UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
x   
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
o  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-37597
NORTHSTAR REALTY EUROPE CORP.
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
32-0468861
(IRS Employer
Identification No.)
590 Madison Avenue, 34th Floor, New York, NY 10022
(Address of Principal Executive Offices, Including Zip Code)
(212) 547-2600
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x      No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o    No  x   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x     No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
 
Accelerated filer
x
 
Non-accelerated filer o
(Do not check if a
smaller reporting company)
 
Smaller reporting company o
Emerging growth   company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017, was $688,237,787. As of March 8, 2018, the registrant had issued and outstanding 55,410,367 shares of common stock, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
None.
 
 
 
 
 


NORTHSTAR REALTY EUROPE CORP.
FORM 10-K
TABLE OF CONTENTS
Index
 
Page
 
 
 
 
 
 
 
 








2

FORWARD-LOOKING STATEMENTS
This Annual Report on Form  10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue,” “future” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to the operating performance of our investments, our liquidity and financing needs, the effects of our current strategies and investment activities, our ability to grow our business, our expected leverage, our expected cost of capital, our ability to divest non-strategic properties, our management’s track record and our ability to raise and effectively deploy capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the economic environment. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements. These factors include, but are not limited to:
•
the effect of economic conditions, particularly in Europe, on the valuation of our investments and on the tenants of the real property that we own;
•
the effect of the Mergers (as defined in Item 1. Business) on our business;
•
the ability of Colony NorthStar Inc., or CLNS, to scale its operations in Europe to effectively manage our company;
•
the unknown impact of the exit of the United Kingdom, or Brexit, or one or more other countries from the European Union, or EU, or the potential default of one or more countries in the EU or the potential break-up of the EU;
•
our ability to qualify and remain qualified as a real estate investment trust, or REIT;
•
adverse domestic or international economic geopolitical conditions and the impact on the commercial real estate industry;
•
volatility, disruption or uncertainty in the financial markets;
•
access to debt and equity capital and our liquidity;
•
our substantial use of leverage and our ability to comply with the terms of our borrowing arrangements;
•
the impact that rising interest rates may have on our floating rate financing;
•
our ability to monetize our assets on favorable terms or at all;
•
our ability to obtain mortgage financing on our real estate portfolio on favorable terms or at all;
•
our ability to acquire attractive investment opportunities and the impact of competition for attractive investment opportunities;
•
the effect of an increased number of activist stockholders owning our stock and stockholder activism generally;
•
the effects of being an externally-managed company, including our reliance on CLNS and its affiliates and sub-advisors/co-venturers in providing management services to us, the payment of substantial base management and incentive fees to our manager, the allocation of investments by CLNS among us and CLNS’s other sponsored or managed companies and strategic vehicles and various conflicts of interest in our relationship with CLNS;
•
performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments and available for distribution;
•
restrictions on our ability to engage in certain activities and the requirement that we may be required to access capital at inopportune times as a result of our borrowings;
•
our ability to make borrowings under our credit facility;
•
the impact of adverse conditions affecting office properties;
•
illiquidity of properties in our portfolio;
•
our ability to realize current and expected return over the life of our investments;

3

•
tenant defaults or bankruptcy;
•
any failure in our due diligence to identify all relevant facts in our underwriting process or otherwise;
•
the impact of terrorism or hostilities involving Europe;
•
our ability to manage our costs in line with our expectations and the impact on our cash available for distribution, or CAD, and net operating income, or NOI, of our properties;
•
our ability to satisfy and manage our capital requirements;
•
environmental and regulatory requirements, compliance costs and liabilities relating to owning and operating properties in our portfolio and to our business in general;
•
effect of regulatory actions, litigation and contractual claims against us and our affiliates, including the potential settlement and litigation of such claims;
•
changes in European, international and domestic laws or regulations governing various aspects of our business;
•
future changes in foreign, federal, state and local tax law that may have an adverse impact on the cash flow and value of our investments;
•
potential devaluation of foreign currencies, predominately the Euro and U.K. Pound Sterling, relative to the U.S. dollar due to quantitative easing in Europe, Brexit and/or other factors which could cause the U.S. dollar value of our investments to decline;
•
general foreign exchange risk associated with properties located in European countries located outside of the Euro Area, including the United Kingdom;
•
the loss of our exemption from the definition of an “investment company” under the Investment Company Act of 1940, as amended;
•
CLNS’ ability to hire and retain qualified personnel and potential changes to key personnel providing management services to us;
•
the lack of historical financial statements for properties we have acquired and may acquire in compliance with U.S. Securities and Exchange Commission, or SEC, requirements and U.S. generally accepted accounting principles, or U.S. GAAP, as well as the lack of familiarity of our tenants and third-party service providers with such requirements;
•
the potential failure to maintain effective internal controls and disclosure controls and procedures;
•
the historical consolidated financial statements included in this Annual Report on Form 10-K not providing an accurate indication of our performance in the future or reflecting what our financial position, results of operations or cash flow would have been had we operated as an independent public company during the periods presented;
•
our status as an emerging growth company; and
•
compliance with the rules governing REITs.
The foregoing list of factors is not exhaustive. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.
Factors that could have a material adverse effect on our operations and future prospects are set forth in “Risk Factors” in this Annual Report on Form 10-K beginning on page 13. The risk factors set forth in our filings with the SEC could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.



4

PART I
Item 1. Business
References to “we,” “us” or “our” refer to NorthStar Realty Europe Corp. and its subsidiaries unless the context specifically requires otherwise. References to “our Manager” refer to NorthStar Asset Management Group Inc., or NSAM, for the period prior to the Mergers (refer below) and Colony NorthStar, Inc., for the period subsequent to the Mergers. As part of the Mergers, NSAM changed its name to Colony NorthStar, Inc., or Colony NorthStar.
Overview
NorthStar Realty Europe Corp., a publicly-traded real estate investment trust, or REIT, (NYSE: NRE) is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France. We commenced operations on November 1, 2015 following the spin-off by NorthStar Realty Finance Corp., or NorthStar Realty, of its European real estate business (excluding its European healthcare properties) into a separate publicly-traded company, NorthStar Realty Europe Corp., a Maryland corporation, or the Spin-off. Our objective is to provide our stockholders with stable and recurring cash flow supplemented by capital growth over time.
We are externally managed and advised by an affiliate of our Manager. Substantially all of our assets, directly or indirectly, are held by, and we conduct our operations, directly or indirectly, through NorthStar Realty Europe Limited Partnership, a Delaware limited partnership and our operating partnership, or our Operating Partnership. We have elected to be taxed and will continue to conduct our operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.
Significant Developments
Mergers Agreement among NSAM, NorthStar Realty and Colony Capital, Inc.
On January 10, 2017, our external manager, NSAM completed a tri-party merger with NorthStar Realty and Colony Capital, Inc., or Colony, pursuant to which the companies combined in an all-stock merger, or the Mergers, of equals transaction to create a diversified real estate and investment management company. Under the terms of the merger agreement, NSAM, Colony and NorthStar Realty, through a series of transactions, merged with and into NSAM, which was renamed Colony NorthStar. Colony NorthStar is a leading global real estate and investment management firm.
Investments
In May 2017, we partnered with a leading property developer in China to acquire 20 Gresham Street, a Class A office building in London, United Kingdom with 22,557 square meters, 100% occupancy and a 6.3 year weighted average lease term to expiry. We invested approximately $35.3 million ( £26.2 million ) of preferred equity with a base yield of 8% plus equity participation rights.
Sales
In 2016, we announced a strategy to focus on prime office properties located in key cities within Germany, the United Kingdom and France. As a result, we undertook a sales initiative, selling 27 properties through December 31, 2017 for  $560 million  net of sales costs, generating $310 million of proceeds, net of mortgage note repayments. Consequently, we no longer operate in Belgium, Italy, Sweden or Spain. We have one remaining property in each of Portugal and the Netherlands which are both classified as held-for-sale as of December 31, 2017.

In February 2018, we signed definitive sale and purchase agreement to sell the Maastoren property, our largest non-core asset in the Netherlands, for approximately $190 million .
Leasing
During the year 2017, we signed 50,000 square meters of new leases or lease renewals which represents 16% of our portfolio.
Refinancing
In June 2017, we amended and restated the Trias mortgage note agreement to increase the loan amount by $5.9 million and reduce future minimum capital expenditure spending requirements. In September 2017, we amended and restated the financing terms for $568 million of the SEB mortgage note agreement to reduce the margin from 1.80% to 1.55% and extended the maturity date from April 1, 2022 to July 20, 2024.
Amended and Restated Management Agreement
On November 9, 2017, we entered into an amended and restated management agreement, or the Amended and Restated Management Agreement with an affiliate of our Manager, effective as of January 1, 2018. Refer to Note 6 “Related Party Arrangements” in our accompanying consolidated financial statements included in Part II Item 8. “Financial Statements and Supplementary Data” for a description of the terms of the Amended and Restated Management Agreement.

5

Our Investments
Our primary business line is investing in European real estate. We are predominantly focused on real estate equity and preferred equity, refer to Note 14, “Segment Reporting” in Part II, Item 8. “Financial Statements and Supplementary Data” for further disclosure.
Real Estate Equity
Overview
Our real estate equity investment strategy is focused on European prime office properties located in key cities within Germany, the United Kingdom and France.
Our Portfolio
The following presents a summary of our portfolio as of December 31, 2017 :
 
 
 
Portfolio by Geographic Location
 
 
December 31, 2017 (5)
December 31, 2016 (5)
Gross Book Value (1)
$1.9 billion
A2017.JPG
A2016.JPG
Number of properties
25
Number of countries
5
Total square meters (2)
323,230
Weighted average occupancy
86%
Weighted average lease term
6.4 years
In-place rental income: (3)
 
Office portfolio
95%
Other (4)
5%
___________________________________
(1)
Represents gross operating real estate and intangibles as of December 31, 2017 and includes gross assets held-for-sale.
(2)
Based on contractual rentable area, located in many key European markets, including Frankfurt, Hamburg, Berlin, London and Paris.
(3)
In-place rental income represents contractual rent adjusted for vacancies based on the rent roll as of December 31, 2017 and is translated using exchange rates as of December 31, 2017 .
(4)
Other represents retail, industrial and hotel (net lease) assets.
(5)
Based on rental income for 25 assets owned as of December 31, 2017.

The following table presents the sales activity through December 31, 2017 (dollars in thousands):
 
Years Ended December 31,  (1)
 
 
 
2017
 
2016
 
2015
 
Total
Properties as of December 31,
25
 
31
 
49
 

Properties sold
6
 
18
 
3
 
27
Carrying Value (2)
$
109,366

 
$
386,122

 
$
15,226

 
$
510,714

Sales Price
137,509

 
412,107

 
21,895

 
571,511

Net Proceeds (3)
132,538

 
406,850

 
20,955

 
560,343

Realized Gain
$
23,172

 
$
20,728

 
$
5,729

 
$
49,629

 
 
 
 
 
 
 

Debt repayment (4)
$
76,157

 
$
173,890

 
$
—

 
$
250,047

__________________
(1)
Years ended December 31, 2017, 2016 and 2015 amounts are translated using the average exchange rate for the year ended December 31, 2017.
(2)
Includes the assets and liabilities related to share sales.
(3)
Represents proceeds net of sales costs and excludes the associated property debt repayments.
(4)
Excludes repayments due to release premiums.

6

The following table presents significant tenants in our portfolio, based on in-place rental income as of December 31, 2017 :
Significant tenants:
 
Asset (Location)
 
Square Meters (1)
 
Percentage of In-Place Rental Income
 
Weighted Average Lease Term (in years)
DekaBank Deutsche Girozentrale
 
Trianon (Frankfurt, Germany)
 
36,524
 
20.2%
 
6.4
BNP PARIBAS RE
 
Berges de Seine (Paris, France)
 
15,406
 
9.0%
 
2.1
Deutsche Bundesbank
 
Trianon (Frankfurt, Germany)
 
20,903
 
7.7%
 
9.0
Deloitte Holding B.V.
 
Maastoren (Rotterdam, Netherlands)
 
23,548
 
5.5%
 
9.3
Invesco UK Limited
 
Portman Square (London, UK)
 
4,406
 
5.3%
 
9.7
BNP PARIBAS SA
 
Mac Donald (Paris, France)
 
11,235
 
5.1%
 
3.3
Cushman & Wakefield LLP
 
Portman Square (London, UK)
 
5,150
 
4.8%
 
7.3
Morgan Lewis & Bockius LLP
 
Condor House (London, UK)
 
4,848
 
3.8%
 
7.7
PAREXEL International GmbH
 
Parexel (Berlin, Germany)
 
18,254
 
3.2%
 
16.5
Moelis & Co UK LLP
 
Condor House (London, UK)
 
3,366
 
2.6%
 
7.3
 
 
 
 
143,640

67.2%
 
7.0
__________________
(1)
Based on contractual rentable area.

The following table presents gross book value, percentage of net operating income, or NOI, square meters and weighted average lease term concentration by country and type for our portfolio as of December 31, 2017 (dollars in millions):
Country
 
Number of Properties
 
Gross Book Value (1)
 
Percentage of NOI (2)
 
Square Meters (3)
 
Weighted Average Lease Term (in years)
Office
 
 
 
 
 
 
 
 
 
 
Germany
 
9
 
$
895,679

 
44
%
 
143,130

 
7.0
United Kingdom
 
5
 
404,438

 
22
%
 
28,893

 
7.5
France
 
4
 
322,332

 
19
%
 
32,075

 
3.3
Other (4)
 
2
 
183,807

 
11
%
 
42,078

 
6.8
Subtotal
 
20
 
1,806,256

 
96
%
 
246,176

 
6.4
Other Property Types
 
 
 
 
 
 
 
 
 
 
France/Germany (5)
 
5
 
96,163

 
4
%
 
77,054

 
5.6
Total
 
25
 
$
1,902,419

 
100
%
 
323,230

 
6.4
__________________
(1)
Represents gross operating real estate and intangibles as of December 31, 2017 and includes gross assets held-for-sale.
(2)
Based on annualized NOI, for the quarter ended December 31, 2017.
(3)
Based on contractual rentable area.
(4)
Includes an asset in Portugal and an asset in the Netherlands which are both classified as held-for-sale as of December 31, 2017.
(5)
Represents retail, industrial and hotel (net lease) assets.
Preferred Equity
In May 2017, we partnered with a leading property developer in China to acquire a Class A office building in London United Kingdom with 22,557 square meters, 100% occupancy and a 6.3 year weighted average lease term to expiry. We invested approximately $35.3 million ( £26.2 million ) of preferred equity with a base yield of 8% plus equity participation rights.
Investing Strategy
We seek to provide our stockholders with a stable and recurring cash flow for distribution supplemented by capital growth over time. Our business is predominantly focused on prime office properties in key cities within Germany, the United Kingdom and France which are not only the largest economies in Europe, but are the most established, liquid and among the most stable office markets in Europe. We seek to utilize our established local networks to source suitable investment opportunities. We have a long term investment approach and expect to make equity investments, directly or indirectly through joint ventures.
Financing Strategy
We pursue a variety of financing arrangements such as mortgage notes and bank loans available from the commercial mortgage-backed securities market, finance companies and banks. However, we generally seek to limit our reliance on recourse borrowings. We target overall leverage of 40% to 50% over time, although there is no assurance that this will be the case. Borrowing levels for our investments may be dependent upon the nature of the investments and the related financing that is available.

7

Attractive long-term, non-recourse, non-mark-to-market, financing continues to be available in the European markets. We predominately use floating rate financing and we seek to mitigate the risk of interest rates rising through hedging arrangements including interest rate caps.
In addition, we may use corporate level financing such as credit facilities. In April 2017, we amended and restated our revolving credit facility, or Credit Facility, with a commitment of $35 million and with an initial two year term. The Credit Facility no longer contains a limitation on availability based on a borrowing base and the interest rate remains the same.
In March 2018, we amended the Credit Facility, increasing the size to $70 million and extending the term until April 2020 with one year extension option. The Credit Facility includes an accordion feature, providing for the ability to increase the facility to $105 million.
In June 2017, we amended and restated the Trias mortgage note agreement to increase the loan amount by $5.9 million and reduce future minimum capital expenditure spending requirements. In September 2017, we amended and restated the financing terms for $568 million of the SEB mortgage note agreement to reduce the margin from 1.80% to 1.55% and extended the maturity date from April 1, 2022 to July 20, 2024.
Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for discussion of liquidity requirements and sources of capital resources.
Risk Management
Risk management is a significant component of our strategy to deliver consistent risk-adjusted returns to our stockholders. Given our need to maintain our qualification as a REIT for U.S. federal income tax purposes, we closely monitor our portfolio and actively seek to manage risks associated with, among other things, our assets, interest rates and foreign exchange rates. In addition, the audit committee of our board of directors, or the Board, in consultation with management, will periodically review our policies with respect to risk assessment and risk management, including key risks to which we are subject, such as credit risk, liquidity risk, financing risk, foreign currency risk and market risk, and the steps that management has taken to monitor and control such risks. The audit committee of the Board maintains oversight of financial reporting risk matters.
Underwriting
Prior to making any equity investments, our underwriting team, in conjunction with third-party providers, undertakes a rigorous asset-level due diligence process, involving intensive data collection and analysis, to seek to ensure that we understand fully the state of the market and the risk-reward profile of the asset. In addition, we evaluate material accounting, legal, financial and business matters in connection with such investment. These issues and risks are built into the valuation of an asset and ultimate pricing of an investment.
During the underwriting process, we review the following data, including, but not limited to: property financial data including historic and budgeted financial statements, liquidity and capital expenditure plans, property operating metrics (including occupancy, leasing activity, lease expirations, sales information, tenant credit review, tenant delinquency reports, operating expense efficiency and property management efficiency) and local real estate market conditions including vacancy rates, absorption, new supply, rent levels and comparable sale transactions, as applicable.
In addition to evaluating the merits of any proposed investment, we evaluate the diversification of our portfolio of assets. Prior to making a final investment decision, we determine whether a target asset will cause our portfolio of assets to be too heavily concentrated with, or cause too much exposure to, any one real estate sector, geographic region, source of cash flow such as tenants or borrowers, or other geopolitical issues. If we determine that a proposed investment presents excessive concentration risk, we may decide not to pursue an otherwise attractive investment.
Portfolio Management
Our Manager performs portfolio management services on our behalf. In addition, we rely on the services of local third-party service providers. The comprehensive portfolio management process includes day-to-day oversight by the portfolio management team, regular management meetings and a quarterly investment review process. These processes are designed to enable management to evaluate and proactively identify investment-specific matters and trends on a portfolio-wide basis. Nevertheless, we cannot be certain that such review will identify all potential issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific investments; therefore, potential future losses may also stem from investments that are not identified during these investment reviews.
Our Manager uses many methods to actively manage our risks to seek to preserve income and capital, which includes our ability to manage our investments and our tenants in a manner that preserves cost and income and minimizes credit losses that could decrease income and portfolio value. Frequent re-underwriting, dialogue with tenants/property managers and regular inspections of our properties have proven to be an effective process for identifying issues early. Monitoring tenant creditworthiness is an important component of our portfolio management process, which may include, to the extent available, a review of financial

8

statements and operating statistics, delinquencies, third party ratings and market data. During the quarterly portfolio review, or more frequently if necessary, investments may be put on highly-monitored status and identified for possible asset impairment based upon several factors, including missed or late contractual payments, tenant rating downgrades (where applicable) and other data that may indicate a potential issue in our ability to recover our invested capital from an investment.
We may need to make unplanned capital expenditures in connection with changes in laws and governmental regulations in relation to real estate. Where properties are being repositioned or refurbished, we may also be exposed to unforeseen changes in scope and timing of capital expenditures.
Given our need to maintain our qualification as a REIT for U.S. federal income tax purposes, and in order to maximize returns and manage portfolio risk, we may dispose of an asset earlier than anticipated or hold an asset longer than anticipated if we determine it to be appropriate depending upon prevailing market conditions or factors regarding a particular asset. We can provide no assurances, however, that we will be successful in identifying or managing all of the risks associated with acquiring, holding or disposing of a particular investment or that we will not realize losses on certain dispositions.
Interest Rate and Foreign Currency Hedging
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. The goal of our interest rate management strategy is to minimize or eliminate the effects of interest rate changes on the value of our assets, to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of financing such assets.
In addition, because we are exposed to foreign currency exchange rate fluctuations, we employ foreign currency risk management strategies, including the use of, among others, currency hedges, and matched currency financing.
We can provide no assurances, however, that our efforts to manage interest rate and foreign currency exchange rate volatility will successfully mitigate the risks of such volatility on our portfolio.
Regulation
We are subject, in certain circumstances, to supervision and regulation by international, federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things:
•    regulate our public disclosures, reporting obligations and capital raising activity;
•    require compliance with applicable REIT rules;
•    regulate credit granting activities;
•    require disclosures to customers;
•    govern secured transactions;
•    set collection, taking title to collateral, repossession and claims-handling procedures and other trade practices;
•    regulate land use and zoning;
•    regulate the foreign ownership or management of real property or mortgages;
•
regulate the ability of foreign persons or corporations to remove profits earned from activities within the country to the person’s or corporation’s country of origin;
•    regulate tax treatment and accounting standards; and
•
regulate use of derivative instruments and our ability to hedge our risks related to fluctuations in interest rates and exchange rates.
We qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, beginning with the year ended December 31, 2015 upon filing our initial U.S. federal income tax. As a REIT, we must currently distribute, at a minimum, an amount equal to 90% of our taxable income. In addition, we must distribute 100% of our taxable income to avoid paying corporate U.S. federal income taxes. REITs are also subject to a number of organizational and operational requirements in order to elect and maintain REIT status. These requirements include specific share ownership tests and assets and gross income composition tests. If we fail to continue to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at regular

9

corporate tax rates. Even if we qualify for taxation as a REIT, we may be subject to tax in foreign jurisdictions in which we operate or own property and state and local income taxes and to U.S. federal income tax and excise tax on our undistributed income.
We believe that we are not, and intend to conduct our operations so as not to become regulated as, an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. We have relied, and intend to continue to rely on current interpretations of the staff of the U.S. Securities and Exchange Commission, or SEC, in an effort to continue to qualify for an exemption from registration under the Investment Company Act. For more information on the exemptions that we use refer to Item 1A. “Risk Factors - Risks Related to Regulatory Matters and Our REIT Tax Status.”
Real estate properties owned by us and the operations of such properties are subject to various international laws and regulations concerning the protection of the environment, including air and water quality, hazardous or toxic substances and health and safety. In addition, such properties are required to comply with applicable fire and safety regulations, building codes, legal or regulatory provisions regarding access to our properties for persons with disabilities and other land use regulations. For further information regarding environmental matters, refer to “Environmental Matters” below.
In addition, we currently own two hotels, leased to third-party operators, which are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas. We believe each of our hotels have the necessary permits and approvals to operate its business.
In the judgment of management, while we do incur significant expense complying with the various regulations to which we are subject, existing statutes and regulations have not had a material adverse effect on our business. However, it is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon our future business, financial condition and results of operations or prospects.
Environmental Matters
A wide variety of environmental and occupational health and safety laws and regulations affect our properties. These complex laws, and their enforcement, involve a myriad of regulations, many of which involve strict liability on the part of the potential offender. Some of these laws may directly impact us. Under various local environmental laws, ordinances and regulations, an owner of real property, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal or property damages and the owner’s liability therefore could exceed or impair the value of the property, and/or the assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral which, in turn, could reduce our revenues.
Selected Regulations Regarding our Operations in Germany, the United Kingdom and France
Our commercial real estate investments are subject to a variety of laws and regulations in Europe. If we fail to comply with any of these laws and regulations, we may be subject to civil liability, administrative orders, fines or even criminal sanctions. The following provides a brief overview of selected regulations that are applicable to our business operations in Germany, the United Kingdom and France, where a majority of our properties in terms of contribution to rental income are located.
Germany
Land-use Regulations, Building Regulations and Tenancy Law for Commercial Properties
Land-use Regulations. There are several regulations regarding the use of land including German planning law and urban restructuring planning by communities.
Urban Restructuring Planning . Communities may designate certain areas as restructuring areas and undertake comprehensive modernization efforts regarding the infrastructure in such areas. While this may improve the value of properties located in restructuring areas, being located in a restructuring area also imposes certain limitations on the affected properties ( e.g. , the sale, encumbrance and leasing of such properties, as well as reconstruction and refurbishment measures, are generally subject to special consent by municipal authorities).
Building Regulations. German building laws and regulations are quite comprehensive and address a number of issues, including, but not limited to, permissible types of buildings, building materials, proper workmanship, heating, fire safety, means of warning and escape in case of emergency, access and facilities for the fire department, hazardous and offensive substances, noise protection, ventilation and access and facilities for disabled people. Owners of erected buildings may be required to conduct alterations or improvements of the property if safety or health risks with respect to users of the building or the general public occur, including fire risks, traffic risks, risks of collapse and health risks from injurious building materials such as asbestos. To our knowledge, there are currently no official orders demanding any alterations to existing buildings owned by us.

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Tenancy Law for Commercial Properties. German tenancy laws for commercial properties generally provide landlords and tenants with far-reaching discretion in how they structure lease agreements and use general terms and conditions. Certain legal restrictions apply with regard to the strict written form requirements regarding the lease agreement and any addenda thereto, transfer of operating costs and maintenance costs, cosmetic repairs and final decorative repairs. Lease agreements with a term of more than one year must be executed in writing or are deemed to have been concluded for an indefinite period. As a consequence, and regardless of the contractually agreed lease term, such lease agreements can then be terminated by the lessor or the lessee at the end of one year turning over the leased property to the lessee at the earliest, and on the third working day of a calendar quarter to the end of the following calendar quarter thereafter. Subject to certain exceptions, operating costs of commercial tenancies may be apportioned to the tenants if the lease agreement stipulates explicitly and specifically which operating costs shall be borne by the tenant. Responsibility for maintenance and repair costs may be transferred to tenants, except for the full cost transfer of maintenance and repair costs for roof, structures and areas used by several tenants in general terms and conditions. Expenses for cosmetic repairs ( Schönheitsreparaturen ) may, in principle, be allocated to tenants, provided that the obligation to carry out ongoing cosmetic repairs is not combined with an undertaking to perform initial and/or final decorative repairs. German law considers standardized terms to be invalid if they are not clear and comprehensive or if they are disproportionate and provide an unreasonable disadvantage for the other party. For example, clauses allocating decorative repair costs and ancillary costs have been subject to extensive case law in Germany.
Regulation Relating to Environmental Damage and Contamination
The portion of our commercial real estate portfolio located in Germany is subject to various rules and regulations relating to the remediation of environmental damage and contamination.
Soil Contamination. Pursuant to the German Federal Soil Protection Act ( Bundesbodenschutzgesetz ), the responsibility for residual pollution and harmful changes to soil, or Contamination, lies with, among others, the perpetrator of the Contamination, such perpetrator’s universal successor, the current owner of the property, the party in actual control of the property and, if the title was transferred after March 1999, the previous owner of the property if such owner knew or should have known about the Contamination, or the Liable Persons. The Liable Person that carried out the remediation work may claim indemnification on a pro rata basis from the other Liable Persons. Independently, from the aforementioned liability, civil law liability for Contaminations can arise from contractual warranty provisions or statutory law.
United Kingdom
For a discussion of the impact of regulations in the United Kingdom, refer to Item 1A. “Risk Factors — Risks Related to our Financing Strategy- “We are subject to risks associated with obtaining mortgage financing on our real estate, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to stockholders.”
France
Participation in an Organismes de placement collectif en immobilier
We hold participations in Organismes de placement collectif en immobilier , or OPCIs, each of which takes the form of a Société de Placement à Prépondérance Immobilière à Capital Variable , or SPPICAV. These SPPICAVs and their management company, Swiss Life Reim (France), are authorized and supervised by the French Autorité des Marchés Financiers.
Commercial Lease Regulation
The contractual conditions applying to commercial lease periods, renewal, rent and rent indexation are heavily regulated. The minimum duration of commercial leases is nine years. We cannot terminate the lease before such period has expired, except in very specific cases (such as reconstructing or elevating an existing building). The tenant, on the other hand, has the power to terminate the lease at the end of every three-year period, subject to a six-month prior notice requirement. However, leases of premises to be used exclusively as office spaces may contain provisions restricting or excluding, such power of the tenant to terminate the lease.
The tenant has also a right of renewal of the lease at the end of its initial period and a right to a review of the rent every three years and, unless other agreed by the parties, upon renewal of the lease. The rent variation is capped. In case of review, after a three-year period or in case of a renewal (unless otherwise agreed by the parties), the variation of the rent cannot exceed the variation of the Commercial Rent Index ( indice trimestriel des loyers commerciaux ) or the Tertiary Activities Rent Index ( indice trimestriel des loyers des activités tertiaires ), which are published by the French National Institute of Statistics and Economic Studies ( Institut national de la statistique et des études économiques ), except in case of (i) a rent review after a three-year period where the rental value has considerably changed ( i.e. , increase or decrease by more than 10%), (ii) a renewal of a lease where either the features of the premises, the use of the premises, the obligations of the parties under the lease or local marketing factors were significantly modified, (iii) a renewal of a lease, the initial duration of which exceeded nine years or the effective duration of which exceeded twelve years and (iv) certain variable rent leases (such as leases including sales-based or revenue-based rent clauses). In addition, a rent increase for a given year cannot exceed 10% of the rent paid during the previous year.

