for the trade to be “on the basis of” inside information. Asserting that one would have traded in the absence of the information or because of different information is not a defense. |
Bad Intent/Knowledge
To be held liable, an insider or tipper must know that the tippee was likely to trade on the information. A tippee must know that the insider violated a duty by providing the information. In the civil context (an SEC action, not a criminal case by the U.S. Department of Justice) recklessness as opposed to actual knowledge is enough. If you make an innocent mistake go to the compliance department. It is evidence of good intent. Consulting the compliance department before trading also shows good intent.
Selective Disclosure
Colony Capital Supervised Persons must never disclose the composition of Client portfolios to nonaffiliated third parties unless absolutely necessary for business purposes or as instructed by the Client. Federal Securities Laws may specifically prohibit the dissemination of such information and doing so may be construed as a violation of Colony Capital’s fiduciary duty to Clients. Selectively disclosing the portfolio holdings of a Client’s portfolio to certain investors or outside parties may also be viewed as Colony Capital engaging in a practice of favoritism. All inquiries that are received by Colony Capital Supervised Persons to disclose portfolio holdings must be immediately reported to the CCO.
Colony Capital will provide certain information relating to the performance of the Clients to Investors, as requested. All Investors are provided with the opportunity to request such information to ensure that no selective disclosure of such information has occurred.
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Relationships with Investors
Given Colony Capital’s standing in the investment community, executives of public companies and other well connected individuals have become Investors (sometimes called “value added investors”). While Colony Capital may occasionally converse with these individuals as part of the normal course of its research/due diligence process, Portfolio Managers and other Colony Capital Supervised Persons must be aware that the relationship could incentivize those individuals to divulge additional information (including Material Non-Public Information) to Colony Capital due to the potential for personal gain. Accordingly, Colony Capital will be cognizant of this potential conflict and take extra precautions when discussing investment matters with Investors that are employed by companies in Colony Capital’s investable universe. In the ordinary course, this should not limit or restrict Colony Capital from providing reports to such investors that are substantially similar to what is provided to other investors.
Obtaining Research from Political Participants
Colony Capital Supervised Persons must consult with the CCO or designee prior to seeking research or other information from participants in non-public political processes. This obligation may apply to elected officials, lobbyists and political staff members. The CCO or designee may discuss the matter with the CLO, outside counsel and/or chaperone any meetings or telephone calls with the information provider.
Paying Industry Experts for Research
Colony Capital Supervised Persons may consult with paid industry experts as part of the Company’s research process. Such experts may be privy to Material Non-Public Information via their current and/or prior employment arrangements, other business activities, personal and professional contacts and/or for other reasons. As such, Colony Capital Supervised Persons should use caution when communicating with such experts and immediately report the receipt of any potentially Material Non-Public Information to the CCO and/or Colony Capital’s legal team.
Intentional Receipt of Non-Public Information about Public Issuers
In certain circumstances Colony Capital may intentionally obtain Non-Public Information about public issuers. For example, the Company might be provided with Non-Public Information in connection with executing a confidentiality agreement. Colony Capital’s receipt of Non-Public Information about a public issuer may limit the Company’s ability to invest in that issuer’s public Securities, so Colony Capital Supervised Persons should carefully consider the benefits and limitations before Non-Public Information is received. Only authorized signers can sign confidentiality agreements and non-disclosure agreements on Colony Capital’s behalf, following legal review and approval. All executed confidentiality agreements containing any potentially Material Non-Public Information should be made available to the CCO or designee at all times. This applies whether the subject of the confidential information is publicly traded or not. When appropriate, the CCO or designee will ensure that the issuer is placed on the Restricted List.
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Rumors
Creating or passing false rumors with the intent to manipulate Securities prices or markets may violate the antifraud provisions of Federal Securities Laws. Such conduct is contradictory to Colony Capital’s code of conduct as well as the Company’s expectations regarding appropriate behavior of its Supervised Persons. Colony Capital Supervised Persons are prohibited from knowingly circulating false rumors or sensational information that might reasonably be expected to affect market conditions for one or more Securities, sectors or markets or improperly influencing any person or entity.
This policy is not intended to discourage or prohibit appropriate communications between Colony Capital Supervised Persons and other market participants and investment counterparties. Colony Capital Supervised Persons should consult with the CLO, CCO or designee regarding questions about the appropriateness of any communications.