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Moreover, the tenant has a right of first refusal if the leased premises are offered for sale.
The legal allocation of charges (rental expenses, related costs and taxes) between us and the tenant can be contractually determined. However, articles L. 145-40-2 and R. 145-35 of the French Commercial Code, make it mandatory for the property owner in leases entered into or renewed, on or after November 5, 2014 to incur expenditures for major repairs, in particular those related dilapidated premises and those required to meet changing regulation.
Bankruptcy Law
In France, a safeguard proceeding ( sauvegarde ), judicial restructuring ( redressement judiciaire ) or judicial liquidation ( liquidation judiciaire ) procedure commencement order involving an insolvent tenant does not lead to the automatic termination of the lease. In such cases, we will not be able to get paid directly by the tenant and any due and unpaid rent as of the date of the commencement order will be subject to the rules applicable to the insolvency proceeding, which may have a substantial negative impact on our ability to be paid. Furthermore, the tenant, via the insolvency court-appointed receiver ( administrateur judiciaire or liquidateur judiciaire ) acting on behalf of the tenant, will have the choice to continue or terminate any unexpired lease. If the tenant chooses to continue an unexpired lease, but still fails to pay rent in connection with the occupancy after the issue of the commencement order, we cannot legally request the termination of the lease before the end of a three-month period from the date of issue of the commencement order.
Environmental Law
In France, our investments are subject to regulations regarding the accessibility of buildings to persons with disabilities, public health and the environment, covering a number of areas, including the ownership and use of classified facilities; the use, storage, and handling of hazardous materials in building construction; inspections for asbestos, lead, and termites; inspection of gas and electricity facilities; assessments of energy efficiency; and assessments of technological and natural risks.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Act, or JOBS Act and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We have availed ourselves of some of the reduced regulatory and reporting requirements that are available to us as long as we qualify as an emerging growth company, except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act.
We will, in general, remain as an emerging growth company for up to five full fiscal years following December 31, 2015. We would cease to be an emerging growth company and, therefore, become ineligible to rely on the above exemptions, if we:
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have more than $1 billion in annual revenue in a fiscal year;
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issue more than $1 billion of non-convertible debt during the preceding three-year period; or
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become a “large accelerated filer” as defined in Exchange Act Rule 12b-2, which would occur at the end of the fiscal year after: (i) we have filed at least one annual report pursuant to the Exchange Act; (ii) we have been an SEC-reporting company for at least 12 months; and (iii) the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter.
Competition
We are subject to increased competition in seeking investments. We compete with many third parties engaged in real estate investment activities including publicly-traded REITs, insurance companies, commercial and investment banking firms, private equity funds, sovereign wealth funds and other investors. Some of these competitors, including other REITS and private real estate companies and funds, have substantially greater financial resources than we do. Such competitors may also enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.
Future competition from new market entrants may limit the number of suitable investment opportunities offered to us. It may also result in higher prices, lower yields and a narrower spread over our borrowing costs, making it more difficult for us to originate or acquire new investments on attractive terms.
Employees
We are externally managed by our Manager and do not have our own employees.

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Available Information and Corporate Governance
We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board of directors consists of a majority of independent directors; the audit, compensation and nominating and corporate governance committees of the board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics, which delineate our standards for our officers, directors and employees.
Our internet address is www.nrecorp.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K. We make available, free of charge through a link on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, financial supplements, and amendments to such reports, if any, as filed or furnished with the SEC, as soon as reasonably practicable after such filing or furnishing. We also post corporate presentations on our website from time-to-time. Our website further contains our code of business conduct and ethics, code of ethics for senior financial officers, corporate governance guidelines and the charters of our audit committee, nominating and corporate governance committee and compensation committee of our board of directors. Within the time period required by the rules of the SEC and the NYSE we will post on our website any amendment to our code of business conduct and ethics and our code of ethics for senior financial officers as defined in the code.
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or that generally apply to all businesses also may adversely impact our business. If any of the following risks occur, our business, financial condition, operating results, cash flow and liquidity could be materially adversely affected .
Risks Related to Our Business
The commercial real estate industry has been and may continue to be adversely affected by economic conditions and geopolitical events in Europe, the United States and elsewhere.
Our business and operations are dependent on the commercial real estate industry generally, which in turn is dependent upon global economic conditions and geopolitical events in Europe, the United States and elsewhere. Concerns over global economic conditions, energy and commodity prices, geopolitical events, acts of war and terrorism, nuclear proliferation, inflation, deflation, rising interest rates, divergent central bank policy making, foreign exchange rates, the durability of the Euro as a currency, the availability and cost of credit, the sovereign debt crisis, the U.K. vote on June 23, 2016 to leave the European Union, or Brexit, the rise of protectionism and populism in the United States and Europe, and weak consumer confidence in many markets continue to contribute to increased economic uncertainty for the global economy. These factors, combined with the volatile prices of oil and declining business and consumer confidence in certain markets could precipitate an economic slowdown, as well as cause extreme volatility in security prices. Global economic and political headwinds, along with global market instability, the risk of maturing commercial real estate debt that may have difficulties being refinanced, and divergent central bank policy making, may continue to cause periodic volatility in the commercial real estate market for some time. Adverse economic conditions in the commercial real estate industry, geopolitical events, acts of war or terrorism could harm our business and financial condition by, among other factors, reducing the value of our properties, limiting our access to debt and equity capital, impairing our ability to obtain new financing or refinance existing obligations and otherwise negatively impacting our operations.
Liquidity in the capital markets is essential to our business.
Liquidity is essential to our business. Our business may be adversely affected by disruptions in the debt and equity capital markets and institutional lending market, including a lack of access to capital or prohibitively high costs of obtaining or replacing capital, both within the United States and Europe. We depend on external financing to fund the growth of our business mainly because one of the requirements of the Internal Revenue Code for a REIT is that we distribute 90% of our taxable income to our stockholders, including taxable income where we do not receive corresponding cash. Our access to equity or debt financing depends on the willingness of third parties to make equity and debt investments in us. It also depends on conditions in the capital markets generally. Companies in the real estate industry, including us, are currently experiencing, and have at times historically experienced, limited availability of capital and new capital sources may not be available on acceptable terms. Our ability to raise capital could be impaired if the capital markets have a negative perception of our long-term or short-term financial prospects or the prospects for REITs and the commercial real estate market generally. Sufficient funding or capital may not be available to us in the future on terms that are acceptable to us. If we cannot obtain sufficient funding on acceptable terms, we will not be able to grow our business and may have difficulty maintaining liquidity and making distributions to our stockholders, which would have a negative impact on the market price of our common stock. For information about our available sources of funds, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in Item 7 of Part II of this Annual Report on Form 10-K and the notes to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K.

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We use significant leverage in connection with our investments, which increases the risk of loss associated with our investments and restricts our ability to engage in certain activities.
As of December 31, 2017 we had $1.2 billion of borrowings outstanding. We may also incur additional borrowings in the future to satisfy our capital and liquidity needs. Although the use of leverage may enhance returns and increase the number of investments that we can make, it may increase our risk of loss, impact our liquidity and restrict our ability to engage in certain activities. Our substantial borrowings, among other things, may:
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require us to dedicate a large portion of our cash flow to pay principal and interest on our borrowings, which will reduce the availability of cash flow to fund working capital, capital expenditures and other business activities;
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require us to maintain minimum unrestricted cash;
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increase our vulnerability to general adverse economic and industry conditions;
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require us to post additional reserves and other additional collateral to support our financing arrangements, which could reduce our liquidity and limit our ability to leverage our assets;
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subject us to maintaining various debt, operating income, net worth, cash flow and other covenants and financial ratios;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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restrict our operating policies and ability to make strategic acquisitions, dispositions or exploit business opportunities;
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require us to maintain a borrowing base of assets;
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place us at a competitive disadvantage compared to our competitors that have fewer borrowings;
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put us in a position that necessitates raising equity capital at a time that is unfavorable to us and dilutive to our stockholders;
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limit our ability to borrow additional funds (even when necessary to maintain adequate liquidity), dispose of assets or make distributions to our stockholders; and
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increase our cost of capital.
If we fail to comply with the covenants in the instruments governing our borrowings or do not generate sufficient cash flow to service our borrowings, our liquidity may be materially and adversely affected. If we default or fail to meet certain coverage tests, we may be required to repay outstanding obligations, together with penalties, prior to the stated maturity, post additional collateral, sell assets to generate cash at inopportune times, subject our assets to foreclosure and/or require us to seek protection under bankruptcy laws.
Continuing concerns regarding European debt, market perceptions concerning the instability and suitability of the Euro as a single currency, recent volatility and price movements in the rate of exchange between the U.S. dollar and the Euro could adversely affect our business, results of operations and financings.
Concerns persist regarding the debt burden of certain Euro Area countries and their potential inability to meet their future financial obligations, the overall stability of the Euro and the suitability of the Euro as a single currency, given the diverse economic and political circumstances in individual Euro Area countries, Brexit and recent volatility in the value of the Euro. These concerns could lead to the re-introduction of individual currencies in one or more Euro Area countries, or, in more extreme circumstances, the possible dissolution of the Euro currency entirely. Should the Euro dissolve entirely, the legal and contractual consequences for holders of Euro-denominated obligations would be uncertain. Such uncertainty would extend to, among other factors, whether obligations previously expressed to be owed and payable in Euros would be re-denominated in a new currency (with considerable uncertainty over the conversion rates), what laws would govern and which country’s courts would have jurisdiction. These potential developments, or market perceptions concerning these and related issues, could materially adversely affect the value of our Euro-denominated investments and obligations.
Furthermore, market concerns about economic growth in the Euro Area relative to the United States and speculation surrounding the potential impact on the Euro of a possible Greek or other country sovereign default and/or exit from the Euro Area as well as the resurgence of distress in certain Euro Area banking sectors, such as Italy, may continue to exert downward pressure on the rate of exchange between the U.S. dollar and the Euro, which may adversely affect our results of operations and our ability to obtain financing.

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The U.K. vote to leave the European Union, or EU, could adversely impact our business, results of operations and financial condition.
Brexit, could adversely impact our business, results of operations and financial condition due to the resulting substantial uncertainty. Any impact of the Brexit vote depends on the terms of the U.K.’s withdrawal from the EU, which still need to be fully determined and could take several years to accomplish. The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against the U.K. Pound Sterling. Strengthening of the U.S. dollar relative to the U.K. Pound Sterling may adversely affect our results of operations, in a number of ways, including:
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All of the rent payments under our leases are denominated in Euro or U.K. Pound Sterling. A significant portion of our operating expenses and borrowings are also transacted in local currency. We report our results of operations and consolidated financial information in U.S. dollars. As a result, to the extent we are unable to fully hedge our exchange rate exposure, our results of operations as reported in U.S. dollars is impacted by fluctuations in the value of the local currencies in which we conduct our business.
•
While we seek to mitigate the risk of fluctuations in currency exchange rates by utilizing hedging strategies to reduce the impact of exchange rates fluctuations on our income, we do not employ any hedging techniques on our Euro or U.K. Pound Sterling denominated assets, which fully exposes our asset values to exchange rate risk. 
The U.K.’s withdrawal from the EU could result in a regional economic downturn, which could depress the demand for European commercial real estate. The U.K. also could lose access to the European Economic Area single market and to the global trade deals negotiated by the EU on behalf of its members, depressing trade between the U.K. and other countries, which would negatively impact the demand for our properties located in the U.K. Additionally, we may face new regulations in the U.K. Compliance with any such regulations could be costly, negatively impacting our business, results of operations and financial condition. Further, the U.K.’s withdrawal from the EU could include changes to the U.K.’s border and immigration policy, which could negatively impact our Manager’s ability in the U.K. to recruit and retain employees to work in its U.K. based offices.
Risks Related to Our Manager
Our ability to achieve our investment objectives and to pay distributions to our stockholders depends in substantial part upon the performance of our Manager.
We rely upon our Manager to manage our day-to-day operations and our investments. Our ability to achieve our investment objectives and grow our business is dependent upon the performance of our Manager in the acquisition or disposition of investments, the determination of financing arrangements and the management of our investments and operation of our day-to-day activities under the supervision of, and subject to the policies and guidelines established by, our board of directors. If our Manager performs poorly and as a result is unable to manage our investments successfully, we may be unable to achieve our investment objectives or to pay distributions to our stockholders.
Any adverse changes in our Manager’s financial health, the public perception of our Manager or our relationship with our Manager could hinder our operating performance and adversely affect our financial condition and results of operations.
Because our Manager is a publicly-traded company, any negative reaction by the stock market reflected in the price of its securities or deterioration in the public perception of our Manager could result in an adverse effect on its ability to manage our portfolio, including acquiring or disposing of assets and obtaining financing from third parties on favorable terms or at all. Our Manager depends upon the management and other fees and reimbursement of costs that it receives from us and our Manager’s other managed companies in connection with the acquisition, management and sale of properties to conduct its operations. Any adverse changes in the financial condition of our Manager or our relationship with our Manager could hinder our Manager’s ability to successfully support our business, which could have a material adverse effect on our financial condition and results of operations.
Failure of our Manager to effectively perform its obligations to us, including under the management agreement, could have an adverse effect on our business and performance.
We have engaged our Manager to provide asset management and other services to us pursuant to a management agreement. Our ability to achieve our investment and business objectives and to make distributions to our stockholders depends in substantial part upon the performance of our Manager and its ability to provide us with asset management and other services. We are also dependent on other third party service providers to whom our Manager has delegated various responsibilities or engaged on our behalf. If for any reason our Manager or any other service provider is unable to perform such services at the level we require, our ability to replace our Manager or any other service provider is limited under the terms of our management agreement. For example, even if we were able to terminate our management agreement with our Manager, alternate service providers may not be readily available on acceptable terms or at all, which could adversely affect our performance and materially harm our ability to execute our business plan.

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Our ability to terminate our management agreement with our Manager is limited and we may be required to pay our Manager a substantial termination fee in connection with a termination.
Prior to January 1, 2023, our management agreement with our Manager is only terminable by us for cause. During such period, we are unable to terminate our management agreement for any other reason, including if our Manager performs poorly or is unable to manage our company successfully. The term “cause” is limited to specific circumstances set forth in the management agreement. Termination for unsatisfactory financial performance does not constitute “cause” under our management agreement. Beginning January 1, 2023, the management agreement automatically renews for successive three-year terms unless we or our Manager elect (with at least six months prior notice) not to renew the management agreement. If we elect not to renew the management agreement, we will be required to pay a termination fee to our Manager equal to three times the amount of the base management fees earned by our Manager over the four most recent quarters immediately preceding the non-renewal. This termination fee increases the cost to us of terminating the management agreement, thereby potentially adversely affecting our willingness to terminate our Manager without cause.
Our limited termination rights under the management agreement increases our risk that our Manager may not perform well and our business could suffer. If at any time our Manager’s performance as our Manager does not meet our or our stockholders’ expectations, and we are unable to terminate the management agreement at such time, the market price of our common stock could be adversely affected. For additional information relating to the terms of the management agreement please refer to Note 6 “Related Party Arrangements” in our accompanying consolidated financial statements included in Part II Item 8. “Financial Statements and Supplementary Data”.
Our incentive fee structure with our Manager could encourage our Manager to invest our assets in riskier investments.
Our Manager has the ability to earn incentive fees based on our total stockholder return exceeding a 10% cumulative annual hurdle rate, which may create an incentive for our Manager to invest in investments with higher yield potential, that are generally riskier or more speculative, or sell an investment prematurely for a gain, in an effort to increase our short-term net income and thereby increase our stock price and the incentive fees to which it is entitled. If our interests and those of our Manager are not aligned, the execution of our business plan and our results of operations could be adversely affected, which could materially and adversely affect the market price of our common stock and our ability to make distributions to our stockholders.
The provisions of our original management agreement were not determined on an arm’s length basis; therefore, we did not have the benefit of arm’s length negotiations of the type normally conducted between unrelated parties.
The provisions of our original management agreement entered into at the time of the Spin-off were not determined on an arm’s length basis. As a result, the provisions of such agreement, including the amount of the management fees, were determined without the benefit of arm’s length negotiations of the type normally conducted between unrelated parties and may have been in excess of amounts that we would otherwise have paid to third parties for such services. Although our amended and restated management agreement was negotiated and approved by an independent, special committee of our board of directors and in consultation with financial advisors, it is possible that we would have been able to negotiate more favorable management agreement terms with an unaffiliated third party if we were not already subject to the original management agreement.
In addition to the management fees we pay to our Manager, we reimburse our Manager for costs and expenses incurred on our behalf, including certain indirect personnel and employment costs of our Manager, which costs and expenses may be substantial.
We pay our Manager substantial fees for the services it provides to us and we also have an obligation to reimburse our Manager for direct costs and expenses it may incur and pay on our behalf. Subject to certain limitations and quarterly maximums, we are also obligated to reimburse our Manager for certain indirect costs, including our Manager’s personnel and employment costs for employees of our Manager who provide services to us, which prior to January 1, 2018 were provided by unaffiliated third parties, services such as accounting and treasury services, plus an amount equal to 20% of such employees’ costs to cover reasonable overhead charges with respect to such personnel. The costs and expenses our Manager incurs on our behalf, including such compensatory costs incurred by our Manager and its affiliates, may be substantial and there are conflicts of interest that could arise when our Manager makes allocation determinations. In addition, we expect to issue annual equity awards to our Manager’s employees under the terms of our management agreement. Our Manager could allocate costs and expenses to us in excess of what we anticipate and such costs and expenses could have an adverse effect on our financial performance and ability to make distributions to our stockholders.
There are conflicts of interest in our relationship with our Manager that could result in decisions that are not in the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationship with our Manager, its affiliates, managed entities and strategic ventures. In particular, we expect to compete for investment opportunities directly with other companies and/or accounts that our Manager or its strategic or joint venture partners manage. Our Manager and certain of our Manager’s managed companies, along with companies, funds and vehicles that are subject to a strategic relationship between our Manager and its strategic or joint venture

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partners (which we refer to collectively as strategic vehicles), may have investment mandates and objectives that target the same investments as us.
In addition, our Manager may have additional managed companies or strategic vehicles that will compete directly with us for investment opportunities in the future. We adopted an investment allocation policy with our Manager that is intended to ensure that investments are allocated fairly and appropriately among us, our Manager, and our Manager’s other managed companies or strategic vehicles over time, but there is no assurance that our Manager will be successful in eliminating the conflicts arising from the allocation of investment opportunities. When determining the entity for which an investment opportunity would be the most suitable, the factors that our Manager may consider include, among other factors, the following:
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investment objectives, dedicated mandates, strategy and criteria;
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current and future cash requirements and of the investment and the managed company;
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effect of the investment on the diversification of the portfolio, including by geography, size of investment, type of investment and risk of investment;
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leverage policy and the availability of financing for the investment by each managed company;
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anticipated cash flow of the investment to be acquired;
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ramp-up or draw-down periods;
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cost of capital;
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risk return profiles;
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targeted distribution rates;
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anticipated future pipeline of suitable investments;
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the expected holding period of the investment and the remaining term of a managed company or strategic vehicle, if applicable;
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legal, regulatory or tax considerations, including any conditions of an exemptive order;
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affiliate and/or related party considerations; and
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whether a managed company or strategic vehicle has other sources of investment opportunities.
A dedicated mandate may cause some managed companies or strategic vehicles to have priority over other managed companies or strategic vehicles with respect to certain investments. If, after consideration of the relevant factors, our Manager determines that an investment is equally suitable for us and one of its clients or strategic vehicles, the investment will be allocated among each of the applicable entities, including us, on a rotating basis. Our Manager’s new managed companies or strategic vehicles, including us, will be initially added at the end of the rotation. If, after an investment has been allocated, a subsequent event or development, such as delays in structuring or closing on the investment, makes it, in the opinion of our Manager’s investment professionals, more appropriate for a different entity to fund the investment, our Manager may determine to place the investment with the more appropriate entity while still giving credit to the original allocation. In certain situations, our Manager may determine to allow more than one managed company or strategic vehicle to co-invest in a particular investment. Managed companies and strategic vehicles may have different allocation preferences. In addition, strategic vehicles may receive preference in the allocation of an investment opportunity that is initially presented to our Manager by the applicable strategic or joint venture partner. A dedicated mandate may cause a client to have priority over certain other clients with respect to investment opportunities.
Our Manager will allocate third-party acquisition costs incurred in connection with the selection, acquisition or origination of an investment to those managed companies or strategic vehicles that acquire or originate the investment. Such allocation will be made in accordance with each client’s allocation of the investment opportunity. If our Manager does not complete a proposed investment, it will allocate any third-party acquisition costs (Broken Deal Costs) incurred to date relating to the proposed investments, to those clients that would have acquired or originated the investment in accordance with the allocations set out in the applicable investment allocation. If our Manager does not complete an investment before making an investment allocation, it

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will allocate the Broken Deal Costs to the client or clients for which the investment opportunity was suitable. If there are multiple managed companies or strategic vehicles, such Broken Deal Costs will be allocated pro-rata.
There is no assurance this policy will remain in place during the entire period we are seeking investment opportunities. In addition, our Manager may sponsor additional managed companies or strategic vehicles in the future and, in connection with the creation of such managed companies or strategic vehicles, may revise these allocation procedures. The result of a revision to the allocation procedures may, among other things, be to increase the number of parties who have the right to participate in investment opportunities sourced by our Manager or us, thereby reducing the number of investment opportunities available to us.
In addition, under this policy, our Manager’s investment professionals may consider the investment objectives and anticipated pipeline of future investments of its managed companies or strategic vehicles. The decision of how any potential investment should be allocated among us and one of our Manager’s managed companies or strategic vehicles for which such investment may be suitable may, in many cases, be a matter of subjective judgment which will be made by our Manager. Pursuant to the investment allocation policy, our Manager may choose to allocate favorable investments to its other managed companies instead of to us. Our Manager’s investment allocation policy could produce unfavorable results for us that could harm our business.
Our Manager may encourage our use of third party service providers, including those in which our Manager owns an interest, for which we pay a fee. In addition, we may enter into principal transactions or cross transactions with our Manager’s other managed companies or strategic vehicles. In certain transactions our Manager may receive a fee from the managed company. There is no guaranty that any such transactions will be favorable to us. Because our interests and our Manager’s interests may not be aligned, we may face conflicts of interest that result in action or inaction that is detrimental to us.
Further, there are conflicts of interest that arise when our Manager makes expense allocation determinations, as well as in connection with any fees payable between us and our Manager.  These fees and allocation determinations are sometimes based on estimates or judgments, which may not be correct and could result in our Manager’s failure to allocate and pay certain fees and costs to us appropriately.
There is a risk of investor influence over our company that may be adverse to our best interests and those of our other shareholders
Our Manager owned approximately 10.2% of the shares of our common stock, as of December 31, 2017. Pursuant to and subject to the terms of an ownership waiver and voting agreement that we provided our Manager at the time we entered into our amended and restated management agreement, we granted our Manager an ownership waiver allowing it to purchase up to 45% of the shares of our common stock; provided that to the extent our Manager owns more than 25% of our common stock (such shares owned by our Manager in excess of the 25% threshold, the “Excess Shares”), it will vote the Excess Shares in the same proportion that the remaining shares of the Company not owned by our Manager or its affiliates are voted. Moreover, two of our directors are currently employed by our Manager and under the terms of our management agreement, our Manager has the right, beginning with our 2018 annual stockholders’ meeting, to nominate one director (who is expected to be one of our current directors employed by our Manager) to our Board.
Our Manager’s current ownership of our common stock and its ability to significantly increase its ownership stake, together with the composition of our board of directors and the terms of our management agreement, may have the effect of making some transactions more difficult without our Manager’s support and can also have the effect of making certain transactions more likely if they are supported by our Manager even if they are not supported by the majority of our other stockholders. The interests of our Manager or any of its affiliates could conflict with or differ from our interests or the interests of the other holders of our common stock. For example, the large ownership stake held by our Manager (which ownership stake can be increased substantially) could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination that may otherwise be favorable for us and the other stockholders. Our Manager may also pursue acquisition opportunities for itself that could have been complementary to our business, and as a result, those acquisition opportunities may not be available to us. We do not believe that the terms of the ownership waiver and voting agreement can fully protect against these risks.
To the extent that our Manager owns a substantial portion of our outstanding shares, it would be able to exert significant influence over us, including:
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the composition of our Board (in addition to its existing rights to nominate a director under the terms of our management agreement);
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direction and policies, including the appointment and removal of officers;
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the determination of incentive compensation, which may affect our ability to retain key employees;
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any determinations with respect to mergers or other business combinations;
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our acquisition or disposition of assets;
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our financing decisions and our capital raising activities;

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the payment of dividends;
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conduct in regulatory and legal proceedings; and
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amendments to our charter and bylaws.
Our Manager’s professionals who perform services for us face competing demands relating to their time and conflicts of interests relating to performing services on our behalf, which may cause our operations to suffer.
We rely on our Manager’s professionals to perform services related to the operation of our business. Our Manager professionals performing services for us may also perform services for our Manager’s other managed companies or strategic vehicles. As a result of their interests in our Manager, other managed companies and the fact that they may engage in other business activities on behalf of others, these individuals may face conflicts of interest in allocating their time among us, our Manager and other managed companies or strategic vehicles and other business activities in which they are involved. In addition, certain management personnel performing services on behalf of our Manager own equity interests in our Manager or other managed companies and our Manager may grant additional equity interests in our Manager or other managed companies to such persons in connection with their continued services. These conflicts of interest, as well as the loyalties of these individuals to other entities and investors, could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment opportunities. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to our stockholders or to maintain or increase the value of our portfolio.
Further, at times when there are turbulent conditions in the real estate markets or distress in the credit markets or other times when we will need focused support and assistance from our Manager, our Manager’s other managed companies or strategic vehicles may likewise require greater focus and attention, placing our Manager’s resources in high demand. In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed or if our Manager did not act as a manager for other entities.
Our executive officers are employees of our Manager and face conflicts of interest related to their positions and interests in our Manager, which could hinder our ability to implement our business strategy.
Our executive officers are employees of our Manager and provide services to us solely in such capacity pursuant to our Manager’s obligations to us under the management agreement. We do not have employment agreements with any of our executive officers; however we are required, in certain instances, pursuant to the terms of our Management Agreement with our Manager, to reimburse our Manager for up to 50% of any severance payments paid to Mr. Nia. If the management agreement with our Manager were to be terminated, we would lose the services of all our executive officers and our Manager investment professionals acting on our behalf. Furthermore, if any of our executive officers ceased to be employed by our Manager, such individual would also no longer serve as one of our executive officers. Our Manager is an independent contractor and controls the activities of its employees, including our executive officers. Our executive officers therefore owe duties to our Manager and its stockholders, which may from time-to-time conflict with the duties they owe to us and our stockholders. In addition, our executive officers may also own equity in our Manager or its other managed companies. As a result, the loyalties of these individuals to other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment opportunities.
Both our board of directors and our Manager’s board of directors have adopted, and will likely in the future adopt, certain incentive plans to create incentives that will allow us and our Manager to retain and attract the services of key employees. These incentive plans may be tied to the performance of our common stock or our Manager’s common stock and any decline in our stock price may result in us or our Manager being unable to motivate and retain our management and these other employees. Our inability to motivate and retain these individuals could also harm our business and our prospects. Additionally, competition for experienced real estate professionals could require our Manager or us to pay higher wages and provide additional benefits to attract qualified employees, which could result in higher compensation expenses to us.
We may not realize the anticipated benefits of our manager’s strategic partnerships and joint ventures.
Our Manager may enter into strategic partnerships and joint ventures to further its own interests or the interests of its managed companies, including us. Our Manager may not be able to realize the anticipated benefits of these strategic partnerships and joint ventures. These strategic partnerships and/or joint ventures may also subject our Manager and its managed companies, including us, to additional risks and uncertainties, as our Manager and its managed companies, including us, may be dependent upon, and subject to, liability, losses or reputational damage relating to systems, control and personnel that are not under our Manager’s control. In addition, where our Manager does not have a controlling interest, it may not be able to take actions that are in our best interests due to a lack of full control. Furthermore, to the extent that our Manager’s partners provide services to us, certain conflicts of interests may exist. Moreover, disagreements or disputes between our Manager and its partners could result in litigation, which could potentially distract our Manager from our business.

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Our Manager manages our portfolio pursuant to very broad investment guidelines and our board of directors does not approve each investment and financing decision made by our Manager unless required by our investment guidelines.
Our Manager is authorized to follow very broad investment guidelines established by our board of directors. Our board of directors periodically reviews our investment guidelines and our investment portfolio but does not, and is not required to review all of our proposed investments, except in limited circumstances as set forth in our investment guidelines. Our board of directors may also make modifications to our investment guidelines from time to time as it deems appropriate. In addition, in conducting periodic reviews or modifying our investment guidelines, our board of directors may rely primarily on information provided to them by our Manager. Furthermore, transactions entered into by our Manager on our behalf may be costly, difficult or impossible to unwind by the time they are reviewed by our board of directors. Our Manager has flexibility within the broad parameters of our investment guidelines in determining the types and amounts of investments in which to invest on our behalf, including making investments that may result in returns that are substantially below expectations or result in losses, which could materially and adversely affect our business and results of operations, or may otherwise not be in the best interests of our stockholders.
Our Manager’s liability is limited under the management agreement and we have agreed to indemnify our Manager against all liabilities incurred in accordance with and pursuant to the management agreement.
We have entered into a management agreement with our Manager, which governs our relationship with our Manager. Our Manager maintains a fiduciary relationship with us. Under the terms of the management agreement, and subject to applicable law, our Manager, its directors, officers, employees, partners, managers, members, controlling persons, and any other person or entity affiliated with our Manager are not liable to us or our subsidiaries for acts taken or omitted to be taken in accordance with and pursuant to the management agreement, except those resulting from acts of gross negligence, willful misfeasance or bad faith in the performance of our Manager’s duties under the management agreement. In addition, subject to applicable law, we have agreed to indemnify our Manager and each of its directors, officers, employees, partners, managers, members, controlling persons and any other person or entity affiliated with our Manager from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our Manager’s performance of its duties or obligations under the management agreement or otherwise as our manager, except where attributable to acts of gross negligence, willful misfeasance or bad faith in the performance of our Manager’s duties under the management agreement.
Our Manager is subject to extensive regulation as an investment adviser and/or fund manager, which could adversely affect its ability to manage our business.
Certain of our Manager’s affiliates, including our manager, are subject to regulation as investment advisers and/or fund managers by various regulatory authorities that are charged with protecting the interests of our Manager’s managed companies, including us. Instances of criminal activity and fraud by participants in the investment management industry and disclosures of trading and other abuses by participants in the financial services industry have led the U.S. government and regulators in foreign jurisdictions to consider increasing the rules and regulations governing, and oversight of, the financial system. This activity is expected to result in continued changes to the laws and regulations governing the investment management industry and more aggressive enforcement of the existing laws and regulations. Our Manager could be subject to civil liability, criminal liability, or sanction, including revocation of its registration as an investment adviser in the United States or in any foreign jurisdictions where it is registered, revocation of the licenses of its employees, censures, fines or temporary suspension or permanent bar from conducting business, if it is found to have violated any of these laws or regulations. Any such liability or sanction could adversely affect its ability to manage our business.
Our Manager must continually address conflicts between its interests and those of its managed companies, including us. In addition, the SEC and other regulators have increased their scrutiny of potential conflicts of interest. However, appropriately dealing with conflicts of interest is complex and difficult and if our Manager fails, or appears to fail, to deal appropriately with conflicts of interest, it could face litigation or regulatory proceedings or penalties, any of which could adversely affect its ability to manage our business.
Risks Related to Our Investments
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our investments.
Our investments may be susceptible to economic slowdowns or recessions, which could lead to financial losses and a decrease in revenues, earnings and asset values. Any economic slowdown or recession, most particularly affecting the jurisdictions in which we own properties, in addition to other non-economic factors such as an excess supply of properties, could have a material negative impact on the values of our investments. Declining real estate values will reduce the value of our properties, as well as our ability to refinance our properties and use the value of our existing properties to support the purchase or investment in additional properties. Slower than expected economic growth pressured by a strained labor market, along with overall financial uncertainty, could result in lower occupancy rates and lower lease rates across many property types and may create obstacles for us to achieve our business plans. We may also be less able to pay principal and interest on our borrowings, which could cause us to lose title to properties

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securing our borrowings. Any of the foregoing could significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.
We are subject to significant competition and we may not be able to compete successfully for investments.
We are subject to significant competition for attractive investment opportunities from other real estate investors, some of which have greater financial resources than us, including publicly-traded REITs, non-traded REITs, insurance companies, commercial and investment banking firms, private institutional funds, hedge funds, private equity funds, sovereign wealth funds and other investors. We may not be able to compete successfully for investments. In addition, the number of entities and the amount of funds competing for suitable investments may increase. If we pay higher prices for investments, our returns may be lower and the value of our investments may not increase or may decrease significantly below the amount we paid for such investments. If such events occur, we may experience lower returns on our investments.
While we are primarily focused on investing in office properties within Germany, the United Kingdom, and France, we have no established investment criteria limiting the particular country or region, industry concentration or investment type of our investments. If our investments are concentrated in a particular country or region or property type that experiences adverse economic conditions, our investments may lose value and we may experience losses.
Properties that we may acquire may be concentrated in a particular country or region or in a particular property type. These current and future investments carry the risks associated with significant regional or industry concentration. We have not established and do not plan to establish any investment criteria to limit our exposure to these risks for future investments. As a result, properties underlying our investments may be overly concentrated in certain countries or regions or industries and we may experience losses as a result. A worsening of economic conditions, a natural disaster or civil disruptions in a particular country or region in which our investments may be concentrated, or economic upheaval with respect to a particular property type, could have an adverse effect on our business, including impairing the value of our properties.
Approximately 95% of our in-place rental income is generated from office properties, which increases the likelihood that risks related to owning office properties will become more material to our business and results of operations.
Our exposure to the risks inherent in the office sector may make us more vulnerable to a downturn or slowdown in the office sector. A downturn in the office industry could negatively affect our lessees’ ability to make lease payments to us and our ability to pay distributions to our stockholders. These adverse effects may be more pronounced than if our investments were more diversified.
We are subject to additional risks due to the international nature of our investments, which could adversely impact our business and results of operations.
All of our investments are located within Europe, primarily within Germany, the United Kingdom and France.
Our investments may be affected by factors peculiar to the laws of the jurisdiction in which the property is located and these laws may expose us to risks that are different from and/or in addition to those commonly found in the United States. We and our Manager may not be as familiar with the potential risks to our investments outside of the United States and we may incur losses as a result. These risks include:
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governmental laws, rules and policies including laws relating to the foreign ownership of real property or mortgages and laws relating to the ability of foreign persons or corporations to remove profits earned from activities within the country to the person’s or corporation’s country of origin;
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translation and transaction risks related to fluctuations in foreign currency exchange rates;
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adverse market conditions caused by inflation, deflation or other changes in national or local political and economic conditions;
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challenges of complying with a wide variety of foreign laws, including corporate governance, operations, taxes and litigation;
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changes in relative interest rates;
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changes in the availability, cost and terms of borrowings resulting from varying national economic policies;
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changes in real estate and other tax rates, the tax treatment of transaction structures and other changes in operating expenses in a particular country where we have an investment;
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our REIT tax status not being respected under foreign laws, in which case any income or gains from foreign sources be subject to foreign taxes and withholding taxes;
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lack of uniform accounting standards (including availability of information in accordance with accounting principles generally accepted in the United States, or U.S. GAAP);

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changes in land use and zoning laws;
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more stringent environmental laws or changes in such laws;
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changes in the social stability or other political, economic or diplomatic developments in or affecting a country where we have an investment;
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changes in applicable laws and regulations in the United States that affect foreign operations; and
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legal and logistical barriers to enforcing our contractual rights in other countries, including insolvency regimes, landlord/tenant rights and ability to take possession of collateral.
Each of these risks might adversely affect our performance and impair our ability to make distributions to our stockholders required to qualify and remain qualified as a REIT. In addition, there is generally less publicly available information about foreign companies and a lack of uniform financial accounting standards and practices (including the availability of information in accordance with U.S. GAAP) which could impair our ability to analyze transactions and receive timely and accurate financial information from tenants necessary to meet our reporting obligations to financial institutions or governmental or regulatory agencies.
Our business is also subject to extensive regulation by various non-U.S. regulators, including governments, central banks and other regulatory bodies, in the jurisdictions in which we make investments. In many countries, the laws and regulations applicable to the financial services and securities industries are uncertain and evolving and it may be difficult for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our inability to remain in compliance with local laws in a particular market and manage our relationships with regulators could have a significant and adverse effect not only on our businesses in that market but also on our reputation generally.
Our joint venture partners could take actions that decrease the value of an investment to us and lower our overall return.
We currently are party to and may in the future enter into joint ventures with third parties to make investments. We may also make investments in partnerships or other co-ownership arrangements or participations. Such investments may involve risks not otherwise present with other methods of investment, including, for example, the following risks:
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our joint venture partner in an investment could become insolvent or bankrupt;
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fraud or other misconduct by our joint venture partners;
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we may share decision-making authority with our joint venture partner regarding certain major decisions affecting the ownership of the joint venture and the joint venture property, such as the sale of the property or the making of additional capital contributions for the benefit of the property, which may prevent us from taking actions that are opposed by our joint venture partner;
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such joint venture partner may at any time have economic or business interests or goals that are or that become in conflict with our business interests or goals, including for example the operation of the properties owned by such joint venture;
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such joint venture partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;
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our joint venture partners may be structured differently than us for tax purposes and this could create conflicts of interest and risk to our REIT status; and
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the terms of our joint ventures could restrict our ability to sell or transfer our interest to a third party when we desire on advantageous terms, which could result in reduced liquidity.
Any of the above might subject us to liabilities and thus reduce our returns on our investment with that joint venture partner. In addition, disagreements or disputes between us and our joint venture partner could result in litigation, which could increase our expenses and potentially limit the time and effort our officers and directors are able to devote to our business.
Because real estate investments are relatively illiquid, we may not be able to vary our portfolio in response to changes in economic and other conditions, which may result in losses.
Real estate investments are relatively illiquid. A variety of factors could make it difficult for us to dispose of any of our investments on acceptable terms even if a disposition is in the best interests of our stockholders. We cannot predict whether we will be able to sell any property for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Certain properties may also be subject to transfer restrictions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of financing that can be placed or repaid on that property. We may be required to expend cash to correct defects or to make improvements before a property can be sold, and we

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cannot assure you that we will have cash available to correct those defects or to make those improvements. Additionally, the Internal Revenue Code also places limits on our ability to sell certain properties held for fewer than two years.
We may also give our tenants a right of first refusal or similar options. As a result, our ability to sell investments in response to changes in economic and other conditions could be limited. To the extent we are unable to sell any property for its book value or at all, we may be required to take a non-cash impairment charge or loss on the sale, either of which would reduce our earnings. Limitations on our ability to respond to adverse changes in the performance of our properties may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
We are subject to risks, such as declining real estate values and operating performance, associated with future advance or capital expenditure obligations and our capital expenditure projections may prove inaccurate.
Future funding obligations subject us to significant risks such as that the property may have declined in value, projects to be completed with the additional funds may have cost overruns and the tenant may be unable to generate enough cash flow and execute its business plan, or sell or refinance the property, in order to repay our indebtedness. We may also need to fund capital expenditures and other significant expenses for our investments in excess of those projected at the time of our underwriting because of, among other reasons, inaccurate or incomplete technical advice from our advisors at the time of underwriting that results in greater than expected expenditures.
We could also determine that we need to fund more money than we originally anticipated in order to maximize the value of our investment even though there is no assurance additional funding would be the best course of action. Further, future funding obligations require us to maintain higher liquidity than we might otherwise maintain and these funding obligations could reduce the overall return on our investments. We could also find ourselves in a position with insufficient liquidity to fund future obligations, which could result in material losses.
We may obtain only limited warranties when we purchase a property, which increases the risk that we could lose some or all of our invested capital in the property or rental income from the property if losses are incurred that are not covered by the limited warranties, which, in turn, could materially adversely affect our business, financial condition and results from operations and our ability to make distributions to our stockholders.
The seller of a property often sells such property in an “as is” condition on a “where is” basis and “with all faults.” In addition, the related real estate purchase and sale agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Despite our efforts, we may fail to uncover all material risks during our diligence process. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property, as well as the loss of rental income from that property if losses are incurred that are not covered by the limited warranties. If we experience losses that are not recoverable under the limited warranties provided by a seller, it may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. In addition, we may be further limited in our ability to enforce against breaches of certain representations and warranties granted in the purchase and sale agreement beyond a very limited period of time or at all where a seller is in financial distress or where the seller of a property we purchase is a liquidating fund or funds after our purchase of the property.
We may be required to indemnify purchasers of our assets against certain liabilities and obligations, which may affect our returns on dispositions.
We may be required to enter into real estate purchase and sale agreements with warranties, representations and indemnifications, which may expose us to liabilities and obligations following dispositions of our assets. Despite our efforts, we may fail to identify all liabilities, which may materially impair the anticipated returns on any dispositions. Further, we may be forced to incur unexpected significant expense in connection with such liabilities and obligations, which could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to stockholders.
The price we pay for acquisitions of real property is based on our projections of market demand, occupancy and rental income, as well as on market factors, and our return on our investment may be lower than expected if any of our projections are inaccurate.
The price we pay for real property investments is based on our projections of market demand, occupancy levels, rental income, the costs of any development, redevelopment or renovation of property and other factors. In addition, increased competition in the real estate market may drive up prices for commercial real estate. If any of our projections are inaccurate or we overpay for investments and their value subsequently drops or fails to rise because of market factors, returns on our investment may be lower than expected and we could experience losses. This may be particularly pronounced during periods of market dislocation.
Our lease transactions may not result in market rates over time, which could have an adverse impact on our income and distributions to our stockholders.
We expect substantially all of our rental and escalation income to come from lease transactions, which may have longer terms than one year or renewal options that specify maximum rate increases. If we do not accurately judge the potential for increases

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in market rates, rental and escalation increases, the terms of our lease transactions may fail to result in fair market rates over time. Further, we may have no ability to terminate our lease transactions or adjust the rent to then-prevailing market rates. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not enter into lease agreements with longer terms or renewal options that specify maximum rates increase, which could have an adverse impact on our income and ability to make distributions to our stockholders.
We may enter into short term leases that are subject to heightened lease turnover risk or we may invest in single tenant properties or properties that are leased primarily to one tenant, which could negatively impact our ability to comply with financial covenants under our borrowings and could materially impact our income and distributions to our stockholders.
We may also enter into leases that are short term in nature and therefore subject to heightened lease turnover risk. Additionally, for single tenant properties or our properties that are primarily leased to one tenant, such as certain of our French and Dutch properties and the Trianon Tower, lease expirations may impact our ability to comply with financial covenants under our borrowings. As a result, we could be subject to a sudden and material change in value of our portfolio and available cash flow from such investments in the event that these leases are not renewed or in the event that we are not able to comply with or obtain relief from our financial covenants under the borrowings related to, or cross-collateralized with, the properties that are subject to these leases.
We may not be able to relet or renew leases at our properties on favorable terms, or at all.
The ability to relet or renew leases underlying our properties may be negatively impacted by challenging economic conditions in general or challenging market conditions in a particular region or asset class. For example, upon expiration or earlier termination of leases for space located at our properties, the space may not be relet or, if relet, the terms of the renewal or reletting (including the cost of required renovations or concessions to tenants) may be less favorable than current lease terms. We may be receiving above market rental rates in certain instances at our properties, which may decrease upon renewal. Any such decrease could adversely impact our income and could harm our ability to service our debt and operate successfully. Weak economic conditions would likely reduce tenants’ ability to make rent payments in accordance with the contractual terms of their leases and could lead to early termination of leases. Furthermore, commercial space needs may contract, resulting in lower lease renewal rates and longer releasing periods when leases are not renewed. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. Additionally, to the extent that market rental rates are reduced, property-level cash flow would likely be negatively affected as existing leases renew at lower rates. If we are unable to relet or renew leases for all or substantially all of the space at these properties, if the rental rates upon such renewal or reletting are significantly lower than expected or if our reserves for these purposes prove inadequate, we will experience a reduction in net income and may be required to reduce or eliminate cash distributions to our stockholders.
Additionally, the open market lease review process in certain jurisdictions can be a lengthy one and often results in resolution through arbitration. While the agreed rent level generally applies retroactively to the lease review date, this can be a lengthy and costly process.
Many of our investments are dependent upon tenants successfully operating their businesses and their failure to do so could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
We depend on our tenants to manage their day-to-day business operations in a manner that generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage, pay real estate taxes and maintain the properties under their operational control in a manner that does not jeopardize their operating licenses or regulatory status. We may not be able to find suitable tenants to lease our properties, and the ability of our tenants to fulfill their obligations to us may depend, in part, upon the overall profitability of their operations, including any other facilities, properties or businesses they may acquire or operate. The cash flow generated by the operation of our properties may not be sufficient for a tenant to meet its obligations to us. Tenants who are having trouble with their cash flow are more likely to expose our properties to liens and other risks to our investments. In addition, we may have trouble recovering from tenants who are insolvent or in financial distress. Our financial position could be weakened and our ability to fulfill our obligations under our real estate borrowings could be limited if our tenants are unable to meet their obligations to us or we fail to renew or extend our contractual relationship with any of our tenants. In addition, to the extent we seek to replace a tenant following a default we may incur substantial delays and expenses. Further, we may be required to fund certain expenses and obligations to preserve the value of our properties while they are being marketed to secure a new tenant. Once a suitable tenant is located, it may still take an extended period of time before the replacement tenant takes possession of the property. Any of these results could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

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We may become responsible for unexpected capital improvements. To the extent such capital improvements are not undertaken, the ability of our tenants to manage our properties effectively and on favorable terms may be affected, which in turn could materially adversely affect our business, financial conditions and results of operations and our ability to make distributions to our stockholders.
We may be responsible under local law of certain jurisdictions in which we own property for unexpected capital improvements. In France, the legal distribution of charges between us and the tenant may be contractually set out. However, certain French law makes it mandatory for us, as owners of the real properties, for leases entered into or renewed on or after November 3, 2014, to incur expenditures for major repairs, in particular those related to the obsolescence of the properties and those required to meet changing legal regulation. French law may also force us to pay certain taxes. These expenditures, which cannot be contractually transferred to the tenant, could have a material adverse effect on our business if they exceed our expectations.
In addition, under German law, maintenance and modernization measures may be required to meet changing legal, environmental or market requirements ( e.g. , with regard to health and safety requirements and fire protection). The costs associated with keeping properties up to market demand are borne primarily by the property owner. Lease agreements for commercial properties may also transfer responsibility for the maintenance and repair of leased properties to tenants. However, the costs of maintenance and repairs to the roof and structures and of areas located in the leased property used by several tenants may not be fully transferred to tenants by use of general terms and conditions and requires contractual limitation on the amount apportioned.
Furthermore, although tenants are generally responsible for capital improvement expenditures under typical net lease structures applicable in the United Kingdom, it is possible that a tenant may not be able to fulfill its obligations to keep a property in good operating condition. To the extent capital improvements are not undertaken or are deferred, occupancy rates and the amount of rental and reimbursement income generated by the property may decline, which would negatively impact the overall value of the affected property. We may be forced to incur unexpected significant expense to maintain our properties, even those that are subject to net leases. Any of these results could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
We could incur additional costs if the actual costs of maintaining or modernizing our properties exceed our estimates, if we are not permitted to raise rents in connection with maintenance and modernization measures, if hidden defects not covered by insurance or contractual warranties are discovered during the maintenance or modernization process or if additional spending is required. Any failure to undertake appropriate maintenance and modernization measures could adversely affect our rental income and entitle tenants to withhold or reduce rental payments or even to terminate existing lease agreements. If we incur substantial unplanned maintenance, repair and modernization costs or fail to undertake appropriate maintenance measures, this could have a material adverse effect on our business, net assets, financial condition, cash flows or results of operations.
We are party to commercial leases that are heavily regulated to protect the tenant and any future amendments to such regulation could increase our expenditures.
Commercial leases are heavily regulated in some countries in which we operate. In France, the contractual conditions applying to commercial leases duration, renewal, rent and rent indexation are considered matters of public order ( ordre public ), and as such are heavily regulated to protect the tenant. The minimum duration of a commercial lease is nine years. The tenant has the right to terminate the lease at the end of every three-year period, unless contractually agreed otherwise for leases of premises to be used exclusively as office space. The tenant also has a right of renewal of the lease at the end of its initial period.
In addition, the tenant has a right to a review of the rent every three years and, unless otherwise agreed by the parties, upon renewal of the lease. The rent variation, however, is capped. In case of a review after a three-year period, or in case of a renewal (unless otherwise agreed by the parties), the variation of the rent cannot exceed the variation of the Commercial Rent Index ( indice trimestriel des loyers commerciaux) , or the Tertiary Activities Rent Index ( indice trimestriel des loyers des activités tertiaires) ,which are published by the French National Institute of Statistics and Economic Studies ( Institut national de la statistique et des études économiques ), except in case of (i) a rent review after a three-year period where the rental value has considerably changed ( i.e. , increase or decrease by more than 10%), (ii) a renewal of a lease where either the features of the premises, the use of the premises, the obligations of the parties under the lease or local marketing factors were significantly modified, (iii) a renewal of a lease, the initial duration of which exceeded nine years or the effective duration of which exceeded twelve years and (iv) certain variable rent leases (such as leases including sales-based or revenue-based rent clauses). In addition, a rent increase for a given year cannot exceed 10% of the rent paid during the previous year. Consequently, we cannot freely raise rents of ongoing leases in France.
Furthermore, changes in the content, interpretation or enforcement of these laws and regulations could compromise some of the practices adopted by us in managing our property holdings and increase our costs for operating, maintaining and renovating our property holdings and adversely affect the valuation of such property holdings. In particular, changes to French law amended many provisions applicable to commercial leases in France, and more specifically:

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replaced all references to the Construction Cost Index (indice national trimestriel mesurant le coût de la construction)with references to the Commercial Rent Index or the Tertiary Activities Rent Index in provisions of the French Code de commerce applicable to rent reviews and renewals of leases;
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prohibited clauses restricting or excluding the tenant’s right to terminate the lease at the end of every three-year period, with the exception of leases of premises to be used exclusively as office space; and
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imposed certain expenses, costs and taxes on the property owner.
In Germany, fixed-term lease agreements with a term exceeding one year can be terminated prior to their contractually agreed expiration date if certain formal requirements are not complied with. These include the requirement that there would be a document that contains all the material terms of the lease agreement, including all attachments and addenda and the signatures of all parties thereto. While the details of the applicable formal requirements are assessed differently by various German courts, most courts agree that such requirements are, in principle, strict. If any of our lease agreements would not satisfy the strict written form requirements, the respective lease agreement could be deemed to have been concluded for an indefinite term. Consequently, such lease agreement could be terminated one year after handover of the respective property to the tenant at the earliest, and at the beginning of a calendar quarter to the end of the following calendar quarter, which may result in a significantly shorter term of the lease. As a result, some of our tenants might attempt to invoke alleged non-compliance with these formal requirements in order to procure an early termination of their lease agreements or a renegotiation of the terms of such lease agreements to our disadvantage.
Moreover, we rely on certain standardized contractual general terms and conditions in Germany. As a general rule, standardized terms are regarded to be invalid under German law if they are not clear and comprehensive or if they are disproportionate and provide an unreasonable disadvantage for the other party. It is impossible to fully avoid risks arising from the use of standardized contractual terms because of the frequency of changes that are made to the legal framework and particularly court decisions relating to general terms and conditions of business. Even in the case of contracts prepared with legal advice, problems of this nature cannot be fully prevented, either from the outset or in the future due to subsequent changes in the legal framework, particularly case law, making it impossible for us to avoid the ensuing legal disadvantages. Such developments could lead to claims being brought against us or us being forced to bear costs that we had expected to be borne by our tenants (e.g., decorative repair costs during the lease term and at lease-end, the allocation of ancillary costs).
Furthermore, our lease terms in Germany typically include an annual indexation that is linked to the consumer price index for Germany ( Verbraucherpreisindex für Deutschland ( CPI )), which is calculated monthly by the German Federal Statistical Office ( Statistisches Bundesamt ). In accordance with applicable German law, these clauses provide not only for upward adjustments but also for downward adjustments tied to changes in the CPI. Consequently, rental proceeds may decrease if the macroeconomic environment worsens and hence consumer prices decline. Furthermore, rent adjustments from indexation will generally only be triggered if certain thresholds of the CPI are met or exceeded, when compared to the index level at the beginning of the lease or the previous rent adjustment. Consequently, we cannot freely raise rents of ongoing leases in Germany.
Lease defaults, terminations or landlord-tenant disputes may reduce our income from our real estate investments.
The creditworthiness of our tenants in our real estate investments have been, or could become, negatively impacted as a result of challenging economic conditions or otherwise, which could result in their inability to meet the terms of their leases. Lease defaults or terminations by one or more tenants may reduce our revenues unless a default is cured or a suitable replacement tenant is found promptly. In addition, disputes may arise between the landlord and tenant that result in the tenant withholding rent payments, possibly for an extended period. These disputes may lead to litigation or other legal procedures to secure payment of the rent withheld or to evict the tenant. Upon a lease default, we may have limited remedies, be unable to accelerate lease payments or evict a defaulting tenant and have limited or no recourse against a guarantor. In addition, the legal process for evicting defaulting tenants may be lengthy and costly. Tenants as well as guarantors may have limited or no ability to satisfy any judgments we may obtain. We may also have duties to mitigate our losses and we may not be successful in that regard. Any of these situations may result in extended periods during which there is a significant decline in revenues or no revenues generated by a property. If this occurred, it could adversely affect our results of operations.
The bankruptcy, insolvency or financial deterioration of any of our tenants could significantly delay our ability to collect unpaid rents or require us to find new tenants.
Our financial position and our ability to make distributions to our stockholders may be adversely affected by financial difficulties experienced by any of our major tenants, including bankruptcy, insolvency or a general downturn in business, or the occurrence of any of our major tenants failing to renew or extend their lease.
We are exposed to the risk that our tenants may not be able to meet their obligations to us or other third parties, which may result in their bankruptcy or insolvency. Although some of our leases and loans permit us to evict a tenant, demand immediate repayment and pursue other remedies, bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant in bankruptcy may be able to restrict our ability to collect unpaid rents or interest during the bankruptcy proceeding. Furthermore,

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dealing with a tenant bankruptcy or other default may divert management’s attention and cause us to incur substantial legal and other costs.
Bankruptcy laws vary across the different jurisdictions in Europe. In certain jurisdictions, a debtor or liquidator has the option to assume (continue) or reject (terminate) an unexpired lease. A debtor cannot choose to keep the beneficial provisions of a contract while rejecting the burdensome ones; the contract must be assumed (continued) or rejected (terminated) as a whole. In France, if the debtor chooses to continue an unexpired commercial lease, but still fails to pay rent in connection with the occupancy after the bankruptcy procedure commencement order, we cannot legally request the termination of the lease before the end of a three-month period from the date of issue of the order relating to the bankruptcy procedure commencement.
Our tenants’ forms of entities may cause special risks or hinder our recovery.
Most of our tenants in the real estate that we own are legal entities rather than individuals. The obligations these entities owe us are typically non-recourse so we can only look to our collateral, and at times, the assets of the entity may not be sufficient to recover our investment. As a result, our risk of loss may be greater than for leases with individuals. Unlike individuals involved in bankruptcies, these legal entities will generally not have personal assets and creditworthiness at stake. As a result, the default or bankruptcy of one of our tenants, or a general partner or managing member of that tenant, may impair our ability to enforce our rights and remedies under the terms of the lease agreement.
Compliance with fire and safety and other regulations may require us or our tenants to make unanticipated expenditures which could adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Our properties are required to comply with jurisdiction-specific fire and safety regulations, building codes and other land regulations and licensing or certification requirements as they may be adopted by governmental agencies and bodies from time-to-time. We may be required to incur substantial costs to comply with those requirements. Changes in labor and other laws could also negatively impact us and our tenants. For example, changes to labor-related statutes or regulations could significantly impact the cost of labor in the workforce, which would increase the costs faced by our tenants and increase their likelihood of default.
Environmental compliance costs and liabilities associated with our properties may materially impair the value of our investments and expose us to liability.
Under various international and local environmental laws, ordinances and regulations, a current or previous owner of real property, such as us, and our tenants, may be liable in certain circumstances for the costs of investigation, removal or remediation of, or related releases of, certain hazardous or toxic substances, including materials containing asbestos, at, under or disposed of in connection with such property, as well as certain other potential costs relating to hazardous or toxic substances, including government fines and damages for injuries to persons and adjacent property. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances and liability may be imposed on the owner in connection with the activities of a tenant at the property. The presence of contamination or the failure to remediate contamination may adversely affect our or our tenants’ ability to sell or lease real estate, or to borrow using the real estate as collateral, which, in turn, could reduce our revenues. We, or our tenants, as owner of a site, may be liable to third parties for damages and injuries resulting from environmental contamination emanating from the site. The cost of any required investigation, remediation, removal, fines or personal or property damages and our or our tenants’ liability could significantly exceed the value of the property without any limits.
The scope of the indemnification our tenants have agreed to provide us may be limited. For instance, some of our agreements with our tenants do not require them to indemnify us for environmental liabilities arising before the tenant took possession of the premises. Further, any such tenant may not be able to fulfill its indemnification obligations. If we were deemed liable for any such environmental liabilities and were unable to seek recovery against our tenant, our business, financial condition and results of operations could be materially and adversely affected.
We may make investments that involve property types and structures with which we have less familiarity, thereby increasing our risk of loss.
We may determine to invest in property types with which we have limited or no prior experience. When investing in property types with which we have limited or no prior experience, we may not be successful in our diligence and underwriting efforts. We may also be unsuccessful in preserving value if conditions deteriorate and we may expose ourselves to unknown substantial risks. Furthermore, these investments could require additional management time and attention relative to investments with which we are more familiar. All of these factors increase our risk of loss.