Procedures to Follow if Potentially in Possession of Material Non-Public Information
If a Colony Capital Supervised Person has questions as to whether they are in possession of Material Non-Public Information, they must inform the CLO, CCO or designee as soon as possible. Such person and the CLO, CCO or designee will then conduct research to determine if the information is likely to be considered important to Investors in making investment decisions, and whether the information has been publicly disseminated.
Given the severe penalties imposed on individuals and firms engaging in Insider Trading Policy, Colony Capital Supervised Persons:
· | Shall not trade the Securities of any company in which they are deemed insiders who may possess Material Non-Public Information about the company; |
· | Shall not engage in Securities transactions of any company, except in accordance with Colony Capital’s Personal Security Transaction Policy and the Federal Securities Laws; |
· | Shall submit personal Security trading reports in accordance with the Personal Security Transaction Policy; |
· | Shall not discuss any potential Material Non-Public Information with colleagues, except as specifically required by their position; |
· | Shall immediately report the potential receipt of Non-Public Information to the CLO, CCO or designee; and |
· | Shall not proceed with any research, trading, etc. until the CCO informs such person of the appropriate course of action. |
Client Restricted List
The CCO or Colony Capital’s legal team maintains a confidential Client Restricted List which is comprised of issuers with respect to which Colony Capital has received Non-Public Information and either (i) Colony Capital owns an interest in such company or has entered into a material joint venture with such company; (ii) Colony Capital has announced its intention or agreement to
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acquire an interest in such company or to engage in a material joint venture or capital transaction with such company; (iii) Colony Capital has entered into an agreement that prohibits the trading of Securities of such issuer; or (iv) Colony Capital is in a position to receive or otherwise has obtained Material Non-Public Information.
Clients are not permitted to trade Securities issued by companies on the Client Restricted List. The CCO or Colony Capital’s legal team will be responsible for alerting the Colony Capital investment team of Securities going onto, or coming off of, the Client Restricted List so that they will know whether or not they can trade them.
Companies may be removed from the Client Restricted List (i) if such company was placed on the Client Restricted List as a result of Colony Capital having acquired an interest in such company or having entered into a material joint venture with such company, at such time that Colony Capital has divested itself of its interest in such company or has exited the material joint venture with such company; (ii) if such company was placed on the Client Restricted List as a result of Colony Capital having made an announcement relating to such company, at such time that the information set forth in Colony Capital’s announcement has cleared the market; (iii) at such time that the agreement to acquire Non-Public Information expires or is terminated. Generally, companies will be removed from the Client Restricted List on the first business day following the announcement; or (iv) at such time that Colony Capital is no longer in a position to obtain and in fact does not possess Material Non-Public Information about such company.
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1.3 Serving as Officers, Trustees and/or Directors of Outside Organizations
Colony Capital has determined that it is in its Clients’ best interests for certain Colony Capital Supervised Persons to serve as officers or as members of the board of directors or trustees of certain outside organizations in connection with Colony Capital’s advice or other service that it provides on behalf of Clients. Certain Colony Capital Supervised Persons may also be permitted to serve in their personal capacities as officers or as members of the boards of directors or trustees of outside organizations such as charities, religious organizations and other outside organizations not in connection with Colony Capital’s service on behalf of clients. However, any service with an outside organization is subject to the parameters set forth below. Outside organizations can include public or private corporations, partnerships, charitable foundations and other not-for-profit institutions.
Colony Capital Supervised Persons are prohibited from serving as an officer or a director of an outside organization or receiving compensation from outside business activities without the prior written approval from the CCO or designee.
Where approval is required, the approval process will commence upon the CCO or designee’s receipt of a form on Schwab CT. Approval will be granted on a case by case basis, subject to proper resolution of potential conflicts of interest. Outside activities will be approved only if any conflict of interest issues can be satisfactorily resolved and all of the necessary disclosures are made on Part 2 of Form ADV.
Any Colony Capital Supervised Person holding any such director or officer position or receiving compensation for outside business activities will at all times be mindful of the potential for serious conflicts of interest. As an outside board member or officer, a Colony Capital Supervised Person may come into possession of Material Non-Public Information. It is critical that a proper information barrier be in place between Colony Capital and the outside organization, and that such person does not communicate any Non-Public Information to Colony Capital.