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We may dispose of properties that no longer meet our strategic plans. If the proceeds of our dispositions are not what we expect, or if we cannot effectively and timely deploy the proceeds from a disposal, there could be an adverse effect on our results of operations and our ability to make distributions to our stockholders.
We may dispose of properties that no longer meet our strategic plans. We then intend to use the proceeds generated from any potential disposition to acquire additional properties that meet the requirements of our strategic plans. We may not be able to dispose of properties for the amounts of proceeds we expect, or at all. In addition, if we are able to dispose of those properties, we may not be able to use the capital in a timely or more efficient manner. As such, we may not be able to adequately time any decrease in revenues from the sale of properties with a corresponding increase in revenues associated with the acquisition of new properties. The failure to dispose of properties, or to timely and more efficiently apply the proceeds from any disposition of properties to attractive acquisition opportunities could have an adverse effect on our results of operations and our ability to make distributions to our stockholders.
Uninsured losses relating to real estate and lender requirements to obtain insurance may reduce our returns.
There are types of losses relating to real estate, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, for which we may not obtain insurance unless we are required to do so by our mortgage lenders. If any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by any such uninsured loss. In addition, other than any reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large amounts for uninsured losses, we could suffer reduced earnings that would result in less cash available for distribution to our stockholders. In cases where we are required by mortgage lenders to obtain casualty loss insurance for catastrophic events or terrorism, such insurance may not be available, or may not be available at a reasonable cost, which could inhibit our ability to finance or refinance our properties. Additionally, if we obtain such insurance, the costs associated with owning a property would increase and could have a material adverse effect on the net income from the property, and, thus, the cash available for distribution to our stockholders.
Risks Related to Our Financing Strategy
We may not be able to access financing sources on attractive terms, if at all, which could adversely affect our ability to execute our business plan.
We use a variety of financing sources, including mortgage notes, credit facilities and other term borrowings, as well as preferred equity. For example, as of March 8, 2018 , we had $1.2 billion of borrowings outstanding.
Our ability to effectively execute our financing strategy depends on various conditions in the financing markets that are beyond our control, including liquidity and credit spreads. While we seek non-recourse long-term financing, such financing may not be available to us on favorable terms or at all. If our strategy is not viable, we will have to find alternative forms of financing for our assets, which may include more restrictive recourse borrowings and borrowings with higher debt service that limit our ability to engage in certain transactions and reduce our cash available for distribution to stockholders. If alternative financing is not available on favorable terms, or at all, we may have to liquidate assets at unfavorable prices to pay off such financing. Our return on our investments and distributions to stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the earnings that we can derive from the assets we acquire or originate.
Substantially all of our borrowings are floating rate and fluctuations in interest rates may cause losses.
Substantially all of our existing borrowings bear, and future borrowing may bear, interest at variable rates. As market interest rates increase, the interest rate on our variable rate borrowings will increase and will create higher debt service requirements, which would adversely affect our cash flow and could adversely impact our results of operations. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions and other factors beyond our control. While we may enter into agreements limiting our exposure to higher debt service requirements, any such agreements may not offer complete protection from this risk.
Our interest rate risk sensitive assets, liabilities and related derivatives are generally held for non-trading purposes. Based on our current portfolio, a hypothetical 100 basis point increase to the interest rate caps in the applicable benchmark (EURIBOR and GBP LIBOR) applied to our floating-rate liabilities and related derivatives would result in an increase in net interest expense of approximately $7.0 million .
In a period of rising interest rates, our interest expense could increase while the income we earn on our investments would not change, which would adversely affect our profitability.
Our operating results depend in large part on differences between the income from our investments less our operating costs, reduced by any credit losses and financing costs. Income from our investments may respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may influence our net income. Increases in these rates may decrease our net income. Interest rate fluctuations resulting in our interest expense exceeding

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the income from our investments could result in losses for us and may limit our ability to make distributions to our stockholders. In addition, if we need to repay existing borrowings during periods of rising interest rates, we could be required to liquidate one or more of our investments at times that may not permit realization of the maximum return on those investments, which would adversely affect our profitability.
Our Credit Facility permits us to make significant borrowings, which restrict our ability to engage in certain activities and could require that we generate significant cash flow or access the capital markets to satisfy the payment and other obligations.
We may in the future make significant borrowings under our Credit Facility. We could also obtain additional facilities or increase our line of credit on our existing facility in the future. Our Credit Facility contains various affirmative and negative covenants, including, among other things, limitations on debt, liens and restricted payments, as well as financial covenants. Compliance with these covenants restrict our ability to engage in certain transactions, which could materially adversely affect our financial condition.
In addition, any future borrowings under our Credit Facility may exceed our cash on hand and/or our cash flows from operating activities. Our ability to meet the payment and other obligations under our Credit Facility depends on our ability to generate sufficient cash flow or access capital markets in the future. Our ability to generate cash flow or access capital markets, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us, in amounts sufficient to enable us to meet our payment obligations under our Credit Facility. If we are not able to generate sufficient cash flow to service our Credit Facility or other borrowing obligations, we may need to refinance or restructure our borrowings, reduce or delay capital investments, or seek to raise additional capital. There is no assurance we will be able to do any of the foregoing on favorable terms or at all. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under our Credit Facility, which could materially and adversely affect our liquidity.
We may not be able to borrow under our Credit facility.
Our borrowings may restrict our ability to incur additional indebtedness, such as under our Credit Facility, which includes financial maintenance covenants and non-financial covenants. Breach of any such covenants would block additional borrowings under the facility. Our inability to borrow additional amounts could delay or prevent us from acquiring, financing, and completing desirable investments and could negatively affect our liquidity, which could materially and adversely affect our business. Inability to borrow could also prevent us from making distributions to our stockholders.
We are subject to risks associated with obtaining mortgage financing on our real estate, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
As of December 31, 2017, our real estate portfolio had $1.2 billion of total mortgage financing. Financing for new real estate investments and our maturing borrowings may be provided by credit facilities, private or public debt offerings, assumption of secured borrowings, mortgage financing on a portion of our owned portfolio or through joint ventures. We are subject to risks normally associated with financing, including the risks that our cash flow is insufficient to make timely payments of interest or principal, that we may be unable to refinance existing borrowings or support collateral obligations and that the terms of refinancing may not be as favorable as the terms of existing borrowing. If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds from other capital transactions or the sale of the underlying property, our cash flow may not be sufficient in all years to make distributions to our stockholders and to repay all maturing borrowings. This may entitle secured creditors to exercise their rights under their credit documentation which may include an acceleration of their claims and a foreclosure of security. The rights of secured creditors will be jurisdiction specific, but in the United Kingdom, for example, this may include the appointment of a receiver pursuant to the Law of Property Act 1925 or under the terms of the security document who, in the latter case, will be entitled to take possession and control of the relevant secured properties subject to the mortgage and to exercise a power of sale of a property in order discharge the secured indebtedness. This creates a risk that the proceeds will be insufficient to provide us with any equity in those properties. Alternatively, certain secured creditors may have the right to appoint an administrator with respect to the property investments held by a company incorporated in the United Kingdom. An administrator is an officer of the court who will take possession, custody and control of the relevant company’s assets and undertakings and is able to exercise legislative powers that include a power of sale. The appointment of an administrator may similarly create a risk that the proceeds of realization of our assets in an administration will be insufficient to provide us with any equity in those properties or surplus proceeds.
Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, the interest expense relating to that refinanced borrowing would increase, which could reduce our profitability and the amount of distributions we are able to pay to our stockholders. Moreover, additional financing increases the amount of our leverage, which could negatively affect our ability to obtain additional financing in the future or make us more vulnerable in a downturn in our results of operations or the economy generally.

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Hedging against interest rate and currency exposure may adversely affect our earnings, limit our gains or result in losses, which could adversely affect cash available for distribution to our stockholders.
We have and may in the future enter into interest rate swap, cap or floor agreements or pursue other interest rate or currency hedging strategies. Our hedging activity will vary in scope based on interest rate levels, the type of investments held and other changing market conditions. Interest rate and/or currency hedging may fail to protect or could adversely affect us because, among other things:
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interest rate and/or currency hedging can be expensive, particularly during periods of rising and volatile interest rates;
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available interest rate and/or currency hedging may not correspond directly with the risk for which protection is sought;
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the duration of the hedge may not match the duration of the related liability or investment;
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our hedging opportunities may be limited by the treatment of income from hedging transactions under the rules determining REIT qualification;
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the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;
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the counterparties with which we trade may cease making markets and quoting prices in such instruments, which may render us unable to enter into an offsetting transaction with respect to an open position;
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the party owing money in the hedging transaction may default on its obligation to pay; and
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we may purchase a hedge that turns out not to be necessary, i.e. , a hedge that is out of the money.
Any hedging activity we engage in may adversely affect our earnings, which could adversely affect cash available for distribution to our stockholders. Therefore, while we may enter into such transactions to seek to reduce interest rate and/or currency risks, unanticipated changes in interest rates or exchange rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not be able to establish a perfect correlation between hedging instruments and the investments being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. We may also be exposed to liquidity issues as a result of margin calls or settlement of derivative hedges.
Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearinghouse or regulated by any foreign or U.S. governmental authorities and involve risks and costs.
The cost of using hedging instruments increases as the period covered by the instrument lengthens and during periods of rising and volatile interest rates and change in foreign currency exchange rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising or foreign currency exchange rates are unfavorable and hedging costs have increased. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, not guaranteed by an exchange or its clearing house, or are less regulated by foreign or U.S. governmental authorities than exchange traded instruments. Consequently, there are no regulatory or statutory requirements with respect to recordkeeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we may enter into a hedging transaction will most likely result in a default. Default by a party with whom we may enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. It may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
Refer to the below risk factor “- Risks Related to Regulatory Matters and Our REIT Tax Status” - The direct or indirect effects of the continuing implementation and enforcements by regulations of the Dodd-Frank Act, originally enacted in July 2010 for the purpose of stabilizing or reforming the financial markets, may have an adverse effect on our interest rate hedging activities for a discussion of how the Dodd-Frank Wall Street Reform Act, or the Dodd-Frank Act, may affect the use of hedging instruments.

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Risks Related to Our Company
We may be subject to the actions of activist stockholders.
We may be the subject of increased activity by activist stockholders as stockholder activism generally is increasing. Responding to stockholder activism can be costly and time-consuming, create conflicts with our manager, disrupt our operations and divert the attention of our manager from executing our business plan. Activist campaigns can create perceived uncertainties as to our future direction, strategy or leadership and may result in the loss of potential business opportunities, harm our ability to attract new investors, tenants/operators/managers and joint venture partners and cause our stock price to experience periods of volatility or stagnation. Moreover, if individuals are elected to our board of directors with a specific agenda, even though less than a majority, our ability to effectively and timely implement our current initiatives and execute on our long-term strategy may be adversely affected.
Failure of NorthStar Realty, a subsidiary of Colony NorthStar, to effectively perform its obligations to us could have an adverse effect on our business and performance.
In connection with the Spin-off, we entered into a separation agreement and various other agreements with NorthStar Realty. These agreements govern our relationship with NorthStar Realty and generally provide that all liabilities and obligations attributable to periods prior to the Spin-off. We and NorthStar Realty agreed to provide each other with indemnities with respect to liabilities arising out of the period after the Spin-off. We rely on NorthStar Realty to perform its obligations under these agreements. Following the Mergers, NorthStar Realty is a subsidiary of our Manager. Any such failure could lead to a decline or other adverse effects to our operating results and could harm our ability to execute our business plan.
We rely on our Manager for the performance of our information technology functions and our Manager’s failure to implement effective information and cyber security policies, procedures and capabilities could disrupt our business and harm our results of operations.
All of our information technology functions and data are maintained on our Manager’s systems and we are therefore we are dependent on the effectiveness of our Manager’s information and cyber security policies, procedures and capabilities to protect its computer and telecommunications systems and our data that resides on or is transmitted through them. An externally caused information security incident, such as a hacker attack, virus, worm, or natural disaster or an internally caused issue, such as failure to control access to sensitive systems, could materially interrupt business operations or cause disclosure or modification of sensitive or confidential information and could result in material financial loss, loss of competitive position, regulatory actions, breach of contracts, reputational harm or legal liability. Such security incidents also could result in a violation of applicable U.S. and international privacy and other laws, and subject us to litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. For example, the EU adopted a new regulation that becomes effective in May 2018, called the General Data Protection Regulation (“GDPR”), which requires companies to meet new requirements regarding the handling of personal data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to meet GDPR requirements could result in penalties of up to 4% of worldwide revenue. Our reputation could also be adversely impacted if we fail, or are perceived to have failed, to properly respond to these incidents. Such failure to properly respond could also result in similar exposure to liability. In addition, our Manager is dependent on information technology systems provided by other parties upon which it does not have control thus the performance of such systems may be affected due to failures or other information security events originating at suppliers or vendors (so called “fourth party risk”). We and our Manager may not be able to effectively monitor or mitigate fourth-party risk.
We may continue to grow our business through acquisitions, which entails substantial risk.
We may continue growing our business through acquisitions. Such acquisitions entail substantial risk. During our due diligence of such acquisitions, we may not uncover all relevant liabilities and we may have limited, if any, recourse against the sellers. We may also incur significant transaction and integration costs in connection with such acquisitions. Further, we may not successfully integrate the investments that we acquire into our business and operations, which could have a material adverse effect on our financial results and condition.
We are migrating to a new accounting system and, if this new system proves ineffective or we experience difficulties with the migration, we may be unable to timely or accurately prepare financial reports.
We are in the process of migrating our accounting systems. Any problems or delays associated with the implementation of our accounting platform or the failure to complete such implementation on a timely basis could adversely affect our ability to report financial information as our company grows, including the filing of our quarterly or annual reports with the SEC on a timely and accurate basis. After converting from prior systems and processes, we may discover data integrity problems or other issues that, if not corrected, could impact our business or financial results.

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We believe cash available for distribution, or CAD and NOI, each a non-GAAP measure, provide meaningful indicators of our operating performance, however, CAD and NOI should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP as indicators of operating performance.
Our management uses CAD and NOI, each a non-GAAP measure, to evaluate our profitability and our board of directors considers CAD and NOI in determining our quarterly cash distributions.
We believe that CAD is useful because it adjusts net income (loss) for a variety of non-cash items. We calculate CAD by subtracting from or adding to net income (loss) attributable to common stockholders, non-controlling interests and the following items: depreciation and amortization items, including straight-line rental income or expense (excluding amortization of rent free periods), amortization of above/below market leases, amortization of deferred financing costs, amortization of discount on financings and other and equity-based compensation; unrealized gain (loss) on derivatives and others; realized gain (loss) on sales and other (excluding accelerated amortization related to sales of investments); impairment on depreciable property; non-recurring bad debt expense; acquisition gains or losses; transaction costs; foreign currency gains (losses); impairment on goodwill and other intangible assets; and one-time events pursuant to changes in U.S. GAAP and certain other non-recurring items. These items, if applicable, include any adjustments for unconsolidated ventures. The definition of CAD may be adjusted from time to time for our reporting purposes in our discretion, acting through our audit committee or otherwise.
We believe NOI is a useful metric of the operating performance of our real estate portfolio in the aggregate. Portfolio results and performance metrics represent 100% for all consolidated investments and represent our ownership percentage for unconsolidated joint ventures. Net operating income represents total property and related revenues, adjusted for: (i) amortization of above/below market rent; (ii) straight line rent (except with respect to rent free period); (iii) other items such as adjustments related to joint ventures and non-recurring bad debt expense and (iv) less property operating expenses.
However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, transaction costs, depreciation and amortization expense, realized gains (losses) from the sale of properties and other items under U.S. GAAP and capital expenditures and leasing costs necessary to maintain the operating performance of properties, all of which may be significant economic costs. NOI may fail to capture significant trends in these components of U.S. GAAP net income (loss) which further limits its usefulness.
CAD and NOI should not be considered as an alternative to net income (loss), determined in accordance with U.S. GAAP, as indicators of operating performance. In addition, our methodology for calculating CAD and NOI involves subjective judgment and discretion and may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies. For example, our calculation of CAD per share will not take into account any potential dilution from any Senior Notes or restricted stock units subject to performance metrics not yet achieved.
We believe that disclosing EPRA NAV, a non-GAAP measure used by other European real estate companies, helps investors compare our balance sheet to other European real estate companies; however, EPRA NAV should not be considered as an alternative to net assets determined in accordance with U.S. GAAP as a measure of our asset values.
As our entire portfolio is based in Europe, our management calculates European Public Real Estate Association net asset value, or EPRA NAV, a non-GAAP measure, to compare our balance sheet to other European real estate companies and believes that disclosing EPRA NAV provides investors with a meaningful measure of our net asset value. Our calculation of EPRA NAV is derived from our U.S. GAAP balance sheet with adjustments reflecting our interpretation of EPRA’s best practices recommendations. Accordingly, our calculation of EPRA NAV may be different from how other European real estate companies calculate EPRA NAV, which utilize International Financial Reporting Standards (“IFRS”) to prepare their balance sheet. EPRA NAV makes adjustments to net assets as determined in accordance with U.S. GAAP in order to provide our stockholders a measure of fair value of our assets and liabilities with a long-term investment strategy. This performance measure excludes assets and liabilities that are not expected to materialize in normal circumstances. EPRA NAV includes the revaluation of investment properties and excludes the fair value of financial instruments that we intend to hold to maturity, deferred tax and goodwill that resulted from deferred tax. All other assets, including real property and investments reported at cost are adjusted to fair value based upon an independent third party valuation conducted in December and June of each year. This measure should not be considered as an alternative to measuring our net assets in accordance with U.S. GAAP.
The use of estimates and valuations may be different from actual results, which could have a material effect on our consolidated financial statements.
We make various estimates that affect reported amounts and disclosures. Broadly, those estimates are used in measuring the fair value of our assets, establishing provision for losses and potential litigation liability. Market volatility may make it difficult to determine the fair value for certain of our assets and liabilities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these assets in future periods. In addition, at the time of any sales and settlements of these assets and liabilities, the price we ultimately realize will depend on the demand and liquidity in the market at that time for

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that particular type of asset and may be materially lower than our estimate of their current fair value. Estimates are based on available information and judgment. In addition, the value of the assets in our portfolio may differ from our estimates. Therefore, actual values and results could differ from our estimates and that difference could have a material adverse effect on our consolidated financial statements.
Our distribution policy is subject to change.
Our board of directors determines an appropriate distribution on our common stock based upon numerous factors, including REIT qualification requirements, the amount of cash flow generated from operations, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our investments, general economic conditions and economic conditions that more specifically impact our business or prospects. Our board of directors expects to review changes to our distribution on a quarterly basis and distribution levels are subject to adjustment based upon any one or more of the risk factors set forth in this Annual Report on Form 10-K, as well as other factors that our board of directors may, from time-to-time, deem relevant to consider when determining an appropriate distribution on our common stock.
We may not be able to make distributions in the future.
Our ability to generate income and to make distributions to our stockholders may be adversely affected by the risks described in this Annual Report on Form 10-K and any document we file with the SEC. All distributions are made at the discretion of our board of directors, subject to applicable law, and depend on our earnings, our financial condition, maintenance of our REIT qualification and such other factors as our board of directors may deem relevant from time-to-time. We may not be able to make distributions in the future or we may have to reduce our distribution rate.
There can be no assurance that we will continue to repurchase our common stock or that we will repurchase stock at favorable prices.
Our board of directors has approved a stock repurchase program and may approve additional repurchase programs in the future. The amount and timing of stock repurchases are subject to capital availability and our determination that stock repurchases are in the best interest of our stockholders and are in compliance with all respective laws and our agreements applicable to the repurchase of stock. Our ability to repurchase stock will depend upon, among other factors, our cash balances and potential future capital requirements, our results of operations, financial condition and other factors beyond our control that we may deem relevant. A reduction in, or the completion or expiration of, our stock repurchase program could have a negative effect on our stock price. We can provide no assurance that we will repurchase stock at favorable prices, if at all. Further, stock repurchases result in increased leverage, which increases the risk of loss associated with our business.
Our ability to make distributions is limited by the requirements of Maryland law.
Our ability to make distributions on our common stock is limited by the laws of Maryland. Under applicable Maryland law, a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its liabilities as the liabilities become due in the usual course of business, or generally if the corporation’s total assets would be less than the sum of its total liabilities plus, unless the corporation’s charter provides otherwise, the amount that would be needed if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the stockholders whose preferential rights are superior to those receiving the distribution. We may not make a distribution on our common stock unless permitted by Maryland law.
We may change our investment strategy without stockholder consent and make riskier investments.
We may change our investment strategy at any time without the consent of our stockholders, which could result in us making investments that are different from and possibly riskier than our existing investments. A change in our investment strategy may increase our exposure to interest rate and commercial real estate market fluctuations.
Stockholders have limited control over changes in our policies and operations, which increases the uncertainty and risks they face as stockholders.
Our board of directors determines our major policies, including our policies regarding growth, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. We may change our investment policies without stockholder notice or consent, which could result in investments that are different than, or in different proportion than, those described in this Annual Report on Form 10-K. Under the Maryland General Corporation Law, or MGCL, and our charter, stockholders have a right to vote only on limited matters. Our board of directors’ broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face.

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Certain provisions of Maryland law may limit the ability of a third-party to acquire control of us, which could depress our stock price.
Certain provisions of the MGCL may have the effect of inhibiting a third-party from acquiring us or of impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
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“business combination” provisions that, subject to limitations, prohibit certain business combinations between an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation) or an affiliate of any interested stockholder and us for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority stockholder voting requirements on these combinations; and
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“control share” provisions that provide that holders of “control shares” of our company defined as voting shares of stock that, if aggregated with all other shares of stock owned or controlled by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares,” subject to certain exceptions) have no voting rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares.
Pursuant to the Maryland Business Combination Act, our board of directors will exempt any business combinations between us and any person, provided that any such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person). Additionally, our board of directors has exempted any business combinations between us and our Manager, any of its affiliates or any of their sponsored or other managed companies. Consequently, the five-year prohibition and the super-majority vote requirements do not apply to business combinations between us and any of them. As a result, such parties may be able to enter into business combinations with us that may not be in the best interest of stockholders, without compliance with the supermajority vote requirements and the other provisions in the statute. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. There can be no assurance that these resolutions or exemptions will not be amended or eliminated at any time in the future.
Our authorized but unissued common and preferred stock and other provisions of our charter and bylaws may prevent a change in our control.
Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock and authorizes a majority of our entire board of directors, without stockholder approval, to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have the authority to issue. In addition, our board of directors may classify or reclassify any unissued shares of our common stock or preferred stock and may set the preferences, conversions or other rights, voting powers and other terms of the classified or reclassified shares. Our board of directors could establish a series of common stock or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be in the best interest of stockholders.
Our charter and bylaws contains other provisions that may delay or prevent a transaction or a change in control that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.
Maryland law also allows a corporation with a class of equity securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in its charter or bylaws, to a classified board, unless its charter prohibits such an election. Our charter contains a provision prohibiting such an election to classify our board of directors under this provision of Maryland law. This may make us more vulnerable to a change in control. If stockholders voted to amend this charter provision and to classify our board of directors, the staggered terms of our directors could reduce the possibility of a tender offer or an attempt at a change in control even though a tender offer or change in control might be in the best interests of stockholders.
Risks Related to Regulatory Matters and Our REIT Tax Status
We are subject to substantial regulation, numerous contractual obligations and extensive internal policies and failure to comply with these matters could have a material adverse effect on our business, financial condition and results of operations.
We and our subsidiaries are subject to substantial regulation, numerous contractual obligations and extensive internal policies. Given our organizational structure, we are subject to regulation by the SEC, NYSE, Internal Revenue Service, or IRS, and other

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international, federal, state and local governmental bodies and agencies. These regulations are extensive, complex and require substantial management time and attention. If we fail to comply with any of the regulations that apply to our business, we could be subjected to extensive investigations as well as substantial penalties and our business and operations could be materially adversely affected. Our lack of compliance with applicable law could result in among other penalties, our ineligibility to contract with and receive revenue from the federal government or other governmental authorities and agencies. We also have numerous contractual obligations that we must adhere to on a continuous basis to operate our business, the default of which could have a material adverse effect on our business and financial condition. We established internal policies designed to ensure that we manage our business in accordance with applicable law and regulation and in accordance with our contractual obligations. While we designed policies to appropriately operate our business, these internal policies may not be effective in all regards and, further, if we fail to comply with our internal policies, we could be subjected to additional risk and liability.
The direct or indirect effects of the continuing implementation and enforcement by regulators of the Dodd-Frank Act, originally enacted in July 2010 for the purpose of stabilizing or reforming the financial markets, may have an adverse effect on our interest rate hedging activities.
In July 2010, the Dodd-Frank Act became law in the United States. Title VII of the Dodd-Frank Act provided for significantly increased regulation of and restrictions on derivatives markets and transactions that could affect our interest rate hedging or other risk management activities, including: (i) regulatory reporting for swaps; (ii) mandated clearing through central counterparties and execution through regulated exchanges or electronic facilities for certain swaps; and (iii) margin and collateral requirements for certain uncleared swaps. The U.S. Commodity Futures Trading Commission has finalized the majority of the requirements that are to take effect, such as swap reporting, the mandatory clearing of certain interest rate swaps and credit default swaps and the mandatory trading of certain swaps on swap execution facilities or exchanges. The full potential impact of the Dodd-Frank Act on our interest rate hedging activities has been in part mitigated by our ability in some instances to rely on exemptions from certain requirements that are available for swaps used for commercial hedging activities (including exemptions from the exchange trading, mandatory clearing and margin requirements). Nonetheless, our counterparties typically cannot rely on these exemptions for their broader business, and this can result in increased costs or lower liquidity for their customers, thus potentially limiting our ability to hedge. In addition, regulators continue to implement and/or revise other Dodd-Frank Act rules and regulations, and market practices related to the implementation of Dodd-Frank Act requirements in practice continue to develop, and thus the requirements of Title VII may affect our ability to enter into hedging or other risk management transactions, may increase our costs in entering into such transactions and may result in us entering into such transactions on less favorable terms than prior to effectiveness of the Dodd-Frank Act and the rules promulgated thereunder. The occurrence of any of the foregoing events may have an adverse effect on our business.
If we are deemed an investment company under the Investment Company Act, our business would be subject to applicable restrictions under the Investment Company Act, which could make it impracticable for us to continue our business as contemplated and would have a material adverse impact on the market price of our common stock.
We do not believe that we are an “investment company” under the Investment Company Act because we are not, and we do not hold ourselves out, as being engaged primarily in the business of investing, reinvesting or trading in securities, and thus we do not fall within the definition of investment company provided in Section 3(a)(1)(A) of the Investment Company Act. Instead, we are in the business of commercial real estate. In addition, we satisfy the 40% test provided in Section 3(a)(1)(C) of the Investment Company Act. This test, described in more detail under “Business-Regulation-Policies Related to the Investment Company Act” below, provides that issuers that own or propose to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets are investment companies. Because of the nature of our assets, we do not expect to own investment securities. Instead, we own commercial real estate through our wholly-owned and majority-owned subsidiaries. Thus, we seek to conduct our operations so that we will not be deemed an investment company under the Investment Company Act. If we were to be deemed an investment company, however, either because of SEC interpretation changes or otherwise, we could, among other things, be required either: (i) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company; or (ii) to register as an investment company, either of which could have an adverse effect on us and the market price of our common stock. If we are required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration and other matters.
Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.
We believe that our organization and method of operation have enabled us to meet the requirements for qualification and taxation as a REIT commencing with our taxable year ended December 31, 2015, and we intend to continue to operate in a manner so as to continue to qualify as a REIT. However, we cannot assure you that we will remain qualified as a REIT. Our qualification and taxation as a REIT will depend upon our ability to meet on a continuing basis, through actual annual operating results, certain

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qualification tests set forth in the U.S. federal tax laws. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements.
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
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we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;
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we could be subject to the U.S. federal alternative minimum tax and possibly increased state and local taxes; and
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unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it could adversely affect the value of our common stock.
If NorthStar Realty, a subsidiary of Colony NorthStar, failed to qualify as a REIT in its 2015 taxable year, we would be prevented from electing to qualify as a REIT.
We believe that from the time of our formation until the date of our separation from NorthStar Realty, we were treated as a “qualified REIT subsidiary” of NorthStar Realty. Under applicable Treasury regulations, if NorthStar Realty failed to qualify as a REIT in its 2015 taxable year, unless NorthStar Realty’s failure was subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which NorthStar Realty failed to qualify.
Complying with REIT requirements may force us to borrow funds to make distributions to our stockholders or otherwise depend on external sources of capital to fund such distributions.
To qualify as a REIT, we are required to distribute annually at least 90% of our taxable income, subject to certain adjustments, to stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we may elect to retain and pay income tax on our net long-term capital gain. In that case, a stockholder would be taxed on its proportionate share of our undistributed long-term gain and would receive a credit or refund for its proportionate share of the tax we paid. A stockholder, including a tax-exempt or foreign stockholder, would have to file a U.S. federal income tax return to claim that credit or refund. Furthermore, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We anticipate that distributions generally will be taxable as ordinary income, although a portion of such distributions may be designated by us as long-term capital gain to the extent attributable to capital gain income recognized by us, or may constitute a return of capital to the extent that such distribution exceeds our earnings and profits as determined for tax purposes.
From time-to-time, we may generate taxable income greater than our net income (loss) for U.S. GAAP, due to among other things, amortization of capitalized purchase premiums, fair value adjustments and reserves. In addition, our taxable income may be greater than our cash flow available for distribution to stockholders as a result of, among other things, repurchases of our outstanding debt at a discount and investments in assets that generate taxable income in advance of the corresponding cash flow from the assets (for example, if a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise).
If we do not have other funds available in the situations described in the preceding paragraph, we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to distribute enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.
Because of the distribution requirement, it is unlikely that we will be able to fund all future capital needs, including capital needs in connection with investments, from cash retained from operations. As a result, to fund future capital needs, we likely will have to rely on third-party sources of capital, including both debt and equity financing, which may or may not be available on favorable terms or at all. Our access to third‑party sources of capital will depend upon a number of factors, including the market’s perception of our growth potential and our current and potential future earnings and cash distributions and the market price of our stock.
We could fail to qualify as a REIT and/or pay additional taxes if the IRS recharacterizes the structure of certain of our European investments.
We have funded our equity in certain of our European investments through the use of instruments that we believe will be treated as equity for U.S. federal income tax purposes. If the IRS disagreed with such characterization and was successful in recharacterizing the nature of our investments in European jurisdictions, we could fail to satisfy one or more of the asset and gross income tests

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applicable to REITs. Additionally, if the IRS recharacterized the nature of our investments and we were to take action to prevent such REIT test failures, the actions we would take could expose us to increased taxes both internationally and in the United States.
We could be subject to increased taxes if the tax authorities in various European jurisdictions were to modify tax rules and regulations on which we have relied in structuring our European investments.
We comply with local tax rules, regulations, tax authority rulings and international tax treaties in structuring our investments. Should changes occur to these rules, regulations, rulings or treaties, the amount of taxes we pay with respect to our investments may increase.
If, in order to meet the REIT distribution requirement, we must repatriate cash from various European jurisdictions at a higher level than planned, we could be subject to additional taxes in such European jurisdictions.
As discussed above, we comply with local tax rules, regulations, tax authority rulings and international tax treaties in structuring our investments. Our tax treatment under such rules, regulations, rulings and treaties may be dependent, in part, on the timing, amount and level of ownership from which we repatriate cash from European jurisdictions. If, in order to meet the REIT distribution requirement, we must repatriate cash from those jurisdictions at certain times and in certain amounts we could be subject to additional taxes in such European jurisdictions.
Even if we qualify as a REIT, we may be subject to tax (including foreign taxes for which we will not be permitted to pass-through any foreign tax credit to our stockholders), which would reduce the amount of cash available for distribution to our stockholders.
Even if we qualify as a REIT, we may be subject to foreign, U.S. federal, state and local taxes, including alternative minimum taxes and foreign, state or local income, franchise, property and transfer taxes. For example, we intend to make investments solely in real properties located outside the United States through foreign entities. Such entities may be subject to local income and property taxes in the jurisdiction in which they are organized or where their assets are located. In addition, in certain circumstances, we may be subject to non-U.S. withholding tax on repatriation of earnings from such non-U.S. entities. To the extent we are required to pay any such taxes we will not be able to pass through to our stockholders any foreign tax credit with respect to our payment of any such taxes.
To the extent we distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed income and will incur a 4% non-deductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under the Internal Revenue Code. In addition, we could in certain circumstances be required to pay an excise or penalty tax, which could be significant in amount, in order to utilize one or more relief provisions under the Internal Revenue Code to maintain qualification for taxation as a REIT. Furthermore, we may hold some of our assets through taxable REIT subsidiaries, or TRSs. Any TRS or other taxable corporation in which we own an interest could be subject to U.S. federal, state and local income taxes at regular corporate rates if such entities are formed as domestic entities or generate income from U.S. sources or activities connected with the United States, and also will be subject to any applicable foreign taxes. Any of these taxes would decrease the amount available for distribution to our stockholders.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to stockholders and the ownership of our stock. As discussed above, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Additionally, we may be unable to pursue investments that would be otherwise attractive to us in order to satisfy the source of income requirements for qualifying as a REIT.
We must also ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and mortgage-backed securities, personal property leased in connection with the real property to the extent the rents attributable to such property are treated as “rents from real property,” and debt instruments issued by “publicly offered REITs” (i.e. REITs that are required to file annual and periodic reports with the SEC under the Exchange Act). The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets) and no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total securities can be represented by securities of one or more TRSs. Lastly, no more than 25% of the value of our total securities can be represented by debt instruments of “publicly offered REITs” to the extent such debt instruments are not secured by real property or interests in real property.

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If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences, unless certain relief provisions apply. As a result, compliance with the REIT requirements may hinder our ability to operate solely on the basis of profit maximization and may require us to liquidate investments from our portfolio, or refrain from making, otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to stockholders.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge the risks inherent to our operations. Under current law: (i) any transaction entered into in the normal course of our trade or business primarily to manage the risk of interest rate or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets; (ii) any transaction entered into primarily to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income test (or any property which generates such income or gain); and (iii) any transaction entered into to “offset” a transaction described in clause (i) or (ii) if a portion of the hedged indebtedness is extinguished, or the related property is disposed of, will not constitute gross income for purposes of the 75% and 95% income requirements applicable to REITs. Beginning with our 2016 and subsequent taxable years, any transaction entered into in the normal course of our trade or business primarily to manage interest rate risk or price changes with respect to any previous hedging transaction with respect to which the related borrowing or obligation has been extinguished will also not constitute gross income for purposes of the 75% and 95% income requirements applicable to REITs. We are required to clearly identify any such hedging transaction before the close of the day on which it was acquired, originated or entered into and to satisfy other identification requirements in order to be treated as a qualified hedging transaction. In addition, any income from certain other qualified hedging transactions would generally not constitute gross income for purposes of both the 75% and 95% income tests. However, we may be required to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur. We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT.
Currency fluctuations could adversely impact our ability to satisfy the REIT requirements.
Substantially all of our operating income and expense is denominated in currencies where our assets are located and our Operating Partnership pays distributions in foreign currencies or U.S. dollars. Accordingly, our Operating Partnership holds various foreign currencies at any given time and may enter into foreign currency hedging transactions. The U.S. federal income tax rules regarding foreign currency transactions could adversely impact our compliance with the REIT requirements. For example, changes in the U.S. dollar value of the currencies of our operations will impact the determination of our gross income from such operations for U.S. federal income tax purposes. Variations in such currency values could therefore adversely affect our ability to satisfy the REIT gross income tests. In addition, foreign currency held by our Operating Partnership could adversely affect our ability to satisfy the REIT asset tests to the extent our Operating Partnership holds foreign currency on its balance sheet other than its functional currency or otherwise holds any foreign currency that is not held in the normal course of the activities of our Operating Partnership which give rise to qualifying income under the 95% or 75% gross income tests or are directly related to acquiring or holding qualifying assets under the 75% asset test.
If any of our activities do not comply with the applicable REIT requirements, the U.S. federal income tax rules applicable to foreign currencies could magnify the adverse impact of such activities on our REIT compliance. For example, if we receive a distribution from our Operating Partnership that is attributable to operations within a particular foreign jurisdiction, we could recognize foreign currency gain or loss based on the fluctuation in the U.S. dollar value of the local currency of such jurisdiction between the time that the underlying income was recognized and the time of such distribution. Provided that the segment of our Operating Partnership’s business to which such distribution is attributable satisfies certain of the REIT income and asset tests on a standalone basis, any foreign currency gain resulting from such distribution will be excluded for purposes of the REIT gross income tests. However, if such segment did not satisfy the applicable REIT income and asset tests on a standalone basis, any currency gain resulting from such distribution may be non-qualifying income for purposes of the REIT gross income tests, which would adversely affect our ability to satisfy such tests. As another example, foreign currency gain attributable to our holding of certain obligations, including currency hedges of such obligations, will be excluded for purposes of the 95% gross income test, but not the 75% gross income test. However, if such gains are attributable to cash awaiting distribution or reinvestment, such gains may be non-qualifying income under the 75% and 95% gross income tests. Furthermore, the impact of currency fluctuations on our compliance with the REIT requirements could be difficult to predict.
The U.S. federal income tax rules regarding foreign currency transactions are complex, in certain respects uncertain, and limited authority is available regarding the application of such rules. As a result, there can be no assurance that the IRS will not challenge the manner in which we apply such rules to our operations. Any successful challenge could increase the amount which we are required to distribute to our stockholders in order to qualify as a REIT or otherwise adversely impact our compliance with the REIT requirements.

38

Liquidation of assets may jeopardize our REIT qualification.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% prohibited transaction tax on any resulting gain if we sell assets that are treated as dealer property or inventory.
Legislative or regulatory tax changes could adversely affect us or our stockholders.
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in us. The REIT rules are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department which may result in statutory changes as well as revisions to regulations and interpretations. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in our common stock.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules governing the taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. In addition to reducing corporate and non-corporate tax rates, the Tax Cuts and Jobs Act eliminates or restrictions various deductions. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The Tax Cuts and Jobs Act makes numerous large and small changes to tax rules that do not affect REITs directly, but may affect our stockholders and may indirectly affect us.
While the changes in the Tax Cuts and Jobs Act generally are favorable with respect to REITs, the extensive changes to the non-REIT provisions of the Internal Revenue Code may have unanticipated impacts on us or our stockholders. Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short period of time without hearings and substantial time for review is likely to have led to drafting errors, issues requiring clarification, and unintended consequences that will have to be reviewed in subsequent tax legislation. At this point, it is not clear when Congress will address these issues or when the IRS will be able to issue administrative guidance on the changes made in the Tax Cuts and Jobs Act. Investors are urged to consult their tax advisors with respect to the status of the Tax Cuts and Jobs Act and any other legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common stock.
We may be subject to the REIT prohibited transactions tax as a result of executing on our capital recycling plan, which could result in a significant U.S. federal income tax liability to us.
We have disposed of certain non-strategic assets in conjunction with our capital recycling plan. A REIT will incur a 100% tax on the net income from prohibited transactions. Generally, a prohibited transaction includes a sale or disposition of property held primarily for sale to customers in the ordinary course of a trade or business. While we believe that any dispositions of our assets pursuant to our capital recycling plan should not be treated as prohibited transactions, and although we intend to conduct our operations so that we will not be treated as holding our properties for sale, whether a particular sale will be treated as a prohibited transaction depends on the underlying facts and circumstances and we have not sought and do not intend to seek, a ruling from the IRS on that issue. Accordingly, we cannot assure you that the IRS would not successfully assert a contrary position with respect to our dispositions. If all or a significant portion of our dispositions were treated as prohibited transactions, we would incur a significant U.S. federal income tax liability, which could have a material adverse effect on our results of operations.
We may distribute our common stock in a taxable distribution, in which case stockholders may sell shares of our common stock to pay tax on such distributions, placing downward pressure on the market price of our common stock.
We may make taxable distributions that are payable in cash and our common stock. On August 11, 2017, the IRS issued Revenue Procedure 2017-45 authorizing elective cash/stock dividends to be made by publicly offered REITs (e.g., REITs that are required to file annual and periodic reports with the SEC under the Exchange Act). Pursuant to Revenue Procedure 2017-45, effective for distributions declared on or after August 11, 2017, the IRS will treat the distribution of stock pursuant to an elective cash/stock dividend as a distribution of property under Section 301 of the Internal Revenue Code (e.g., a dividend), as long as at least 20% of the total dividend is available in cash and certain other parameters detailed in the Revenue Procedure are satisfied. If we made a taxable distribution payable in cash and our common stock, taxable stockholders receiving such distributions will be required to include the full amount of the distribution, which is treated as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such distributions in excess of the cash distributions received. If a U.S. stockholder sells our common stock that it receives as a distribution in order to pay this tax, the sales proceeds may be less than the amount recorded in earnings with respect to the distribution, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such distributions, including in respect of all or a portion of such distribution that is payable in our common stock. If we made a taxable distribution payable in cash and our common stock and a significant number of stockholders determine to sell shares of our common stock in order to pay taxes owed on distributions, it may put downward pressure on the trading price of our common stock.

39

The stock ownership restrictions of the Internal Revenue Code for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in our stock and restrict our business combination opportunities.
To qualify as a REIT, five or fewer individuals, as defined in the Internal Revenue Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our stock under this requirement. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person, including entities, may own more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% in value or number (whichever is more restrictive) of the aggregate of the outstanding shares of our common stock. The board may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our common stock outstanding would result in the termination of our status as a REIT. Despite these restrictions, it is possible that there will be five or fewer individuals who own more than 50% in value of our outstanding shares, which could cause us to fail to continue to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends paid deduction or net capital gain for this purpose) in order to continue to qualify as a REIT. We have made and intend to continue to make distributions to stockholders to comply with the REIT requirements of the Internal Revenue Code and to avoid corporate income tax and the 4% excise tax. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Distributions paid by REITs are generally taxed at a higher rate than other corporate distributions.
The maximum tax rate for “qualified dividends” paid by corporations to individuals is 20%. Beginning in 2018, under the Tax Cuts and Jobs Act, distributions paid by REITs will generally benefit from a 20% deduction, resulting in a maximum federal income tax rate of 29.6%, rather than the preferential 20% rate applicable to qualified dividends. Additionally, without further legislative action, the 20% deduction applicable to REIT dividends will expire on January 1, 2026. The more favorable rates applicable to regular corporate distributions, combined with reduced corporate tax rates provided by the Tax Cuts and Jobs Act, could cause potential investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay qualified distributions, which could adversely affect the value of the stock of REITs, including our common stock.
Non-U.S. stockholders will generally be subject to withholding tax with respect to our dividends.
Non-U.S. stockholders will generally be subject to U.S. federal withholding tax on dividends received from us at a 30% rate, subject to reduction under an applicable treaty or a statutory exemption under the Internal Revenue Code. Although such withholding taxes may be creditable in such non-U.S. stockholder’s resident jurisdiction, for many such non-U.S. stockholders, investment in a REIT that invests principally in non-U.S. real property may trigger additional tax costs compared to a direct investment in such assets which would generally not subject such non-U.S. stockholders to U.S. federal withholding taxes.
Changes to our corporate structure may result in an additional tax burden.
We may undergo changes to our corporate structure involving, among other things, the direct or indirect transfer of legal or beneficial title to real estate. These transactions may results in unforeseen adverse tax consequences that may have detrimental effects on our business, net assets, financial condition, cash flow and results of operations.
Risks Related to Ownership of Our Common Stock
The market price and trading volume of our common stock may be volatile.
The market price of our common stock could fluctuate significantly for many reasons, including in response to the risk factors listed in this Annual Report on Form 10-K or for reasons unrelated to our specific performance, such as investor perceptions, reports by industry analysts or negative developments with respect to our affiliates, as well as third parties. Our common stock could also be volatile as a result of speculation or general economic and industry conditions.

40

The reduced disclosure requirements applicable to us as an “emerging growth company” may make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may avail ourselves of certain exemptions from various reporting requirements of public companies that are not “emerging growth companies,” including, but not limited to, an exemption from complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and, like smaller reporting companies, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirement of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may remain an emerging growth company for up to five full fiscal years following the Spin-off. We would cease to be an emerging growth company, and, therefore, become ineligible to rely on the above exemptions, if we have more than $1 billion in annual revenue in a fiscal year, if we issue more than $1 billion of non-convertible debt over a three-year period or on the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act which would occur at the end of the fiscal year after: (i) we have filed at least one annual report; (ii) we have been an SEC-reporting company for at least 12 months; and (iii) the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
If some investors find our common stock less attractive as a result of the exemptions available to us as an emerging growth company, there may be a less active trading market for our common stock (assuming a market ever develops) and our value may be more volatile than that of an otherwise comparable company that does not avail itself of the same or similar exemptions.
If, we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act or our internal control over financial reporting is not effective, the reliability of our financial statements may be questioned and our stock price may suffer.
Section 404 of the Sarbanes-Oxley Act requires any company subject to the reporting requirements of the U.S. securities laws to do a comprehensive evaluation of its and its consolidated subsidiaries’ internal controls over financial reporting. To comply with this statute, we will be required, following the loss of our status as an emerging growth company to document and test our internal controls procedures. The rules governing the standards that must be met for management to assess our internal controls over financial reporting are complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. During the course of its testing, our management may identify material weaknesses or deficiencies which may not be remedied in time to meet the deadline imposed by the Sarbanes-Oxley Act. If our management cannot favorably assess the effectiveness of our internal controls over financial reporting or our auditors identify material weaknesses in our internal controls, investor confidence in our financial results may weaken and our stock price may suffer.
Our bylaws designate the Circuit Court for Baltimore City, Maryland or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to bring a claim in a judicial forum that the stockholders believe is a more favorable judicial forum for disputes with us or our directors, officers, manager or agents.
Our bylaws currently provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim for breach of a duty owed by any director, officer, manager, agent or employee of ours to us or our stockholders; (iii) any action asserting a claim against us or any director, officer, manager, agent or employee of ours arising pursuant to the Maryland General Corporation Law, our charter or bylaws brought by or on behalf of a stockholder; or (iv) any action asserting a claim against us or any director, officer, manager, agent or employee of ours that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers, manager or agents, which may discourage lawsuits against us and our directors, officers, manager or agents.



41

Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our properties are part of our real estate equity segment and are described under Part I. Item 1. “Business - Our Investments” and Part II Item 8. “Financial Statements and Supplementary Data - Schedule III - Real Estate and Accumulated Depreciation” of this Annual Report.
Item 3. Legal Proceedings
We are involved in various litigation matters arising in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations. Refer to Note 12, “Commitments and Contingencies” in Part II, Item 8. “Financial Statements and Supplementary Data” for further disclosure regarding legal proceedings.
Item 4. Mine Safety Disclosures
None.

42

PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information
Our common stock is listed on the New York Stock Exchange, or NYSE under the symbol “NRE.” The following table presents the high, low and last sales prices for our common stock, as reported on the NYSE, and our dividends declared on common stock, on a per share basis with respect to the periods indicated:
 
 
 
 
Stock Price
 
 
Period
 
Dividend Declaration Date
 
High
 
Low
 
Close
 
Dividends Per Share
2017
 
 
 
 
 
 
 
 
 
 
Fourth Quarter (1)
 
March 7, 2018
 
$
14.70

 
$
12.80

 
$
13.83

 
$
0.15

Third Quarter
 
November 6, 2017
 
$
13.10

 
$
12.16

 
$
12.64

 
$
0.15

Second Quarter
 
August 2, 2017
 
$
13.00

 
$
11.15

 
$
12.08

 
$
0.15

First Quarter
 
May 1, 2017
 
$
12.88

 
$
11.38

 
$
12.09

 
$
0.15

2016
 
 
 
 
 
 
 
 
 
 
Fourth Quarter
 
March 1, 2017
 
$
13.04

 
$
9.39

 
$
10.96

 
$
0.15

Third Quarter
 
November 1, 2016
 
$
11.30

 
$
8.50

 
$
9.81

 
$
0.15

Second Quarter
 
August 3, 2016
 
$
12.17

 
$
8.71

 
$
11.21

 
$
0.15

First Quarter
 
May 10, 2016
 
$
11.93

 
$
7.81

 
$
11.36

 
$
0.15

____________________
(1)
On March 7, 2018, we declared a dividend of $0.15 per share of common stock. This dividend is expected to be paid on March 23, 2018 to stockholders of record as of the close of business on March 19, 2018.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a discussion of our dividend policy. On March 8, 2018 , the closing sales price for our common stock, as reported on the NYSE, was $10.39. As of March 8, 2018 , there were 3,339 record holders of our common stock and 55,410,367 shares outstanding. This figure does not reflect the beneficial ownership of shares held in nominee name.
Refer to Part III, Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance under equity compensation plans.
Equity Compensation Plan Information
Refer to Part III, Item 12. “Equity Compensation Plan Information” for information regarding securities authorized for issuance under equity compensation plans.
Recent Sales of Unregistered Securities
On June 18, 2015, we issued 100 shares of our common stock to NorthStar Realty in connection with our initial capitalization for an aggregate purchase price of $1,000. The issuance of such shares was effected in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act.
In July 2015, we issued $340 million aggregate principal amount of 4.625% senior stock-settlable notes due December 2016, or the Senior Notes. The issuance of the Senior Notes to the underwriters was effected in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act because the issuance of such securities did not involve a “public offering” as contemplated by Section 4(a)(2) under the Securities Act. In addition, the underwriters agreed not to offer or sell the Senior Notes in any manner involving a public offering within the meaning of Section 4(a)(2) under the Securities Act.
In connection with the issuance of the Senior Notes, we issued $340 million aggregate principal amount of the notes. The net proceeds from the offering were approximately $331 million, after deducting the initial purchasers’ discount of $1.7 million and offering expenses of $6.8 million. Deutsche Bank Securities Inc., Wells Fargo Securities Inc. and Citigroup Inc. served as the initial purchasers in the offering. The proceeds from the issuance of the Senior Notes were distributed to subsidiaries of NorthStar Realty, which used such amounts for general corporate purposes, including, among other things, the funding of acquisitions, including the Trianon Tower and the repayment of NorthStar Realty’s borrowings.
In 2016, we repurchased approximately $272 million of the Senior Notes, at a slight discount to par value, through privately negotiated transactions. In December 2016, we settled the remaining Senior Notes in cash at maturity.
Purchases of Equity Securities by the Issuer
None.

43

Purchases of Equity Securities by Affiliated Purchasers
The following table sets forth all purchases made by or on behalf of any affiliated purchaser, as defined in Rule10b-18(a)(3) under the Exchange Act, of shares of our common stock during the three months ended December 31, 2017:
Period (1)(2)
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

November 1-November 30
 
636,092

 
$
14.43

 
—

 
$
—

December 1-December 31
 
62,220

 
$
14.54

 
—

 
$
—

__________________
(1)    All shares purchases were open market purchases made by an affiliate of our Manager.
(2)    There were no purchasers made by affiliated purchasers during October 2017.


44

Item 6. Selected Financial Data
The information below should be read in conjunction with “Forward-Looking Statements,” Part I, Item 1A. “Risk Factors,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included in Item 8. “Financial Statements and Supplementary Data,” included in this Annual Report on Form 10-K.
The selected historical consolidated information presented for the five years ended December 31, 2017, other than non-GAAP financial measures which are unaudited, relates to our operations and has been derived from our audited consolidated statements of operations included in this Annual Report on Form 10-K or our Registration Statement on Form S-11/A (SEC No. 333-205440) filed with the SEC on October 9, 2015.
•
The consolidated financial statements for the years ended December 31, 2017 and 2016 represent our results of operations following the Spin-off.
•
The consolidated financial statements for the year ended December 31, 2015 represent: (i) our results of operations following the Spin-off which represents two months of activity as a stand-alone company; and (ii) our results of operations of the business activities related to the launch of the European real estate business and the acquisition of our European portfolios, or the European Real Estate Business, for the periods in which common control was present and an allocation of costs related to us for the period from January 1, 2015 to October 31, 2015.
•
The combined consolidated financial statements for the period from January 1, 2014 to September 15, 2014 represents (i) results of operations of activity related to the ownership period of a third party prior to acquisition of our first investment on September 15, 2014, or the Prior Owner Period; and (ii) an allocation of costs related to the launch of the European Real Estate Business. The combined consolidated financial statements for the period from September 16, 2014 to December 31, 2014 represents: (i) our results of operations of the European Real Estate Business as if the transferred business was the business for the periods in which common control was present; and (ii) an allocation of costs related to us.
•
The combined consolidated financial statements for the year ended December 31, 2013 represents: (i) the Prior Owner Period results of operations, which represents the ownership period of a third party; and (ii) an allocation of costs related to the launch of the European Real Estate Business.