Information barrier procedures, which may include but are not limited to the following, may be imposed in the CCO’s discretion when a supervised person serves in a position which might expose him or her to Material Non-Public Information:
· | The insider may not participate in or be involved with any aspect of the research on the company nor may the insider make any recommendations with respect to the purchase or sale of Securities issued by the Company or any proxy vote involving the Securities. |
· | Other Colony Capital Supervised Persons may not request information of any sort regarding the company from the insider. |
· | The insider shall not communicate any Material Non-Public Information received by virtue of his or her position as an insider of the company to influence trading decisions or strategies or proxy voting recommendations involving the company. |
· | The insider shall at all times have dedicated email/phone/fax communications lines by which information from the company is conveyed and these communications lines should be set-up in a manner to ensure that any material about the company is only directed to the insider. |
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· | Documents received by the insider containing information about the company are to be treated with the utmost discretion and kept secure. Proper safeguarding of such documents includes: (a) not leaving documents in plain view, (b) storing documents in locked cabinets or files, (c) restricting access to cabinets, and (d) destroying duplicate or no longer needed documents. |
Publicly traded Securities issued by companies for which Colony Capital Supervised Persons are outside board members or officers will be placed on the Supervised Person Restricted List by the CCO during the applicable black-out periods for trading by outside board members or officers.
This policy does not prohibit the receipt of compensation for the activities permitted hereby.
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1.4 | Gifts and Entertainment Policy |
Colony Capital Supervised Persons may generally give and receive gifts and entertainment, so long as such gifts and entertainment are permitted by law, appropriate in character, not lavish or excessive, do not give the appearance of being designed to improperly influence the recipient and, where applicable, are reasonably believed to be consistent with the applicable counterpart’s gift policy.
Colony Capital holds Colony Capital Supervised Persons to high ethical standards and strictly prohibits any giving or receipt of things of value that are designed to improperly influence the recipient. Gifts of cash or cash equivalents (including gift cards, Securities, below-market loans, etc.) in any amount are also prohibited. Anti-bribery and anti-corruption statutes in the United States and other jurisdictions (e.g., FCPA, UK anti-bribery law) are broadly written, so Colony Capital Supervised Persons should consult with the CCO or designee if there is even an appearance of impropriety associated with the giving or receipt of anything of value.
If Colony Capital Supervised Persons are offered gifts or entertainment, they should ask themselves the following questions:
· | Is the giver attempting to influence my judgment? |
· | If I accept this gift, would it appear to an outsider that the giver is trying to influence my judgment? |
· | If I accept this gift, will I feel indebted or obligated in some way to the giver? |
Subject to the foregoing, the following are the guidelines to be followed with respect to receiving gifts. If in doubt whether to accept a gift, do not accept it or check with the CCO or designee.
Colony Capital Supervised Persons’ Receipt of Gifts and Entertainment
Colony Capital Supervised Persons may attend business meals, sporting events and other entertainment events at the expense of a giver, provided that the entertainment is not lavish or extravagant in nature. In order to avoid any appearance of impropriety, Colony Capital Supervised Persons must not accept any such gift in excess of $250 or entertainment in excess of $500 per occasion, unless approved in advance by the CCO or designee via Schwab CT. If the giver is a FINRA member (i.e., broker/dealer), then the giver is required to be present at the event. No gift or entertainment in excess of $1,500 will be allowed from any person or entity seeking a benefit from Colony Capital (e.g., seeking to do business or continuing to do business with Colony Capital) if the offer or acceptance of the gift or entertainment could reasonably be viewed as intended to influence Colony Capital to act favorably toward the person or entity.
Colony Capital Supervised Persons must report their intent to accept gifts over $250 or entertainment over $500 to the CCO by completing a form on Schwab CT. Gifts such as holiday baskets or lunches delivered to Colony Capital’s offices, which are received on behalf of Colony Capital, do not require reporting.
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Colony Capital Supervised Persons’ Giving of Gifts and Entertainment
Colony Capital Supervised Persons must obtain approval from the CCO or designee to give any gift over $250 or any entertainment in excess of $500 to any Investor or Prospect. Gifts and entertainment to non-governmental Investors are generally permissible except that Colony Capital will not permit lavish or inappropriate gifts or entertainment to Investors or Prospects that give the perception that the purpose of the gift or entertainment may be to influence the investing decisions of such Investor or Prospect.