45

 
 
NorthStar Europe Period
 
Prior Owner Period
 
 
Year Ended December 31,
 
Year Ended 
 December 31,
 
Year Ended 
 December 31,
 
September 16 to December 31,
 
January 1 to September 15,
 
Year Ended 
 December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2014
 
2013
 
 
(Dollars in thousands, except per share and dividend data)
Operating Data:
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
105,349

 
$
124,321

 
$
101,023

 
$
1,740

 
$
4,455

 
$
6,300

Escalation income
 
21,625

 
25,173

 
18,822

 
982

 
2,707

 
3,569

Total expenses
 
171,905

 
226,166

 
258,002

 
35,332

 
13,569

 
12,163

Net income (loss)
 
(30,333
)
 
(62,502
)
 
(144,143
)
 
(33,906
)
 
(3,007
)
 
1,633

Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
 
(31,125
)
 
(61,753
)
 
(143,136
)
 
(33,630
)
 
(3,007
)
 
1,633

Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.57
)
 
$
(1.07
)
 
$
(2.30
)
 
$
(0.53
)
 
$
(0.05
)
 
$
0.03

Diluted
 
$
(0.57
)
 
$
(1.07
)
 
$
(2.30
)
 
$
(0.53
)
 
$
(0.05
)
 
$
0.03

Dividends per share of common stock
 
$
0.60

 
$
0.60

 
$
0.30

 
N/A

 
N/A

 
N/A

 
 
NorthStar Europe Period
 
Prior Owner Period
 
 
December 31,
 
December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(Dollars in thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
64,665

 
$
66,308

 
$
283,844

 
$
2,100

 
$
1,350

Operating real estate, net
 
1,511,534

 
1,550,847

 
2,085,157

 
54,896

 
59,201

Total assets
 
1,940,917

 
1,845,392

 
2,683,050

 
160,271

 
90,951

Total borrowings
 
1,223,443

 
1,149,119

 
1,758,408

 
75,910

 
47,895

Total liabilities
 
1,314,580

 
1,243,875

 
1,885,739

 
80,197

 
67,367

Redeemable non-controlling interest
 
1,992

 
1,610

 
1,569

 
—

 
—

Total equity
 
624,345

 
599,907

 
795,742

 
80,074

 
23,584

 
 
NorthStar Europe Period
 
Prior Owner Period
 
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended 
 December 31,
 
September 16 to December 31,
 
January 1 to September 15,
 
Year Ended 
 December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2014
 
2013
 
 
(Dollars in thousands)
Other Data:
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow provided by (used in):
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
25,172

 
$
28,130

 
$
(50,180
)
 
$
(34,222
)
 
$
(2,681
)
 
$
7,245

Investing activities
 
84,492

 
391,624

 
(1,900,532
)
 
(149,403
)
 
(2,307
)
 
(7,263
)
Financing activities
 
(119,571
)
 
(630,856
)
 
2,231,566

 
188,408

 
(46
)
 
(656
)
Effect of foreign currency translation on cash and cash equivalents
 
8,264

 
(6,434
)
 
890

 
(2,683
)
 
3,722

 
545


46

 
 
NorthStar Europe Period
 
Prior Owner Period
 
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended 
 December 31,
 
September 16 to December 31,
 
January 1 to September 15,
 
Year Ended 
 December 31,
 
 
2017
 
2016
 
2015 (2)
 
2014
 
2014
 
2013
 
 
(Dollars in thousands, except per share and dividend data)
Non-GAAP Financial Measures: (1)
 
 
 
 
 
 
 
 
 
 
 
 
CAD
 
$
49,549

 
$
52,118

 
$
13,941

 
N/A
 
N/A
 
N/A
NOI
 
$
99,470

 
$
119,079

 
$
68,356

 
N/A
 
N/A
 
N/A
__________________
(1)
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures” for details on the calculation of CAD and NOI including a reconciliation of CAD and NOI to net income (loss) attributable to common stockholders calculated in accordance with U.S. GAAP.
(2)
Represents CAD for the three months ended December 31, 2015 and NOI for the six months ended December 31, 2015. We began disclosing CAD in the fourth quarter 2015 and NOI in the third quarter 2015.

47

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Part II. Item 8. “Financial Statements and Supplementary Data” and risk factors in Part I. Item 1A “Risk Factors” of this report. References to “NorthStar Europe,” “we,” “us” or “our” refer to NorthStar Realty Europe Corp. and its subsidiaries unless the context specifically requires otherwise. References to “our Manager” refer to NorthStar Asset Management Group Inc., or NSAM, for the period prior to the Mergers (refer below) and Colony NorthStar, Inc., for the period subsequent to the Mergers. As part of the Mergers, NSAM changed its name to Colony NorthStar, Inc.
Summary of Business
Our primary business line is investing in European real estate. We are predominantly focused on prime office properties in key cities within Germany, the United Kingdom and France.
Sources of Operating Revenues and Cash Flows
We primarily generate revenue from rental and other operating income from our properties and interest income from our preferred equity investment. Our income is primarily derived through the difference between the revenue and the operating and financing expenses of our investments. We may also continue to acquire investments that generate attractive returns without any leverage.
Profitability and Performance Metrics
We calculate cash available for distribution, or CAD, and NOI, as metrics to evaluate the profitability and performance of our business (refer to “Non-GAAP Financial Measures” for a description of these metrics).
Outlook and Recent Trends
The European economy grew at its fastest rate in a decade during 2017, with Gross Domestic Product, or GDP, growing by 2.5% in both the European Union, EU, and the Euro Area. The region’s robust economic performance was underpinned by strong global economic growth driving European exports, fueling corporate profits and resulting in an increase in overall confidence and investment levels. Unemployment in the EU continued to fall, reaching 7.3% in December 2017, down from 8.2% a year earlier and the lowest level recorded since October 2008.
In February 2018, the European Commission, or EC, revised its 2018 GDP forecast for the Euro Area up by 0.2% to 2.3% citing continued strength in domestic demand and investment levels. The 2019 Euro Area outlook has also been revised upwards to 2.0%, 0.1% above the November forecast.
This stronger than anticipated economic growth resulted in the European Central Bank, or ECB, signaling its intention to begin tapering while citing that, any tightening of monetary policy is likely to be gradual and subject to ongoing review based on the future economic performance and inflation outlook of the region. On March 8, 2018, the ECB announced its decision to maintain interest rates at zero percent and confirmed its intention to continue with its asset purchase program of €30 billion per month through September 2018, and beyond if necessary. The ECB’s expectations are that inflation, which stood at 1.3% in January 2018, will remain below its target of just under 2% through 2019.
Following the Dutch, German and French elections last year, geopolitical uncertainty in the region appears to have receded. However, the prominence of certain Eurosceptic parties in the recent Italian parliamentary elections suggests that the risk of further geopolitical tremors in the region may not have completely disappeared.
In contrast with the overall European economy, the U.K. economy began to slow in 2017, posting 0.5% growth during the fourth quarter, and 1.8% for the full year 2017, as uncertainty associated with Brexit weighed on business sentiment and investment while elevated levels of inflation due to a weaker U.K. Pound Sterling eroded real incomes and began to dampen consumer demand. The EC forecasts the U.K. economy to grow by 1.4% and 1.1% in 2018 and 2019, respectively. On November 2, 2017 the Bank of England, or BOE, raised the U.K. base interest rate from 0.25% to 0.5%, the first interest rate rise in a decade, in an effort to contain inflation which stood at 3.1% in the year to December, well above the BOE’s stated target of 2.0%. The BOE signaled that any further increases were likely to be at a gradual pace and limited in number. This cautious tone is reflective of the outlook for the U.K. economy which, despite its relatively resilient performance since the referendum, remains uncertain and likely to be dependent on the duration and perceived outcome of ongoing Brexit negotiations.
European commercial real estate investment volume totaled €89 billion in the fourth quarter of 2017 and €291 billion in the full year 2017, 11% above its 2016 level. Office remained the most sought after asset class in Europe, representing approximately 40% of the total 2017 transaction volume. Prime property yields in most asset classes and markets were stable during the fourth quarter and continue to remain at a significant premium to sovereign yields.
Strong office occupier demand (10% year on year growth in take up) coupled with modest supply across all major European markets continued to place downward pressure on vacancy throughout 2017, which during the fourth quarter decreased to their

48

lowest levels since 2008. These robust occupational markets coupled with higher level of inflation continued to place upward pressure on rents.
Driven by strong demand for office properties, which represented more than 50% of the total transaction volume during the year, German real estate investment reached €57.4 billion in 2017 (€18 billion in the fourth quarter), 9% above 2016 and the second highest level after 2007. Take up across the top 6 German cities increased by 11% year over year that coupled with constrained office supply created positive pressure on rents that rose 3.4% year over year in 2017.
Total U.K. investment volume reached £16.4 billion in the fourth quarter and £63.3 billion during 2017, a 20% increase on 2016 investment volume. Central London office investment volume totaled £3.5 billion in the fourth quarter of 2017, bringing the year-end total to £16.4 billion, 26% higher than 2016 and the fourth highest annual total on record. Take-up in Central London was 15% ahead of 2016 with flexible workplace providers accounting for more than 21% of all leasing volumes in 2017.
Driven by a number of large transactions completed during the fourth quarter, French investment volume was €12 billion in the fourth quarter 2017, 9% above the same period last year. Total 2017 investment volume was 27 billion, 5% below 2016 due in part to the ongoing shortage of high quality stock. The Paris occupational market remains robust with the Class A vacancy rate reaching a five year low in December 2017, and placing upward pressure on rents.
Our Strategy
We seek to provide our stockholders with a stable and recurring cash flow for distribution supplemented by capital growth over time. Our business is predominantly focused on prime office properties located in key cities within Germany, the United Kingdom and France. These are not only the largest economies in Europe, but the largest, most established, liquid and among the most stable office markets in Europe. We seek to utilize our established local networks to source suitable investment opportunities. We have a long term investment approach and expect to make equity investments, directly or indirectly through joint ventures.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Our significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies” in our accompanying consolidated financial statements included in Part II Item 8. “Financial Statements and Supplementary Data.”
Recent Accounting Pronouncements
For recent accounting pronouncements that may potentially impact our business, refer to Note 2, “Summary of Significant Accounting Policies” in our accompanying consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”


49

Results of Operations
The following presents a summary of our activity for the years ended December 31, 2017 , 2016 and 2015:
•
Year ended December 31, 2017 represents our results of operations which includes the disposal of six assets for net proceeds of $132.5 million and our preferred equity investment of $35.3 million ( £26.2 million ).
•
Year ended December 31, 2016 represents our results of operations for the first full year of activity as a stand-alone company. During 2016, we disposed of 18 assets for net proceeds of $406.9 million .
•
Year ended December 31, 2015 represents: (i) our results of operations following the Spin-off and two months of activity as a stand-alone company; and (ii) our results of operations of the European Real Estate Business as if the transferred business was the business for the periods in which common control was present and an allocation of costs related to us for the period from January 1, 2015 to October 31, 2015. We acquired 49 assets across nine countries in April 2015 and Trianon Tower in July 2015. In December 2015, we disposed of three assets for net proceeds of $21.0 million .
Comparison of the Year Ended December 31, 2017 to December 31, 2016 (dollars in thousands):
 
Years Ended December 31,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
%
Revenues
 
 
 
 
 
 
 
Rental income
$
105,349

 
$
124,321

 
$
(18,972
)
 
(15
)%
Escalation income
21,625

 
25,173

 
(3,548
)
 
(14
)%
Interest income
1,706

 
—

 
1,706

 
100
 %
Other income
1,243

 
1,721

 
(478
)
 
(28
)%
Total revenues
129,923

 
151,215

 
(21,292
)
 
(14
)%
Expenses
 
 
 
 
 
 

Properties - operating expenses
31,119

 
35,892

 
(4,773
)
 
(13
)%
Interest expense
25,844

 
41,439

 
(15,595
)
 
(38
)%
Transaction costs
6,117

 
2,610

 
3,507

 
134
 %
Impairment losses
—

 
27,468

 
(27,468
)
 
(100
)%
Management fee, related party
14,408

 
14,068

 
340

 
2
 %
Other expenses
9,251

 
12,376

 
(3,125
)
 
(25
)%
General and administrative expenses
7,384

 
8,077

 
(693
)
 
(9
)%
Compensation expense
23,768

 
19,257

 
4,511

 
23
 %
Depreciation and amortization
54,014

 
64,979

 
(10,965
)
 
(17
)%
Total expenses
171,905

 
226,166

 
(54,261
)
 
(24
)%
Other income (loss)
 
 
 
 
 
 


Unrealized gain (loss) on derivatives and other
(12,863
)
 
(11,257
)
 
(1,606
)
 
14
 %
Realized gain (loss) on sales and other
22,367

 
26,448

 
(4,081
)
 
(15
)%
Income (loss) before income tax benefit (expense)
(32,478
)
 
(59,760
)
 
27,282

 
(46
)%
Income tax benefit (expense)
2,145

 
(2,742
)
 
4,887

 
N/A

Net income (loss)
$
(30,333
)
 
$
(62,502
)
 
$
32,169

 
(51
)%
Revenues
Rental Income
Rental income consists of rental revenue in our real estate equity segment. Rental income decreased $19.0 million , primarily due to the disposal of 24 properties during 2017 and 2016.
Escalation Income
Escalation income consists of tenant recoveries in our real estate equity segment. Escalation income decreased $3.5 million , primarily due to the disposal of 24 properties during 2017 and 2016 and the timing of certain recoverable expenses. There is a corresponding decrease in properties - operating expenses and a majority of these costs are recovered from our tenants.
Interest Income
Interest income relates to our preferred equity investment originated in the second quarter 2017 in our preferred equity segment.

50

Other Income
Other income is principally related to lease surrender premiums, insurance refunds and termination fees in our real estate equity segment. Other income for the year ended December 31, 2017 predominantly represents lease surrender premium payments. Other income for the year ended December 31, 2016 represents early termination of two tenants whose spaces were subsequently re-let.
Expenses
Properties - Operating Expenses
Properties - operating expenses decreased $4.8 million due to the disposal of 24 properties during 2017 and 2016 partially offset by a straight-line rent write-off related to an early tenant termination at Portman Square in connection with the Invesco expansion. There is a corresponding decrease in escalation income and a majority of these costs are recovered from our tenants.
Interest Expense
Interest expense decreased $15.6 million due to the disposal of 24 properties during 2017 and 2016 and corresponding repayments of certain mortgage notes and due to the refinancing of certain mortgage notes in our real estate equity segment in the third quarter 2017 and the repayment of our senior stock-settlable notes in our corporate segment in 2016.
Transaction Costs
Transaction costs for the year ended December 31, 2017 were primarily related to costs associated with amending the management agreement in our corporate segment and other acquisition costs in our preferred equity segment. In addition, a transaction fee was paid to a third party and reimbursed in total by the entity that originated our preferred equity investment resulting in no impact to transaction costs. Transaction costs for the year ended December 31, 2016 were primarily related to costs associated with exploring potential transactions and the Mergers in our corporate segment.
Impairment losses
Impairment losses for the year ended December 31, 2016 related to impairment of one of our held-for-sale assets in our real estate equity segment, which sold in 2016 for less than the initial carrying value. The initial carrying value was based on the initial purchase price allocation of the asset, which utilized different assumptions than the December 31, 2015 year end independent valuation, primarily being a longer holding period. The sale price of the asset was in line with the December 31, 2015 year end independent valuation.
Management Fee, Related Party
Management fee, related party relates to the management fee incurred to our Manager in our corporate segment (refer to “Related Parties Arrangements” below for more information).
Other Expenses
Other expenses primarily represent third-party service provider fees such as asset management, accounting, tax, legal fees and other compliance related fees related to portfolio management of our real estate equity segment. The decrease of $3.1 million is due to the disposal of 24 properties during 2017 and 2016 partially offset by one time fees associated with the termination of certain third-party property accountants.
General and Administrative Expenses
General and administrative expenses including external and internal audit, legal fees and other corporate expenses are incurred in our corporate segment. For the year ended December 31, 2017 , our Manager did not allocate any general and administrative expenses to us. For the year ended December 31, 2016 , our Manager allocated $0.2 million .
Compensation Expense
Compensation expense is comprised of non-cash amortization of time-based, market-based and performance-based awards in our corporate segment. The increase for the year ended December 31, 2017 , is mainly due to the acceleration of a material portion of our time-based equity awards due to the Mergers which occurred in the first quarter of 2017. Refer to Note 7 “Compensation Expense” and Note 8 “Stockholders’ Equity” in our accompanying consolidated financial statements included in Part II Item 8. “Financial Statements and Supplementary Data” for further information.
Depreciation and Amortization
Depreciation and amortization expense decreased due to the disposal of 24 properties during 2017 and 2016 in our real estate equity segment partially, offset by the write-off of intangibles due to lease terminations in the third quarter 2017.

51

Other Income (Loss)
Unrealized Gain (Loss) on Derivatives and Other
Unrealized gain (loss) on derivatives and other is primarily related to the non-cash change in fair value of derivative instruments. The loss related to foreign currency forwards used to hedge projected net property level cash flows in our corporate segment was primarily due to the strengthened Euro against the U.S. dollar. The decrease in the loss related to the interest rate caps in our real estate equity segment is due to the movement in European interest rate in 2017 compared to 2016.
The following table presents a summary of unrealized gain (loss) on derivatives and other for the years ended December 31, 2017 and 2016 (dollars in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
 
Real Estate Equity
 
Corporate
 
Total
 
Real Estate Equity
 
Corporate
 
Total
Change in fair value of:
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps
 
$
(2,726
)
 
$
—

 
$
(2,726
)
 
$
(14,936
)
 
$
—

 
$
(14,936
)
Foreign currency forwards
 
—

 
(10,340
)
 
(10,340
)
 
—

 
4,653

 
4,653

Foreign currency remeasurement and other
 
16

 
187

 
203

 
(104
)
 
(870
)
 
(974
)
Total unrealized gain (loss) on derivatives and other
 
$
(2,710
)

$
(10,153
)

$
(12,863
)

$
(15,040
)

$
3,783


$
(11,257
)
Realized Gain (Loss) on Sales and Other
The following table presents a summary of realized gain (loss) on sales and other for the years ended December 31, 2017 and 2016 (dollars in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
 
Real Estate Equity
 
Corporate
 
Total
 
Real Estate Equity
 
Corporate
 
Total
Sale of real estate investments (1)
 
$
23,172

 
$
—

 
$
23,172

 
$
18,596

 
$
—

 
$
18,596

Foreign currency transactions (2)
 
(1,421
)
 
22

 
(1,399
)
 
15,957

 
—

 
15,957

Other (3)
 
(385
)
 
—

 
(385
)
 
(2,534
)
 
(4,784
)
 
(7,318
)
Net cash payments (receipts) on derivatives
 
—

 
979

 
979

 
—

 
(787
)
 
(787
)
Total realized gain (loss) on sales and other
 
$
21,366


$
1,001


$
22,367


$
32,019


$
(5,571
)

$
26,448

_____________
(1)
Excludes subsequent sale costs relating to 2016 sales and escrow arrangements entered into for specific indemnification obligations in relation to the sales.
(2)
Includes $(1.4) million and $17.7 million for the years ended December 31, 2017 and 2016, respectively, relating to the reclassification of the currency translation adjustment from a component of accumulated other comprehensive income, or OCI, to realized gain due to the sale of certain real estate assets.
(3)
Includes the write-off of deferred financing costs due to the repayment of certain mortgage and other notes payable and subsequent costs relating to 2016 sales offset by the release of certain escrow arrangements for specific indemnification obligations in relation to the sales.
Income Tax Benefit (Expense)
The income tax expense for the years ended December 31, 2017 represents a net benefit of $2.1 million related to our real estate equity segment. The income tax expense for the years ended December 31, 2016 represents a net expense of $2.7 million primarily related to the capital gain on the sale of real estate investments in our real estate equity segment.

52

Same Store Analysis
The following table presents our same store analysis for the real estate equity segment which represents 25 properties ( 323,230 square meters) and excludes properties that were acquired or sold at any time during the three months ended December 31, 2017 and 2016 (dollars in thousands):
 
Same Store (3)
 
 
 
 
 
Three Months Ended December 31,
 
Increase (Decrease)
 
2017
 
2016 (1)
 
Amount
 
%
Occupancy (end of period)
86.1
%
 
83.2
%
 
 
 
 
Same store
 
 
 
 
 
 
 
Rental income (2)
$
26,159

 
$
24,825

 
$
1,334

 
 
Escalation income
5,143

 
5,223

 
(80
)
 
 
Other income
535

 
924

 
(389
)
 
 
Total revenues
31,837

 
30,972

 
865

 
2.8
 %
Utilities
2,240

 
1,369

 
871

 


Real estate taxes and insurance
1,188

 
1,531

 
(343
)
 


Management fees
512

 
822

 
(310
)
 


Repairs and maintenance
2,531

 
3,425

 
(894
)
 


Ground rent (2)
200

 
182

 
18

 


Straight-line rent write-off
850

 
—

 
850

 
 
Other
500

 
903

 
(403
)
 


Properties - operating expenses
8,021

 
8,232

 
(211
)
 
(2.6
)%
Same store net operating income
$
23,816

 
$
22,740

 
$
1,076

 
4.7
 %
__________________
(1)
Three months ended December 31, 2016 is translated using the average exchange rate for the three months ended December 31, 2017.
(2)
Adjusted to exclude amortization of above/below market leases and ground leases.
(3)
We believe same store net operating income, a non-GAAP metric, is a useful metric of the operating performance as it reflects the operating performance of the real estate portfolio excluding effects of non-cash adjustments and provides a better measure of operational performance for a quarter-over-quarter comparison. Same store net operating income is presented for the same store portfolio, which represents all properties that were owned by us in the end of the reporting period. We define same store net operating income as NOI excluding (i) properties that were acquired or sold during the period, (ii) impact of foreign currency changes and (iii) amortization of above/below market leases. We consider same store net operating income to be an appropriate and useful supplemental performance measure. Same store net operating income should not be considered as an alternative to net income (loss), determined in accordance with U.S. GAAP, as an indicator of operating performance.  In addition, our methodology for calculating same store net operating income involves subjective judgment and discretion and may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.  Refer below for a reconciliation of same store NOI to net income (loss) attributable to common stockholders calculated in accordance with U.S. GAAP.
Same Store Revenue
Same store rental income increased driven primarily by recent leasing activity and rent reviews completed during the year including Deutsche Bundesbank commencing occupation in the Trianon Tower (completed in January 2018). Same store other income decreased due to one-time early termination premiums in the fourth quarter of 2016.
Same Store Expense
Same store properties - operating expenses decreased due to lower repairs and maintenance partially offset by the timing of certain recoverable expenses and a straight-line rent write-off related to an early tenant termination at Portman Square in connection with the Invesco expansion.

53

Reconciliation of Net Income to Same Store
The following table presents a reconciliation from net income (loss) to same store net operating income for the real estate equity segment for the three months ended December 31, 2017 and 2016 (dollars in thousands):
 
Same Store Reconciliation
 
 
Three Months Ended December 31,
 
 
2017
 
2016
 
Net income (loss)
$
2,537

 
$
13,902

 
Corporate segment net (income) loss (1)
13,917

 
10,461

 
Other (income) loss (2)
8,416

 
(430
)
 
Net operating income
24,870

 
23,933

 
Sale of real estate investments and other (3)
(349
)
 
(1,193
)
(5)  
Interest income (4)
(705
)
 
—

 
Same store net operating income
$
23,816

 
$
22,740

 
__________________
(1)
Includes management fees, general and administrative expense, compensation expense, corporate interest expense and corporate transaction costs.
(2)
Includes depreciation and amortization expense, unrealized loss on interest rate caps, and other expenses in the real estate equity segment.
(3)
Represents the impact of assets sold during the period.
(4)
Represents interest income earned in the preferred equity segment.
(5)
Three months ended December 31, 2016 is translated using the average exchange rate for the three months ended December 31, 2017.
Comparison of the Year Ended December 31, 2016 to December 31, 2015 (dollars in thousands):
 
Years Ended 
 December 31,
 
Increase (Decrease)
 
2016
 
2015
 
Amount
 
%
Revenues
 
 
 
 
 
 
 
Rental income
$
124,321

 
$
101,023

 
$
23,298

 
23
 %
Escalation income
25,173

 
18,822

 
6,351

 
34
 %
Other income
1,721

 
694

 
1,027

 
148
 %
Total revenues
151,215

 
120,539

 
30,676

 
25
 %
Expenses
 
 
 
 

 

Properties - operating expenses
35,892

 
26,559

 
9,333

 
35
 %
Interest expense
41,439

 
36,129

 
5,310

 
15
 %
Transaction costs
2,610

 
120,101

 
(117,491
)
 
(98
)%
Impairment losses
27,468

 
1,710

 
25,758

 
1,506
 %
Management fee, related party
14,068

 
2,333

 
11,735

 
503
 %
Other expenses
12,376

 
10,535

 
1,841

 
17
 %
General and administrative expenses
8,077

 
3,502

 
4,575

 
131
 %
Compensation expense
19,257

 
850

 
18,407

 
2,166
 %
Depreciation and amortization
64,979

 
56,283

 
8,696

 
15
 %
Total expenses
226,166

 
258,002

 
(31,836
)
 
(12
)%
Other income (loss)
 
 
 
 


 


Unrealized gain (loss) on derivatives and other
(11,257
)
 
(8,731
)
 
(2,526
)
 
29
 %
Realized gain (loss) on sales and other
26,448

 
1,376

 
25,072

 
1,822
 %
Income (loss) before income tax benefit (expense)
(59,760
)
 
(144,818
)
 
85,058

 
(59
)%
Income tax benefit (expense)
(2,742
)
 
675

 
(3,417
)
 
N/A

Net income (loss)
$
(62,502
)
 
$
(144,143
)
 
$
81,641

 
(57
)%
Revenues
Rental Income
Rental income consists of rental revenue in our real estate equity segment. Rental income increased $23.3 million, primarily due to 2016 being the first full year since acquisition and leases signed in 2016 partially offset by the disposal of 18 properties during 2016 and the vacancy of a tenant in the Trianon Tower in the fourth quarter 2016. For the year ended December 31, 2016, 27,000 square meters of leases were signed and renegotiated in our real estate equity segment generating a revenue increase of $5 million.

54

Escalation Income
Escalation income consists of tenant recoveries in our real estate equity segment. Escalation income increased $6.4 million, primarily due to 2016 being the first full year since acquisition, leases signed in 2016 resulting in higher recoverability partially offset by the disposal of 18 properties during 2016. There is a corresponding increase in properties operating expenses and a majority of these costs are recoverable from the tenants.
Other Income
Other income is principally related to lease termination fees in our real estate equity segment. Other revenue increased for the year ended December 31, 2016 due to the early termination of two tenants whose spaces were subsequently re-let.
Expenses
Properties - Operating Expenses
Properties - operating expenses increased $9.3 million due to 2016 being the first full year of since acquisition partially offset by the disposal of 18 properties during 2016. There is a corresponding increase in escalation income and a majority of these costs are recovered from our tenants.
Interest Expense
Interest expense increased $5.3 million due to 2016 being the first full year since acquisition and financing partially offset by the disposal of 18 properties during 2016 and the refinancing of certain mortgage notes in our real estate equity segment.
Transaction Costs
Transaction costs for the year ended December 31, 2016 primarily relate to costs associated with exploring potential transactions in our real estate equity segment and costs related to the Mergers in our corporate segment. Transaction costs for the year ended December 31, 2015 primarily represented expenses such as real estate transfer tax and professional fees related to the acquisitions in 2015 in our real estate equity segment and the Spin-off in our corporate segment.
Impairment losses
Impairment losses for the year ended December 31, 2016 related to impairment of one of our held-for-sale assets in our real estate equity segment, which sold for less than the initial carrying value subsequent to quarter ended June 30, 2016. The initial carrying value was based on the initial purchase price allocation of the asset, which utilized different assumptions than the December 31, 2015 year end independent valuation, primarily being a longer holding period. The sale price of the asset was in line with the December 31, 2015 year end independent valuation. Impairment losses for the year ended December 31, 2015 relates to impairment of goodwill on one reporting unit which management deemed to be impaired in our real estate equity segment.
Management Fee, Related Party
Management fee, related party relates to the management fee incurred to our Manager in our corporate segment (refer to “Related Parties Arrangements” below for more information). The management contract with our Manager commenced on November 1, 2015.
Other Expenses
Other expenses primarily represent third-party service provider fees such as audit and legal fees and other compliance related fees related to portfolio management of our real estate equity segment. The increase for the year ended December 31, 2016 is due to the full year impact of owning and managing the properties acquired in 2015.
General and Administrative Expenses
General and administrative expenses are principally incurred in our corporate segment. The year ended December 31, 2016 represented a full year of operating as a stand-alone company, which included professional fees such as audit, internal audit, legal and other public company costs and includes an allocation of general and administrative expenses from our Manager of $0.2 million. The year ended December 31, 2015 primarily represent an allocation of certain costs and expenses related to activities for the launch of our European Real Estate Business prior to the Spin-off.
Compensation Expense
Compensation expense is comprised of non-cash amortization of time-based and performance equity-based based awards in our corporate segment. We began to incur compensation expense upon the Spin-off in November 2015. The year ended December 31, 2016 changes do not take into account the impact of the vesting as a result of the Mergers (refer to Item 8 “Compensation Expense” for more information).

55

Depreciation and Amortization
Depreciation and amortization expense increased due to 2016 being the first full year of ownership partially offset by the disposals of 18 properties during 2016 and assets being reclassified into held for sale in our real estate equity segment.
Other Income (Loss)
Unrealized Gain (Loss) on Investments and Other
Unrealized gain (loss) on investments and other is primarily related to the non-cash change in fair value of derivative instruments. The increase in the foreign currency forwards was decreased by the strengthened U.S. dollar against the U.K. Pound Sterling and the Euro. The decrease on the interest rate caps relates to the movement in European interests rates.
The following table presents a summary of unrealized gain (loss) on investments and other for the years ended December 31, 2016 and 2015 (dollars in thousands):
 
 
Years Ended December 31,
 
 
2016
 
2015
 
 
Real Estate
 
Corporate
 
Total
 
Real Estate
 
Corporate
 
Total
Change in fair value of:
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps
 
$
(14,936
)
 
$
—

 
$
(14,936
)
 
$
(8,897
)
 
$
—

 
$
(8,897
)
Foreign currency forwards
 
—

 
4,653

 
4,653

 
—

 
417

 
417

Foreign currency remeasurement
 
(104
)
 
(870
)
 
(974
)
 
28

 
(279
)
 
(251
)
Total unrealized gain (loss) on investments and other
 
$
(15,040
)

$
3,783


$
(11,257
)

$
(8,869
)

$
138


$
(8,731
)
Realized Gain (Loss) on Investments and Other
The following table presents a summary of realized gain (loss) on investments and other for the years ended December 31, 2016 and 2015 (dollars in thousands):
 
 
Years Ended December 31,
 
 
2016
 
2015
 
 
Real Estate
 
Corporate
 
Total
 
Real Estate
 
Corporate
 
Total
Sale of real estate investments (1)
 
$
18,596

 
$
—

 
$
18,596

 
$
5,962

 
$
—

 
$
5,962

Foreign currency transactions (2)
 
15,957

 
—

 
15,957

 
297

 
—

 
297

Other (3)
 
(2,534
)
 
(4,784
)
 
(7,318
)
 
(4,883
)
 
—

 
(4,883
)
Net cash payments on derivatives
 
—

 
(787
)
 
(787
)
 
—

 
—

 
—

Total realized gain (loss)
 
$
32,019


$
(5,571
)

$
26,448


$
1,376


$
—


$
1,376

_____________
(1)
Excludes escrow arrangements entered into for specific warranties in relation to the sales.
(2)
Includes $17.7 million relating to the reclassification of the currency translation adjustment from a component of accumulated OCI to realized gain (losses) due to the sale of certain real estate assets, offset by the realized loss on the repayment of the intercompany loans in different currencies.
(3)
Includes the write-off of deferred financing costs due to the repayment of certain mortgage and other notes payable in the real estate equity segment and our senior stock-settlable notes repurchases in the corporate segment.
Income Tax Benefit (Expense)
The income tax expense for the year ended December 31, 2016 represents a net expense of $2.7 million primarily related to the capital gain on the sale of real estate investments in our real estate equity segment. The income tax benefit for the year ended December 31, 2015 represents a net benefit of $0.7 million primarily related to deferred tax benefits in our real estate equity segment.
Liquidity and Capital Resources
Our financing strategy is to employ investment-level financing to prudently leverage our investments and deliver attractive risk-adjusted returns to our stockholders through a wide range of secured and unsecured debt and public and private equity capital sources to fund our investment activities. In addition to investment-specific financings, we may use and have used credit facilities and repaid facilities on a shorter term basis and public and private, secured and unsecured debt issuances on a longer term basis. Our current primary liquidity needs are to fund:
•
our operating expenses and investment activities;
•
acquisitions of our target assets and related ongoing commitments;
•
capital improvements

56

•
distributions to our stockholders;
•
principal and interest payments on our borrowings; and
•
income tax liabilities of taxable REIT subsidiaries and we are subject to limitations as a REIT.
Our current primary sources of liquidity are:
•
cash flow generated from our investments, both from operations and return of capital
•
net proceeds from asset disposals;
•
financings secured by our assets such as mortgage notes, longer term senior and subordinate corporate capital such as revolving credit facilities; and
•
cash on hand.
We seek to meet our long-term liquidity requirements, including the repayment of borrowings and our investment funding needs, through existing cash resources, issuance of debt or equity capital, return of capital from investments and the liquidation or refinancing of assets. Nonetheless, our ability to meet a long-term (beyond one year) liquidity requirement may be subject to obtaining additional debt and equity financing. Any decision by our lenders and investors to provide us with financing will depend upon a number of factors, such as our compliance with the terms of our existing credit arrangements, our financial performance, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders’ and investors’ resources and policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities.
As a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where we do not receive corresponding cash, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Internal Revenue Code and to avoid federal income tax and the non-deductible excise tax. On a quarterly basis, our Board determines an appropriate common stock dividend based upon numerous factors, including CAD, REIT qualification requirements, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our business or prospects. Future dividend levels are subject to adjustment based upon our evaluation of the factors described above, as well as other factors that our Board may, from time-to-time, deem relevant to consider when determining an appropriate common stock dividend.
In November 2015, our Board authorized the repurchase of up to $100 million of our outstanding common stock. That authorization expired in November 2016 and at such time the Board authorized an additional repurchase of up to $100 million of our outstanding common stock through November 2017. In March 2018, our board of directors authorized the repurchase of up to $100 million of our outstanding common stock. The authorization expires in March 2019, unless otherwise extended by our board of directors. For the year ended December 31, 2017 , we did not repurchase any shares of our common stock. For the year ended December 31, 2016 , we repurchased 5.7 million shares of our common stock for approximately $58.6 million . For the year ended December 31, 2015 , we repurchased 3.6 million shares of our common stock for approximately $41.4 million . From the original authorization in November 2015 through December 31, 2017 , we repurchased 9.3 million shares of its common stock for approximately $100.0 million .
In April 2017, we amended and restated our revolving credit facility, or Credit Facility, with a commitment of $35 million and with an initial two year term. The Credit Facility no longer contains a limitation on availability based on a borrowing base and the interest rate remains the same.
In March 2018, we amended the Credit Facility, increasing the size to $70 million and extending the term until April 2020 with one year extension option. The Credit Facility includes an accordion feature, providing for the ability to increase the facility to $105 million.
In June 2017, we amended and restated the Trias mortgage note agreement to increase the loan amount by $5.9 million and reduce future minimum capital expenditure spending requirements. In September 2017, we amended and restated the financing terms for $568 million of the SEB mortgage note agreement to reduce the margin from 1.80% to 1.55% and extended the maturity date from April 1, 2022 to July 20, 2024.
We believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs. We expect our contractual rental income to be sufficient to meet our expected capital expenditures, interest expense, property operating and general and administrative expenses as well as common dividends declared by us. We may seek to raise additional capital in order to finance new acquisitions. Unrestricted cash as of March 9, 2018 was approximately $62 million and $70 million of availability under the Credit Facility.

57

Cash Flows
The following presents a summary of our activity for the years ended December 31, 2017 , 2016 and 2015:
•
Year ended December 31, 2017 represents our results of operations which includes the disposal of six assets and our preferred equity investment of $35.3 million ( £26.2 million ).
•
Year ended December 31, 2016 represents our results of operations for the first full year of activity as a stand-alone company. During 2016, we disposed of 18 assets.
•
Year ended December 31, 2015 represents: (i) our results of operations following the Spin-off and two months of activity as a stand-alone company; and (ii) our results of operations of the European Real Estate Business as if the transferred business was the business for the periods in which common control was present and an allocation of costs related to us for the period from January 1, 2015 to October 31, 2015. We acquired 49 assets across nine countries in April 2015 and Trianon Tower in July 2015. In December 2015, we disposed of three assets.
 
 
Years Ended December 31,
Cash flow provided by (used in):
 
2017
 
2016
 
2015
Operating activities
 
$
25,172

 
$
28,130

 
$
(50,180
)
Investing activities
 
84,492

 
391,624

 
(1,900,532
)
Financing activities
 
(119,571
)
 
(630,856
)
 
2,231,566

Effect of foreign currency translation on cash and cash equivalents
 
8,264

 
(6,434
)
 
890

Net increase (decrease) in cash and cash equivalents
 
$
(1,643
)
 
$
(217,536
)
 
$
281,744

Year Ended December 31, 2017 Compared to December 31, 2016
Net cash provided by operating activities was $25.2 million for the year ended December 31, 2017 compared to $28.1 million for the year ended December 31, 2016 . The decrease was primarily due to an increase in the change in operating assets and liabilities due to the timing of payments and collection of receivable and the disposal of 24 properties in 2017 and 2016.
Net cash provided by investing activities was $84.5 million for the year ended December 31, 2017 compared to $391.6 million for the year ended December 31, 2016 . Cash flow provided by investing activities for the year ended December 31, 2017 was primarily due to proceeds from the sale of real estate of $141.4 million which includes $135.8 million relating to 2017 sales and $5.6 million relating to 2016 sales, offset by the origination of our preferred equity investment of $35.3 million , improvements of our operating real estate $17.7 million and leasing costs of $3.7 million . Cash flow provided by the year ended December 31, 2016 was primarily due to proceeds from the sale of operating real estate $395.2 million and restricted cash receipt of $11.2 million , offset by improvements of our operating real estate of $10.4 million .
Net cash used in financing activities was $119.6 million year ended December 31, 2017 compared to $630.9 million for the year ended December 31, 2016 . Cash flow used in financing activities for the year ended December 31, 2017 was primarily due to the net cash payment on tax withholding of $11.0 million , repayments of mortgage notes and other notes payable of $77.8 million , dividend payments of $33.5 million , repayments of the Credit Facility of $35 million, payment of financing costs of $2.0 million and distributions to non-controlling interest of $1.9 million offset by borrowings from mortgage note and other notes payable of $5.6 million , borrowings from the Credit Facility of $35 million and net cash received from the settlement of the foreign currency forwards of $1.0 million . Net cash flow used in financing activities for the year ended December 31, 2016 was primarily due to $273.0 million from the repurchase of Senior Notes, the repayment of mortgage notes and other notes payable of $200.7 million , repayment of the credit facility of $65.0 million , repurchase of our common stock of $58.6 million and dividend payments of $35.1 million offset by $65.0 million from the borrowing under the credit facility.
Year Ended December 31, 2016 Compared to December 31, 2015
Net cash provided by operating activities was $28.1 million for the year ended December 31, 2016 compared to cash used in operating activities of $50.2 million for the year ended December 31, 2015 . The increase was due to a full year of activity on our portfolio acquired in 2015 and our first full year as a stand-alone company.
Net cash provided by investing activities was $391.6 million for the year ended December 31, 2016 compared to cash used in investing activities of $1.9 billion for the year ended December 31, 2015 . Cash flow provided by investing activities for the year ended December 31, 2016 was primarily due to proceeds from the sale of real estate of $395.2 million and restricted cash receipt of $11.2 million , offset by improvements of our operating real estate of $10.4 million . Cash flow used in investing activity for the year ended December 31, 2015 was due to the acquisitions in the second and third quarters 2015 for $1.9 billion .
Net cash used in financing activities was $630.9 million for the year ended December 31, 2016 compared to cash provided by financing activities of $2.2 billion for the year ended December 31, 2015 . Net cash flow used in financing activities for the year

58

ended December 31, 2016 was primarily due to $273.0 million from the repurchase of Senior Notes, the repayment of mortgage notes and other notes payable of $200.7 million , repayment of the credit facility of $65.0 million , repurchase of our common stock of $58.6 million and dividend payments of $35.1 million offset by $65.0 million from the borrowing under the credit facility. Net cash flow provided by financing activities for the year ended December 31, 2015 was primarily due to $1.2 billion for the financing by NorthStar Realty for the acquisitions in 2015, $250.0 million from the cash contribution by NorthStar Realty, $340.0 million for the issuance of the Senior Notes, offset by $38.0 million for the repurchase of our common stock, $31.0 million for the new derivatives and $9.6 million for the payment of dividends.
Contractual Obligations and Commitments
The following table presents contractual obligations and commitments as of December 31, 2017 (dollars in thousands):
 
 
Payments Due by Period
 
 
Total (1)
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Mortgage and other notes payable
 
$
1,234,642

 
$
—

 
$
164,095

 
$
—

 
$
1,070,547

Estimated interest payments (2)
 
735,348

 
20,892

 
56,398

 
57,635

 
600,423

Total
 
$
1,969,990


$
20,892


$
220,493


$
57,635


$
1,670,970

_____________________
(1)
Amounts denominated in foreign currencies are translated to the U.S. dollar using the currency exchange rate as of December 31, 2017 .
(2)
Represents GBP LIBOR, EURIBOR or the applicable index as of December 31, 2017 plus the respective spread and foreign currency exchange rate as of December 31, 2017 to estimate payments for our floating-rate liabilities.
The table above does not include the amounts payable to our Manager under the management agreement. The annualized fee for payable to our Manager in 2018 based on the Amended and Restated Management Agreement (refer below) is approximately $16.6 million as of December 31, 2017 .
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Related Party Arrangements
Colony NorthStar, Inc.
On November 9, 2017, we entered into an amended and restated management agreement, or the Amended and Restated Management Agreement, with CNI NRE Advisors, LLC, a Delaware limited liability company (unless the context requires otherwise, together with its affiliates, the “Asset Manager”), an affiliate of Colony NorthStar, effective as of January 1, 2018. The description of the management agreement included below relates to the Amended and Restated Management Agreement. Refer to Note 6 “Related Party Arrangements” in our accompanying consolidated financial statements included in Part II Item 8. “Financial Statements and Supplementary Data” for a description of the terms of the original agreement that was entered into in November 2015 and which was superseded as of January 1, 2018 by the Amended and Restated Management Agreement.
Management Agreement Amendment
Under the Amended and Restated Management Agreement, the Asset Manager is generally responsible to manage our day to day operations, subject to the supervision and management of our Board. The Asset Manager is required to provide us with a management team and other appropriate employees and resources necessary to manage us.
Term; Renewals
The Amended and Restated Management Agreement provides for an initial term (beginning January 1, 2018) of five years, or the Initial Term, with subsequent automatic renewals for additional three-year terms, unless either party provides notice to the other party of its intention to decline to renew the agreement at least six months prior to the expiration of the then-current term. During the Initial Term, the Amended and Restated Management Agreement is terminable only for cause (as described in the Amended and Restated Management Agreement).
If we elect not to renew the Amended and Restated Management Agreement at the end of a term, we will be obligated to pay the Asset Manager a termination fee, or the Termination Fee, equal to three times the amount of the base management fees earned by the Asset Manager over the four most recent quarters immediately preceding the non-renewal. In addition, if at any time after the Initial Term, we undergo a “change of control” (as defined in the Amended and Restated Management Agreement), we may elect to terminate the agreement but upon any such termination it will be obligated to pay the Termination Fee to the Asset Manager.

59

Assignment
The Amended and Restated Management Agreement provides that in the event of a change of control of the Asset Manager or other event that could be deemed an assignment of the Amended and Restated Management Agreement, we will consider such assignment in good faith and not unreasonably withhold, condition or delay our consent. The Amended and Restated Management Agreement further provides that we anticipate consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over $ 10 billion of assets under management. The Amended and Restated Management Agreement also provides that, notwithstanding anything in the agreement to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction by us or the Asset Manager, directly or indirectly, the surviving entity will succeed to the terms of the Amended and Restated Management Agreement.
Base Management Fee
Pursuant to the Amended and Restated Management Agreement, beginning January 1, 2018, we are obligated to pay, quarterly, in arrears, in cash, the Asset Manager a base management fee per annum equal to:
•
1.50% of our reported EPRA NAV (as defined in the Amended and Restated Management Agreement) for EPRA NAV amounts up to and including $2.0 billion; plus
•
1.25% of our reported EPRA NAV on any EPRA NAV amount exceeding $2.0 billion.
EPRA NAV is based on a U.S. GAAP balance sheet adjusted based on our interpretation of the European Public Real Estate Association, or EPRA, guidelines, and similar as prior practices, including adjustments such as fair value of operating real estate, straight-line rent and deferred taxes and additional adjustments to be determined by us in good faith based on any changes to U.S. GAAP, international accounting standards or EPRA guidelines. In calculating EPRA NAV, the liquidation preference of preferred securities outstanding shall not be included as a liability of us and shall not reduce EPRA NAV.
Incentive Fee
In addition to the base management fees, we are obligated to pay the Asset Manager an incentive fee, if any, or the Incentive Fee, with respect to each measurement period equal to twenty percent (20%) of: (i) the excess of (a) our Total Stockholder Return (as defined in the Amended and Restated Management Agreement, which includes stock price appreciation and dividends received and is subject to a high watermark price established when a prior incentive fee is realized) for the relevant measurement period above (b) a 10% cumulative annual hurdle rate, multiplied by (ii) our Weighted Average Shares (as defined in the Amended and Restated Management Agreement) during the measurement period. The first measurement period for the incentive fee will begin January 1, 2018 and end on December 31 of the applicable calendar year and subsequent measurement periods will begin on January 1 of the subsequent calendar year. Subject to the conditions set forth in Section 4(d) of the Amended and Restated Management Agreement for common stock payments, we may elect to pay the Incentive Fee, if any, in cash or in shares of restricted common stock or shares of unrestricted common stock repurchased by us in the open market or a combination thereof. Any shares of common stock delivered by us will be subject to lock-up restrictions that will be released in equal one-third increments on each anniversary of the end of the measurement period with respect to which such incentive fee was earned. In calculating the value of the shares of our common stock paid in satisfaction of the Incentive Fee obligation, the shares of restricted common stock will be valued at the higher of: (i) the volume weighted average trading price per share for the ten consecutive trading days (as defined in the Amended and Restated Management Agreement) ending on the trading day prior to the date the payment is due and (ii) our EPRA NAV per share, based on our most recently published EPRA NAV and the Weighted Average Shares as of the end of the period with respect to which such EPRA NAV was published.
Costs and Expenses
We are responsible to pay (or reimburse the Asset Manager) for all of our direct, out of pocket costs and expenses as a stand alone company incurred by or on behalf of us and our subsidiaries, all of which must be reasonable, customary and documented. Internalized Service Costs (as defined below) are not intended to be covered costs and expenses under this provision and are subject to the limits described in the next paragraph.
In addition to the expenses described in the prior paragraph, for each calendar quarter, beginning with the first quarter of 2018, we are obligated to reimburse the Asset Manager for (i) all direct, reasonable, customary and documented costs and expenses incurred by the Asset Manager for salaries, wages, bonuses, payroll taxes and employee benefits for personnel employed by the Asset Manager: (a) who solely provide services to us which prior to January 1, 2018 were provided by unaffiliated third parties, including accounting and treasury services or (b) who were hired by the Asset Manager after January 1, 2018 but who solely provide services to us in respect of one of the categories of services previously internalized pursuant to clause (a) and who were not hired in connection with any event which otherwise resulted in an increase to our net asset value (such costs and expenses set forth in clauses (i) and (ii), the “Internalized Service Costs”), plus (ii) 20% of the amount calculated under clause (i) to cover

60

reasonable overhead charges with respect to such personnel, provided that we shall not be obligated to reimburse the Asset Manager for such costs and expenses to the extent they exceed the following quarterly limits:
•
0.0375% of our aggregate gross asset value as of the end of the prior calendar quarter (excluding cash and cash equivalents and certain other exclusions) as calculated for purposes of determining EPRA NAV, or GAV, for GAV amounts to and including $2.5 billion, plus
•
0.0313% of GAV amounts between $2.5 billion and $5.0 billion, plus
•
0.025% of GAV amounts exceeding $5.0 billion.
If the Asset Manager’s actual Internalized Service Costs during any quarter exceed the quarterly limit described in the preceding paragraph (the cumulative excess amounts, if any, in respect of each quarter during a calendar year, is referred to as the Quarterly Cap Excess Amount we are obligated to reimburse the Asset Manager on an annual basis for an amount equal to the lesser of (i) the Quarterly Cap Excess Amount and (ii) the sum of the amounts, if any, determined for each quarter within such calendar year by which Internalized Services Costs in respect of such quarter were less than the quarterly limits described in the prior paragraph.
Equity Based Compensation
In addition, we expect to make annual equity compensation grants to our management and other employees of the Asset Manager, provided that the aggregate annual grant amount, type and other terms of such equity compensation must be approved by our compensation committee. The Asset Manager will have discretion in allocating the aggregate grant among our management and other employees of the Asset Manager.
Under the Amended and Restated Management Agreement, beginning with our 2018 annual stockholders’ meeting, the Asset Manager will have the right to nominate one director (who is expected to be one of our current directors employed by the Asset Manager) to our board of directors.
Transaction Expenses
We agreed to pay for up to $2.5 million of fees and expenses payable by the Asset Manager to its external financial advisors in connection with the negotiation and execution of the Amended and Restated Management Agreement.
Colony NorthStar Ownership Waiver and Voting Agreement
In connection with the entry into the Amended and Restated Management Agreement, we provided Colony NorthStar with an ownership waiver under our Articles of Amendment and Restatement, allowing Colony NorthStar to purchase up to 45% of our stock. The waiver provides that if the Amended and Restated Management Agreement is terminated, Colony NorthStar may not purchase any shares of our common stock to the extent Colony NorthStar owns (or would own as a result of such purchase) more than 9.8% of our capital stock. In connection with the waiver, Colony NorthStar also agreed that for all matters submitted to a vote of our stockholders, to the extent Colony NorthStar owns more than 25% of our common stock (such shares owned by Colony NorthStar in excess of the 25% threshold, refer to as the Excess Shares, it will vote the Excess Shares in the same proportion that our remaining shares not owned by Colony NorthStar or its affiliates are voted. If the Amended and Restated Management Agreement is terminated, then beginning on the third anniversary of such termination, the threshold described in the prior sentence will be reduced from 25% to 9.8%.
Manager Ownership of Common Stock
As of December 31, 2017 , Colony NorthStar and its subsidiaries owned 5.6 million shares of our common stock, or approximately 10.2% of the total outstanding common stock.
Recent Developments
Dividends
On March 7, 2018 , we declared a dividend of $0.15 per share of common stock. The common stock dividend will be paid on March 23, 2018 to stockholders of record as of the close of business on March 19, 2018 .
Share Repurchase
In March 2018, our board of directors authorized the repurchase of up to $100 million of our outstanding common stock. The authorization expires in March 2019, unless otherwise extended by our board of directors.
Disposals
In February 2018, we agreed a definitive sale and purchase agreement to sell the Maastoren property, our largest non-core asset, for approximately $190 million . We expect to release approximately $60 million of net equity after repayment of financing (including release premium) and transaction costs.
Credit Facility

61

In March 2018, we amended the Credit Facility, increasing the size to $70 million and extending the term until April 2020 with one year extension option. The Credit Facility includes an accordion feature, providing for the ability to increase the facility to $105 million.
Inflation
Virtually all of our assets and liabilities are interest rate and foreign currency exchange rate sensitive in nature. As a result, interest rates, foreign currency exchange rates and other factors influence our performance significantly more than inflation does. A change in interest rates and foreign currency exchange rates may correlate with changes in inflation rates. With the exception of the United Kingdom, rent is generally adjusted annually based on local consumer price indices. In the United Kingdom, rent is typically subject to an upward only rent review approximately every three to five years.
Refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for additional details.
Non-GAAP Financial Measures
We use CAD and NOI, each a non-GAAP measure, to evaluate our profitability.
Cash Available for Distribution
We believe that CAD provides investors and management with a meaningful indicator of operating performance. We also believe that CAD is useful because it adjusts for a variety of items that are consistent with presenting a measure of operating performance (such as transaction costs, depreciation and amortization, equity-based compensation, realized gain (loss) on sales and other, asset impairment and non-recurring bad debt expense). We adjust for transaction costs because these costs are not a meaningful indicator of our operating performance. For instance, these transaction costs include costs such as professional fees associated with new investments, which are expenses related to specific transactions. Management also believes that quarterly distributions are principally based on operating performance and our board of directors includes CAD as one of several metrics it reviews to determine quarterly distributions to stockholders. The definition of CAD may be adjusted from time to time for our reporting purposes in our discretion, acting through our audit committee or otherwise. CAD may fluctuate from period to period based upon a variety of factors, including, but not limited to, the timing and amount of investments, new leases, repayments and asset sales, capital raised, use of leverage, changes in the expected yield of investments and the overall conditions in commercial real estate and the economy generally.
We calculate CAD by subtracting from or adding to net income (loss) attributable to common stockholders, non-controlling interests and the following items: depreciation and amortization items including straight-line rental income or expense (excluding amortization of rent free periods), amortization of above/below market leases, amortization of deferred financing costs, amortization of discount on financings and other and equity-based compensation; unrealized gain (loss) on derivatives and other; realized gain (loss) on sales and other (excluding any realized gain (loss) on the settlement on foreign currency derivatives); impairment on depreciable property; bad debt expense; acquisition gains or losses; transaction costs; foreign currency gains (losses); impairment on goodwill and other intangible assets; and one-time events pursuant to changes in U.S. GAAP and certain other non-recurring items. These items, if applicable, include any adjustments for unconsolidated ventures.
CAD should not be considered as an alternative to net income (loss) attributable to common stockholders, determined in accordance with U.S. GAAP, as an indicator of operating performance. In addition, our methodology for calculating CAD involves subjective judgment and discretion and may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.