Due to federal, state and local gift and gratuity laws, Colony Capital Supervised Persons must obtain pre-clearance from the CCO or designee by completing a form on Schwab CT to give any gift or entertainment, regardless of value, to any federal, state or local official or employee, including any governmental investor or prospective investor.
The Foreign Corrupt Practices Act (“FCPA”) prohibits the direct or indirect giving of, or a promise to give, “things of value” in order to corruptly obtain a business benefit from an officer, employee, or other “instrumentality” of a foreign government. Companies that are owned, even partly, by a foreign government may be considered an “instrumentality” of that government. In particular, government investments in foreign financial institutions may make the FCPA applicable to those institutions. Individuals acting in an official capacity on behalf of a foreign government or a foreign political party may also be “instrumentalities” of a foreign government.
The FCPA includes provisions that may permit the giving of gifts and entertainment under certain circumstances, including certain gifts and entertainment that are lawful under the written laws and regulations of the recipient’s country, as well as bona-fide travel costs for certain legitimate business purposes. However, the availability of these exceptions is limited and is dependent on the relevant facts and circumstances. Colony Capital Supervised Persons must obtain written pre-clearance from the CCO or designee by completing a form on Schwab CT prior to giving anything of value that might be subject to the FCPA except food and beverages that are provided during a legitimate business meeting and that are clearly not lavish or excessive.
Any gift or entertainment provided by Colony Capital to a labor union or a union official in excess of $250 per fiscal year must be reported on a U.S. Department of Labor Form LM-10 within 90 days following the end of Colony Capital’s fiscal year. Consequently, all gifts and entertainment provided to labor unions or union officials must be pre-approved by the CCO or designee by using Schwab CT or another method approved by the CCO or designee.
Colony Capital is prohibited from giving gifts or entertainment with an aggregate value exceeding $250 per year to any ERISA plan fiduciary (i.e., private or public pension plans), labor union, or union official. Consequently, all gifts and entertainment in excess of $25 provided to ERISA plan fiduciaries, labor unions, and union officials must be pre-approved by the CCO or designee by completing a form on Schwab CT.
Gifts and entertainment provided to or received from individuals with whom Colony Capital Supervised Persons have pre-existing personal relationships are subject to the aforementioned
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requirements, unless a specific relationship exception has been granted by the CCO. Such exceptions will only be granted if the CCO has concluded that any such gifts or entertainment are attributable to the personal relationship and not intended or expected to impact decisions such individuals may make with respect to Colony Capital, Clients, Investors, Prospects or individuals or entities that Colony Capital does, or is seeking to do, business with. For the avoidance of doubt, such gifts or entertainment include travel, accommodations, and other things of value, whether provided in a professional or personal setting. In the event an exception is granted, Colony Capital Supervised Persons are still required to report within a reasonable period of time any such gifts or entertainment and must provide the CCO with any supplemental information requested. Any exceptions granted may be revoked by the CCO at any time.
Quarterly Gifts and Entertainment Certification Form
At the end of each quarter, all Covered Associates and certain other members of senior management and the Investor Relations team are required to complete a form (Quarterly Gifts and Entertainment Certification) via Schwab CT to confirm that all gifts and entertainment given or received during the prior quarter that would have required pre-clearance per Colony Capital’s Gifts and Entertainment policies received the appropriate pre-clearance from CCO or designee.
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1.5 Lobbying
The federal government, each state, and certain localities have laws requiring registration and reporting by lobbyists and in some cases, also by the lobbyist's employer. Lobbying activity generally includes attempts to influence the passage or defeat of legislation. The U.S. Government and many states, however, have extended the definition of lobbying activity to cover efforts to influence formal rulemaking by executive branch agencies or other official actions of agencies, including the decision to enter into a contract or other financial arrangement. Moreover, "grassroots" activity (where one communicates with the public or segment of the public, such as Colony Capital Supervised Persons, encouraging them to call their representative or another public official for the purpose of influencing the passage of legislation or a rulemaking) is in many cases also considered lobbying activity.
To ensure that Colony Capital and Colony Capital Supervised Persons are in compliance with these laws, Colony Capital Supervised Persons may not engage in any of the lobbying activities, as described above, on behalf of Colony Capital without prior approval of the CCO and must be in full compliance with applicable federal, state, and local laws.
If you are not sure whether your activities would be considered lobbying, contact the CCO.
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Exhibit (a)(2)
CERTIFICATIONS
I, Daniel R. Gilbert, certify that:
1. | I have reviewed this report on Form N-CSR of NorthStar Real Estate Capital Income Fund; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 28, 2017
/s/ Daniel R. Gilbert | |
Daniel R. Gilbert | |
Chief Executive Officer and President |
CERTIFICATIONS
I, Frank V. Saracino, certify that:
1. | I have reviewed this report on Form N-CSR of NorthStar Real Estate Capital Income Fund; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 28, 2017
/s/ Frank V. Saracino | |
Frank V. Saracino | |
Chief Financial Officer and Treasurer |
Exhibit (a)(4)
Colony Capital Investment Advisors, LLC
(including its affiliated investment advisors)
Proxy Voting Policy
Definitions
1. | 1940 Act – The Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder. |
2. | Advisers Act – Investment Advisers Act of 1940, as amended from time to time. |
3. | Clients – Colony Capital Private Funds, RICs, and NTRs. |
1. | Colony Capital – Colony Capital Investment Advisors, LLC, a registered investment adviser, together with the following affiliates of Colony Capital Investment Advisors, LLC: Colony NorthStar Advisors, LLC; Colony Realty Partners, LLC; ColInvest Italy Srl; CDCF IV Investment Advisor, LLC; Colony Industrial Investment Advisor, LLC; Colony NorthStar US, LLC; NSAM J-NRE Ltd; NSAM J-NSHC Ltd; NSAM J-NSI Ltd; NSAM J-NSII Ltd; NSAM J-NS/RXR Ltd; Colony NorthStar Bermuda, Ltd; Colony NorthStar-N Luxembourg S.à r.l.; Colony NorthStar UK, Ltd.; Healthcare Opportunity JV, LP.; CNI CCEF Advisors, LLC; CNI RECF Advisors, LLC; CNI TCEF Advisors, LLC; NSAM D-FCVP, LLC. |
2. | Colony Capital Private Funds – Colony Capital’s private pooled investment vehicles and co-investment vehicles. |
3. | Colony Capital Supervised Person – Any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of Colony Capital, or other person who provides investment advice on behalf of Colony Capital and is subject to the supervision and control of Colony Capital. |
4. | NTR – Non-traded REITs managed and/or advised by Colony NorthStar. |
5. | Portfolio Managers – Colony Capital Supervised Persons who manage Clients’ investments. |
6. | PPM – A Private Placement Memorandum. |
7. | RIC – An investment company registered under the 1940 Act, including closed-end management investment companies, and unit investment trusts. |
8. | RIC Client – A RIC which is a Client of Colony Capital or an affiliate either in an advisory or sub-advisory capacity. |
9. | Security – Any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, or warrant or right to subscribe to or purchase any of the foregoing; all forms of limited partnership and limited liability company interests, including interests in private investment funds (such as hedge funds), and interests in investment clubs; foreign unit trusts and foreign mutual funds; all derivative instruments; or all shares in all exchange-traded funds. |
Regulation
Rule 206(4)-6 under the Advisers Act requires every investment adviser to adopt and implement written policies and procedures, reasonably designed to ensure that Colony Capital votes proxies in the best interest of its Clients. Colony Capital votes proxies for its funds, and therefore has adopted and implemented this proxy voting policy.
Policy
Colony Capital has adopted proxy voting policies and procedures designed to ensure that proxies are properly voted and that any conflicts of interest are addressed appropriately. The general policy is to vote proxy proposals as well as any amendments, consents or resolutions relating to client Securities (collectively, “proxies”), in a manner that serves the best interests of client accounts, as determined by Colony Capital in its discretion, taking into account various factors, including, without limitation, the impact on the value of the Securities. These Policies and Procedures are summarized in Colony Capital’s ADV Part 2A, Item 17. Clients may request a copy of Colony Capital’s proxy voting policies and procedures and the proxy voting record relating to their account by contacting Colony Capital.
Colony Capital is rarely requested to vote the proxies of traditional operating companies on behalf of its Clients. However, Colony Capital’s managed companies may invest in limited partnership or similar equity interests (“LP Interests”) in real estate private equity funds (“PE Funds”) and from time to time be requested to vote on or consent to certain matters in connection with their LP Interests.
Portfolio managers and/or investment management teams should be aware of any proxy that requires a vote, consent or election. Portfolio managers and/or the investment management teams shall determine the appropriate manner in which such proxy shall be voted. In some instances, it may be appropriate to abstain from voting (e.g., if the cost of a vote outweigh the benefits). In all
cases, the portfolio and/or the investment management teams shall maintain documentation of how each proxy was voted and provide such documentation to the CCO or designee periodically.
Proxy Voting for RIC Clients may be delegated to a sub-adviser. Colony Capital will receive at least annual reporting of proxies voted by the RIC Client’s sub-advisers in order to oversee their services under the sub-advisory agreement as well as to facilitate the filing of Form N-PX by the RIC Client, as necessary. Proxy voting policies will also be disclosed as required in registration statements and disclosure documents. Additionally, sub-advisers will have their own proxy voting policies and procedures. Colony Capital will monitor each sub-adviser’s compliance with their proxy voting policies and procedures.
Recordkeeping
· | Colony Capital often votes proxies through the website www.proxyvote.com. Whenever this happens, the person voting will save a screenshot to maintain a record of how the proxy was voted |
· | In the event a proxy is voted in a different manner, Colony Capital will ensure that it maintains a record of the vote |
· | Any request, whether written (including e-mail) or oral, received by any member of the Colony Capital investment team, must be promptly reported to a Portfolio Manager. All written requests must be retained in the permanent file. |
· | Such Portfolio Manager will record the identity of the Investor, the date of the request, and the action taken as a result of the request, in a suitable place. |
· | In order to facilitate the management of proxy voting record keeping process, and to facilitate dissemination of such proxy voting records to Investors, such Portfolio Manager may distribute to any Investor requesting proxy voting information the complete proxy voting record of Colony Capital for the period requested. Reports containing proxy information of only those issuers held by a certain Client will not be created or distributed. |
· | Any report disseminated to an Investor(s) will contain the following legend: “This report contains the full proxy voting record of [insert Client’s name]. If securities of a particular issuer were held in the fund’s account on the date of the shareholder meeting indicated, the proxy was exercised as indicated.” |
· | Furnish the information requested, free of charge, to the Investor within a reasonable time period (within 10 business days). Maintain a copy of the written record provided in response to Investor’s written (including e-mail) or oral request. A copy of the written response should be attached and maintained with the Investor’s written request, if applicable and maintained in the permanent file. |
· | Clients are permitted to request the proxy voting record for the 5-year period prior to their request. |
Disclosure
Colony Capital will ensure that Part 2A of Form ADV, the Colony Capital Private Funds’ PPM, and/or registered investment company/business development company offering documents are updated as necessary to reflect: (i) all material changes to its proxy voting policies and procedures; and (ii) information about how Investors may obtain information on how Colony Capital voted proxies.
Clients can contact the CCO or designee to obtain a copy of these policies and procedures and information about how Colony Capital voted with respect to the Client’s Securities. Any request for information about proxy voting or class actions should be forwarded to the CCO or designee, who will ensure that Colony Capital responds to any such requests.
Proxy Solicitation
As a matter of practice, it is Colony Capital’s policy to not reveal or disclose to any Investor how Colony Capital may have voted (or intends to vote) on a particular proxy until after such proxies have been counted at a shareholder’s meeting. Colony Capital will never disclose such information to nonaffiliated third parties prior to voting.
A Portfolio Manager and CCO or designee are to be promptly informed of the receipt of any solicitation from any person to vote proxies on behalf of Clients. At no time may any member of the Colony Capital investment team accept any remuneration in the solicitation of proxies. A Portfolio Manager shall handle or be consulted on all responses to such solicitations.
Exhibit (b)
CERTIFICATION OF CEO AND CFO PURSUANT
TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Certified Shareholder Report on Form N-CSR of NorthStar Real Estate Capital Income Fund (the “RE Capital Fund”) the period from May 6, 2016 (commencement of operations) through December 31, 2016, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Form N-CSR”), Daniel R. Gilbert, as Chief Executive Officer of the RE Capital Fund, and Frank V. Saracino, as Chief Financial Officer of the RE Capital Fund, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
• | The Form N-CSR fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
• | The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the RE Capital Fund. |
Dated: February 28, 2017
/s/ Daniel R. Gilbert | |
Daniel R. Gilbert | |
Chief Executive Officer and President | |
/s/ Frank V. Saracino | |
Frank V. Saracino | |
Chief Financial Officer and Treasurer |
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