62

The following table presents a reconciliation of CAD to net income (loss) attributable to common stockholders for the three months ended and years ended December 31, 2017 and 2016 (dollars in thousands):
 
Three Months Ended December 31,
 
Years Ended December 31,
 
2017
 
2016
 
2017
 
2016
Net income (loss) attributable to common stockholders
$
1,442

 
$
13,859

 
$
(31,125
)
 
$
(61,753
)
Non-controlling interests
1,095

 
43

 
792

 
(749
)
 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
 
Depreciation and amortization items (1)(2)
19,612

 
22,609

 
81,269

 
93,913

Impairment losses
—

 
—

 
—

 
27,468

Unrealized (gain) loss on derivatives and other
795

 
(8,319
)
 
12,863

 
11,257

Realized (gain) loss on sales and other (3)(4)
(14,444
)
 
(20,152
)
 
(21,388
)
 
(27,235
)
Transaction costs and other (5)(6)
4,552

 
1,884

 
7,138

 
9,217

CAD
$
13,052

 
$
9,924

 
$
49,549

 
$
52,118

__________________
(1)
Three months ended December 31, 2017 represents an adjustment to exclude depreciation and amortization of $14.5 million , amortization expense of capitalized above/below market leases of $0.9 million , amortization of deferred financing costs of $0.5 million and amortization of equity-based compensation of $3.7 million . Year ended December 31, 2017 represents an adjustment to exclude depreciation and amortization of $54.0 million , amortization of above/below market leases of $0.7 million , amortization of deferred financing costs of $2.8 million and amortization of equity-based compensation of $23.8 million .
(2)
Three months December 31, 2016 represents an adjustment to exclude depreciation and amortization of $13.7 million , amortization of above/below market leases of $0.3 million , amortization of deferred financing costs of $1.6 million and amortization of equity-based compensation of $7.0 million . Year ended December 31, 2016 represents an adjustment to exclude depreciation and amortization of $65.0 million , amortization of above/below market leases of $2.6 million , amortization of deferred financing costs of $7.1 million and amortization of equity-based compensation of $19.3 million .
(3)
Three months ended December 31, 2017 CAD includes a $(0.7) million net loss related to the settlement of foreign currency derivatives. Year ended December 31, 2017 CAD includes a $1.0 million net gain related to the settlement of foreign currency derivatives.
(4)
Three months ended December 31, 2016 CAD includes a $0.3 million net gain related to the settlement of foreign currency derivatives. Year ended December 31, 2016 CAD includes a $(0.8) million net loss related to the settlement of foreign currency derivatives.
(5)
Three months ended December 31, 2017 represents an adjustment to exclude $4.6 million of transaction costs. Year ended December 31, 2017 represents an adjustment to exclude $6.1 million of transaction costs and $1.0 million of payroll taxes associated with the acceleration of equity awards due to the Mergers.
(6)
Three months December 31, 2016 represents an adjustment to exclude $0.9 million of non-recurring bad debt expense and $1.0 million of taxes associated with the capital gain tax on the sale of real estate investments. Year ended December 31, 2016 represents an adjustment to exclude $2.6 million of transaction costs, $1.3 million of non-recurring bad debt expense and $5.3 million of taxes associated with the capital gain tax on the sale of real estate investments.
Net Operating Income (NOI)
We believe NOI is a useful metric of the operating performance of our real estate portfolio in the aggregate. Portfolio results and performance metrics represent 100% for all consolidated investments. Net operating income represents total property and related revenues, adjusted for: (i) amortization of above/below market leases; (ii) straight-line rent (except with respect to rent free period); (iii) other items such as adjustments related to joint ventures and non-recurring bad debt expense and less property operating expenses. However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, transaction costs, depreciation and amortization expense, realized gains (losses) on sales and other and other items under U.S. GAAP and capital expenditures and leasing costs, all of which may be significant economic costs. NOI may fail to capture significant trends in these components of U.S. GAAP net income (loss) which further limits its usefulness.
NOI should not be considered as an alternative to net income (loss), determined in accordance with U.S. GAAP, as an indicator of operating performance. In addition, our methodology for calculating NOI involves subjective judgment and discretion and may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.

63

The following table presents a reconciliation of NOI of our real estate equity and preferred equity segments to property and other related revenues less property operating expenses for the three months ended and years ended December 31, 2017 and 2016 (dollars in thousands):
    
 
Three Months Ended December 31,
 
Years Ended December 31,
 
2017
 
2016
 
2017
 
2016
Rental income
$
26,041

 
$
25,700

 
$
105,349

 
$
124,321

Escalation income
5,265

 
5,347

 
21,625

 
25,173

Other income
535

 
823

 
1,243

 
1,721

Total property and other income
31,841


31,870

 
128,217


151,215

Properties - operating expenses
8,598

 
8,628

 
31,119

 
35,892

Adjustments:
 
 
 
 
 
 
 
Interest income
705

 
—

 
1,706

 
—

Amortization and other items (1)(2)
922

 
691

 
666

 
3,756

NOI (3)
$
24,870


$
23,933

 
$
99,470


$
119,079

___________________
(1)
Three months ended December 31, 2017 primarily excludes $0.9 million of amortization of above/below market leases. Year ended December 31, 2017 primarily includes $0.7 million of amortization of above/below market leases.
(2)
Three months ended December 31, 2016 primarily excludes $0.9 million of non-recurring bad debt expense offset by $(0.2) million of amortization of above/below market rent. Year ended December 31, 2016 primarily includes $2.6 million of amortization of above/below market leases and $1.3 million of non-recurring bad debt expense.
(3)
The following table presents a reconciliation of net income (loss) to NOI of our real estate equity segment for the three months ended and years ended December 31, 2017 and 2016 (dollars in thousands):
    
 
Three Months Ended December 31,
 
Years Ended December 31,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
2,537

 
$
13,859

 
$
(30,333
)
 
$
(62,502
)
Remaining segments (i)
13,917

 
10,461

 
60,658

 
56,504

Real estate equity and preferred equity segment adjustments:
 
 
 
 
 
 
 
Interest expense
6,093

 
6,734

 
24,989

 
30,974

Other expenses
2,623

 
2,770

 
9,012

 
12,307

Depreciation and amortization
14,535

 
13,716

 
54,014

 
64,979

Unrealized (gain) loss on derivatives and other
798

 
(3,675
)
 
2,710

 
15,040

Realized (gain) loss on sales and other
(14,250
)
 
(20,616
)
 
(21,366
)
 
(32,019
)
Income tax (benefit) expense
(2,461
)
 
227

 
(2,145
)
 
2,742

Impairment losses
—

 
—

 
—

 
27,468

Other items
1,078

 
457

 
1,931

 
3,586

Total adjustments
8,416


(387
)
 
69,145


125,077

NOI
$
24,870


$
23,933

 
$
99,470


$
119,079

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

64

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are primarily subject to interest rate risk, credit risk and foreign currency exchange rate risk. These risks are dependent on various factors beyond our control, including monetary and fiscal policies, domestic and international economic conditions and political considerations. Our market risk sensitive assets, liabilities and related derivative positions are held for investment and not for trading purposes.
Interest Rate Risk
Changes in interest rates affect our net income primarily related to the impact to interest expense incurred in connection with our borrowings and derivatives.
Substantially all of our investments are financed with non-recourse mortgage notes. We predominately use floating rate financing and we seek to generally mitigate the risk of interest rates rising through derivative instruments including interest rate caps. As of December 31, 2017 , a hypothetical 100 basis point increase in GBP LIBOR and EURIBOR applied to our liabilities would result in a decrease in net income of approximately $7.0 million annually.
A change in interest rates could affect the value of our properties, which may be influenced by changes in interest rates and credit spreads (as discussed below) because value is typically derived by discounting expected future cash flow generated by the property using interest rates plus a risk premium based on the property type and creditworthiness of the tenants. A lower risk-free rate generally results in a lower discount rate and, therefore, a higher valuation, and vice versa; however, an increase in the risk-free rate would not impact our net income.
As of December 31, 2017 , none of our derivatives qualified for hedge accounting treatment, therefore, gains (losses) resulting from their fair value measurement at the end of each reporting period are recognized as an increase or decrease in unrealized gain (loss) on derivatives and other in our consolidated statements of operations. In addition, we are, and may in the future be, subject to additional expense based on the notional amount of the derivative and a specified spread over the applicable index. Because the fair value of these instruments can vary significantly between periods, we may experience significant fluctuations in the amount of our unrealized gain (loss) in any given period.
The objective of our interest rate management strategy is to minimize or eliminate the effects of interest rate changes on the value of our assets, to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of financing such assets.
We can provide no assurances, however, that our efforts to manage interest rate volatility will successfully mitigate the risks of such volatility on our portfolio.
Credit Risk
We are subject to the credit risk of the tenants of our properties. We seek to undertake a credit evaluation of each tenant prior to acquiring properties. This analysis includes due diligence of each tenant’s business as well as an assessment of the strategic importance of the underlying real estate to the tenant’s core business operations. Where appropriate, we may seek to augment the tenant’s commitment to the property by structuring various credit enhancement mechanisms into the underlying leases. These mechanisms could include security deposit requirements, letters of credit or guarantees from entities we deem creditworthy. Additionally, we perform ongoing monitoring of creditworthiness of our tenants which is an important component of our portfolio management process. Such monitoring may include, to the extent available, a review of financial statements and operating statistics, delinquencies, third party ratings and market data. In addition, our preferred equity investment is subject to credit risk based on the borrower’s ability to make required interest payments on scheduled due dates and value of collateral. We seek to manage credit risk through our Manager’s comprehensive credit analysis prior to making an investment, actively monitoring our investment and the underlying credit quality, including subordination and diversification of our investment. Our analysis is based on a broad range of real estate, financial, economic and borrower-related factors, which we believe are critical to the evaluation of credit risk inherent in a transaction. For the year ended December 31, 2017 , our preferred equity investment contributed all of our interest income.
We are subject to the credit risk of the borrower when we originate preferred equity investments. We seek to undertake a rigorous credit evaluation of our borrower prior to making an investment. This analysis includes an extensive due diligence investigation of the borrower’s creditworthiness and business as well as an assessment of the strategic importance of the underlying real estate to the borrower’s core business operations.
Foreign Currency Exchange Rate Risk
We are subject to risks related to changes in foreign currency exchange rates as a result of our ownership of, or commitments to acquire, properties within Europe, predominantly the U.S. dollar/Euro and U.S. dollar/U.K. Pounds Sterling exchange rate. As a result, changes in exchange rate fluctuations may positively or negatively affect our consolidated revenues and expenses (as expressed in U.S. dollars) from our business.

65

In addition, because we are exposed to foreign currency exchange rate fluctuations, we employ foreign currency risk management strategies, including the use of, among others, currency hedges, and matched currency financing.
The following chart represents the change in the Euro/U.S. dollar and U.K. Pounds Sterling/U.S. dollar exchange rate during the year s ended December 31, 2017 and 2016 :
FXLINECHARTA09.JPG
Source: Oanda
Our properties and the rent payments under our leases for these properties are denominated predominantly in Euro and U.K. Pounds Sterling and we expect substantially all of our future leases for properties we may acquire in Europe to be denominated in the local currency of the country in which the underlying property is located. Additionally, our non-recourse mortgage borrowings are denominated in the same currency as the assets securing the borrowing. A majority portion of our operating expenses and borrowings with respect to such European properties are also transacted in local currency, however we do have corporate expenses, such as our dividend, that are paid in U.S. dollar. We report our results of operations and consolidated financial information in the U.S. dollars. Consequently, our results of operations as reported in U.S. dollars are impacted by fluctuations in the value of the local currencies in which we conduct our European business.
In an effort to mitigate the risk of fluctuations in foreign currency exchange rates, we, and our Operating Partnership, seek to actively manage our revenues and expenses so that we incur a significant portion of our expenses, including our operating costs and borrowings, in the same local currencies in which we receive our revenues. In addition, subject to satisfying the requirements for qualification as a REIT, we engage in various hedging strategies, which may include currency futures, swaps, forwards and options. We expect that these strategies and instruments may allow us to reduce, but not eliminate, the risk of fluctuations in foreign currency exchange rates. The counterparties to these arrangements are major financial institutions with which we may also have other financial relationships. As of December 31, 2017 , we have entered into foreign currency forwards with respect to the projected net property level cash flows which are hedged for the Euro through November 2017. In January 2018, we entered into additional foreign currency forwards with respect to the projected net property level cash flows which are hedged for the Euro through November 2019.
Based on our portfolio, a hypothetical 10% appreciation or depreciation in the applicable exchange rate to the U.S dollar, adjusting for our foreign currency forwards, applied to our assets and liabilities would result in an increase or decrease of stockholders’ equity of approximately $66.8 million , respectively. Such amount would be recorded in OCI. In addition, we enter into derivative instruments to manage foreign currency exposure of our operating income. A hypothetical 10% increase or decrease in applicable exchange rate to the U.S dollar applied to our assets and liabilities, adjusting for foreign currency forwards would result in an increase or decrease of net operating income adjusted for interest and other expenses of approximately $2.0 million annually, respectively.
We can provide no assurances, however, that our efforts to manage foreign currency exchange rate volatility will successfully mitigate the risks of such volatility on our portfolio.


66

Item 8.    Financial Statements and Supplementary Data
The consolidated financial statements of NorthStar Realty Europe Corp. and the notes related to the foregoing combined consolidated financial statements, together with the independent registered public accounting firm’s reports thereon are included in this Item 8.
Index to Consolidated Financial Statements

67


Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
NorthStar Realty Europe Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of NorthStar Realty Europe Corp. and its subsidiaries as of December 31, 2017 and December 31, 2016, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/PricewaterhouseCoopers, Société coopérative
Luxembourg, March 13, 2018
Represented by





Cornelis. J. Hage


68

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
    
 
December 31, 2017
 
December 31,
2016
Assets

 
 
Operating real estate, gross
$
1,606,890

 
$
1,614,432

Less: accumulated depreciation
(95,356
)
 
(63,585
)
Operating real estate, net
1,511,534

 
1,550,847

Preferred equity investments
35,347

 
—

Cash and cash equivalents
64,665

 
66,308

Restricted cash
6,917

 
10,242

Receivables, net of allowance of $747 and $553 as of December 31, 2017 and December 31, 2016, respectively
9,048

 
6,015

Assets held for sale
169,082

 
28,208

Derivative assets, at fair value
7,024

 
13,729

Intangible assets, net
114,185

 
148,403

Other assets, net
23,115

 
21,640

Total assets
$
1,940,917

 
$
1,845,392

Liabilities

 
 
Mortgage and other notes payable, net
$
1,223,443

 
$
1,149,119

Accounts payable and accrued expenses
27,240

 
28,004

Due to related party (refer to Note 6)
3,590

 
4,991

Derivative liabilities, at fair value
5,270

 
—

Intangible liabilities, net
28,632

 
30,802

Liabilities related to assets held for sale
648

 
2,041

Other liabilities
25,757

 
28,918

Total liabilities
1,314,580

 
1,243,875

Commitments and contingencies

 

Redeemable non controlling interest (refer to Note 9)
1,992

 
1,610

Equity
 
 
 
NorthStar Realty Europe Corp. Stockholders’ Equity
 
 
 
Preferred stock, $0.01 par value, 200,000,000 shares authorized, no shares issued and outstanding as of December 31, 2017 and December 31, 2016
—

 
—

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 55,402,259 and 55,395,143 shares issued and outstanding as of December 31, 2017 and December 31, 2016, respectively
555

 
554

Additional paid-in capital
940,579

 
925,473

Retained earnings (accumulated deficit)
(347,053
)
 
(282,769
)
Accumulated other comprehensive income (loss)
25,618

 
(51,424
)
Total NorthStar Realty Europe Corp. stockholders’ equity
619,699

 
591,834

Non-controlling interests
4,646

 
8,073

Total equity
624,345

 
599,907

Total liabilities, redeemable non controlling interest and equity
$
1,940,917

 
$
1,845,392

    





Refer to accompanying notes to consolidated financial statements.

69

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
 
Years Ended December 31,

2017
 
2016
 
2015 (2)
Revenues

 
 
 
 
Rental income
$
105,349

 
$
124,321

 
$
101,023

Escalation income
21,625

 
25,173

 
18,822

Interest income
1,706

 
—

 
—

Other income
1,243

 
1,721

 
694

Total revenues
129,923

 
151,215

 
120,539

Expenses

 
 
 
 
Properties - operating expenses
31,119

 
35,892

 
26,559

Interest expense
25,844

 
41,439

 
36,129

Transaction costs
6,117

 
2,610

 
120,101

Impairment losses
—

 
27,468

 
1,710

Management fee, related party
14,408

 
14,068

 
2,333

Other expenses
9,251

 
12,376

 
10,535

General and administrative expenses
7,384

 
8,077

 
3,502

Compensation expense (1)
23,768

 
19,257

 
850

Depreciation and amortization
54,014

 
64,979

 
56,283

Total expenses
171,905

 
226,166

 
258,002

Other income (loss)


 
 
 
 
Unrealized gain (loss) on derivatives and other (refer to Note 10)
(12,863
)
 
(11,257
)
 
(8,731
)
Realized gain (loss) on sales and other
22,367

 
26,448

 
1,376

Income (loss) before income tax benefit (expense)
(32,478
)

(59,760
)

(144,818
)
Income tax benefit (expense)
2,145

 
(2,742
)
 
675

Net income (loss)
(30,333
)

(62,502
)

(144,143
)
Net (income) loss attributable to non controlling interests
(792
)
 
749

 
1,007

Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
$
(31,125
)

$
(61,753
)

$
(143,136
)
Earnings (loss) per share:


 
 
 
 
Basic
$
(0.57
)
 
$
(1.07
)
 
$
(2.30
)
Diluted
$
(0.57
)
 
$
(1.07
)
 
$
(2.30
)
Weighted average number of shares:
 
 
 
 
 
Basic
55,073,383

 
57,875,479

 
62,183,638

Diluted
55,599,222

 
58,564,986

 
62,865,124

____________________
(1)
Compensation expense for the years ended December 31, 2017 , 2016 and 2015 is comprised of equity-based compensation expenses. For the year ended December 31, 2017 , compensation expense includes the impact of substantially all time based and certain performance based awards vesting in connection with the change of control of the Manager (refer to Note 7).
(2)
The Company began paying fees on November 1, 2015, in connection with the management agreement with the Manger (refer to Note 6).










Refer to accompanying notes to consolidated financial statements.

70

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)

 
Years Ended December 31,
 
2017
 
2016
 
2015
Net income (loss)
$
(30,333
)
 
$
(62,502
)
 
$
(144,143
)
Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustment, net
77,745

 
(55,226
)
 
6,971

Total other comprehensive income (loss)
77,745

 
(55,226
)
 
6,971

Comprehensive income (loss)
47,412

 
(117,728
)
 
(137,172
)
Comprehensive (income) loss attributable to non-controlling interests
(1,495
)
 
1,991

 
1,082

Comprehensive income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
$
45,917

 
$
(115,737
)
 
$
(136,090
)






















Refer to accompanying notes to consolidated financial statements.

71

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars and Shares in Thousands)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total NorthStar Stockholders’ Equity
 
Non-controlling
Interests
 
Total
Equity
 
 
Shares
 
Amount
 
Balance as of December 31, 2014
—

 
$
—

 
$
116,982

 
$
(33,630
)
 
$
(4,336
)
 
$
79,016

 
$
1,058

 
$
80,074

Net transaction with NorthStar Realty
—

 
—

 
653,534

 
—

 
—

 
653,534

 
—

 
653,534

Capital contribution of NorthStar Realty
62,988

 
630

 
249,370

 
—

 
—

 
250,000

 
—

 
250,000

Non-controlling interests - contribution
—

 
—

 
—

 
—

 
—

 
—

 
192

 
192

Formation of Operating Partnership (refer to note 9)
—

 
—

 
(8,749
)
 
—

 
—

 
(8,749
)
 
8,749

 
—

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

 
—

 
(852
)
 
—

 
—

 
(852
)
 
852

 
—

Amortization of equity-based compensation
—

 
—

 
311

 
—

 
—

 
311

 
526

 
837

Issuance and vesting of restricted stock, net of tax withholding
18

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Tax withholding related to vesting of equity-based compensation
—

 
—

 
(547
)
 
—

 
—

 
(547
)
 
—

 
(547
)
Retirement of shares of common stock
(3,680
)
 
(37
)
 
(41,387
)
 
—

 
—

 
(41,424
)
 
—

 
(41,424
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
6,896

 
6,896

 
75

 
6,971

Dividends on common stock and equity-based compensation
—

 
—

 
—

 
(9,480
)
 
—

 
(9,480
)
 
(104
)
 
(9,584
)
Net income (loss)
—

 
—

 
—

 
(143,136
)
 
—

 
(143,136
)
 
(1,175
)
 
(144,311
)
Balance as of December 31, 2015
59,326


593


968,662


(186,246
)

2,560


785,569


10,173


795,742

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

 
—

 
2,252

 
—

 
—

 
2,252

 
(2,252
)
 
—

Amortization of equity-based compensation
—

 
—

 
15,682

 
—

 
—

 
15,682

 
2,557

 
18,239

Issuance and vesting of restricted stock, net of tax withholding
1,731

 
17

 
(17
)
 
—

 
—

 
—

 
—

 
—

Tax withholding related to vesting of equity-based compensation
—

 
—

 
(2,546
)
 
—

 
—

 
(2,546
)
 
—

 
(2,546
)
Retirement of shares of common stock
(5,662
)
 
(56
)
 
(58,560
)
 
—

 
—

 
(58,616
)
 
—

 
(58,616
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(53,984
)
 
(53,984
)
 
(1,242
)
 
(55,226
)
Dividends on common stock and equity-based compensation
—

 
—

 
—

 
(34,770
)
 
—

 
(34,770
)
 
(414
)
 
(35,184
)
Net income (loss)
—

 
—

 
—

 
(61,753
)
 
—

 
(61,753
)
 
(749
)
 
(62,502
)
Balance as of December 31, 2016
55,395


554


925,473


(282,769
)

(51,424
)

591,834


8,073


599,907

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

 
—

 
1,817

 
—

 
—

 
1,817

 
(1,817
)
 
—

Non-controlling interests - distribution
—

 
—

 
—

 
—

 
—

 
—

 
(1,915
)
 
(1,915
)
Non-controlling interests - redemption
—

 
—

 
(156
)
 
—

 
—

 
(156
)
 
—

 
(156
)
Conversion of Common Units to common stock (refer to Note 9)
268

 
3

 
3,054

 
—

 
—

 
3,057

 
(3,057
)
 
—

Conversion of RSUs to common stock (refer to Note 8)
83

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
—

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

 
—

 
21,433

 
—

 
—

 
21,433

 
2,174

 
23,607

Issuance and vesting of restricted stock, net of tax withholding
517

 
6

 
(6
)
 
—

 
—

 
—

 
—

 
—

Cost of capital
—

 
—

 
(50
)
 
—

 
—

 
(50
)
 
—

 
(50
)
Tax withholding related to vesting of equity-based compensation
(861
)
 
(9
)
 
(10,985
)
 
—

 
—

 
(10,994
)
 
—

 
(10,994
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
77,042

 
77,042

 
703

 
77,745

Dividends on common stock and equity-based compensation
—

 
—

 
—

 
(33,159
)
 
—

 
(33,159
)
 
(307
)
 
(33,466
)
Net income (loss)
—

 
—

 
—

 
(31,125
)
 
—

 
(31,125
)
 
792

 
(30,333
)
Balance as of December 31, 2017
55,402


$
555


$
940,579


$
(347,053
)

$
25,618


$
619,699


$
4,646


$
624,345





Refer to accompanying notes to consolidated financial statements.

72

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
 
Years Ended December 31,
 
2017
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(30,333
)
 
$
(62,502
)
 
$
(144,143
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and amortization
54,014

 
64,979

 
56,283

Amortization of deferred financing costs
2,813

 
7,117

 
5,936

Amortization of equity-based compensation
23,731

 
18,239

 
837

Allowance for uncollectible accounts
1,481

 
1,294

 
115

Unrealized (gain) loss on derivatives and other
12,863

 
11,257

 
8,669

Realized (gain) loss on sales and other
(22,367
)
 
(26,448
)
 
(1,376
)
Goodwill impairment losses
—

 
—

 
1,710

Real estate impairment losses
—

 
27,468

 
—

Foreign currency loss on deposits included in transaction costs
—

 
—

 
6,402

Amortization of capitalized above/below market leases
627

 
2,463

 
1,191

Straight line rental income
(6,314
)
 
(6,705
)
 
(5,695
)
Deferred income taxes, net
(1,515
)
 
(4,952
)
 
(2,992
)
Changes in assets and liabilities:
 
 
 
 
 
Restricted cash
3,199

 
(2,717
)
 
(16,483
)
Receivables
(2,077
)
 
(1,890
)
 
(7,844
)
Other assets
(15
)
 
(3,063
)
 
(1,023
)
Accounts payable and accrued expenses
(6,018
)
 
(4,461
)
 
28,551

Due to related party
(1,401
)
 
987

 
3,447

Other liabilities
(3,516
)
 
7,064

 
16,235

Net cash provided by (used in) operating activities
25,172


28,130

 
(50,180
)
Cash flows from investing activities:
 
 
 
 
 
Acquisition of operating real estate
—

 
—

 
(1,921,511
)
Improvements of operating real estate
(17,668
)
 
(10,413
)
 
(3,003
)
Origination of preferred equity investments
(35,347
)
 
—

 
—

Proceeds from sale of operating real estate
141,360

 
395,226

 
22,623

Other assets
(141
)
 
(4,432
)
 
—

Deferred leasing costs
(3,712
)
 
—

 
—

Changes in restricted cash
—

 
11,243

 
1,359

Net cash provided by (used in) investing activities
84,492


391,624

 
(1,900,532
)
Cash flows from financing activities:
 
 
 
 
 
Repayment of mortgage and other notes payable
(77,804
)
 
(200,666
)
 
(127,280
)
Borrowings from credit facility
35,000

 
65,000

 
—

Borrowings from mortgage and other notes payable
5,649

 
11,770

 
1,224,327

Repayment of credit facility
(35,000
)
 
(65,000
)
 
—

Proceeds of issuance of Senior Notes
—

 
—

 
340,000

Repurchase of Senior Notes
—

 
(273,028
)
 
—

Repayment of Senior Notes
—

 
(67,200
)
 
—

Payment of financing costs
(2,020
)
 
(3,938
)
 
(33,470
)
Purchase of derivative instruments
—

 
(414
)
 
(31,069
)
Settlement of derivatives
979

 
(787
)
 
—

Tax withholding related to vesting of equity-based compensation
(10,994
)
 
(2,546
)
 
—

Repurchase of common stock
—

 
(58,616
)
 
(38,082
)
Contribution of NorthStar Realty
—

 
—

 
250,000

Dividends
(33,466
)
 
(35,184
)
 
(9,584
)
Net transactions with NorthStar Realty
—

 
—

 
653,534

Contributions from non-controlling interest
—

 
—

 
3,190

Distributions to non-controlling interest
(1,915
)
 
(247
)
 
—

Net cash provided by (used in) financing activities
(119,571
)

(630,856
)
 
2,231,566

Effect of foreign currency translation on cash and cash equivalents
8,264

 
(6,434
)
 
890

Net increase (decrease) in cash and cash equivalents
(1,643
)

(217,536
)
 
281,744

Cash and cash equivalents—beginning of period
66,308

 
283,844

 
2,100

Cash and cash equivalents—end of period
$
64,665


$
66,308

 
$
283,844

Refer to accompanying notes to consolidated financial statements.

73

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Continued)
 
Years Ended December 31,
 
2017
 
2016
 
2015
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
 
 
Reclassification of operating real estate to assets held for sale
$
160,651

 
$
22,327

 
$
5,318

Conversion of Common Units to common stock
3,057

 
—

 
—

Reclassification of intangibles to assets and liabilities held for sale
4,467

 
2,045

 
776

Reclassification of operating real estate to intangible assets/liabilities
—

 
—

 
170,694

Reclassification of other assets in investing activities to assets held for sale
—

 
2,523

 
—

Formation of Operating Partnership
—

 
—

 
8,749

Assumption of mortgage note payable upon acquisition
—

 
—

 
273,021

Reclassification of other assets to operating real estate
—

 
—

 
52,245

Reclassification of other assets and liabilities to assets held for sale
3,316

 
740

 
—

Reclassification related to measurement adjustments/other
—

 
827

 
5,291

Retirement of shares of common stock
—

 
—

 
3,342

Assumption of working capital items upon acquisition
—

 
—

 
2,569

Assumption of deferred tax liabilities and corresponding goodwill
—

 
—

 
24,491

Reallocation of interest in Operating Partnership
1,817

 
2,252

 
852

Amounts payable relating to financing costs
—

 
—

 
1,808

Accrued capital expenditures and deferred assets
2,609

 
1,975

 
692

Supplemental disclosures of cash flow information:
 
 
 
 
 
Payment of interest expense
$
22,251

 
$
33,483

 
$
24,273

Payment of income tax
4,433

 
1,928

 
1,298

































Refer to accompanying notes to consolidated financial statements.

74

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Formation and Organization
NorthStar Realty Europe Corp. (“NorthStar Europe” or the “Company”) (NYSE: NRE), a publicly-traded real estate investment trust (“REIT”), is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France. The Company commenced operations on November 1, 2015 following the spin-off by NorthStar Realty Finance Corp. (“NorthStar Realty”) of its European real estate business (excluding its European healthcare properties) into a separate publicly-traded company, NorthStar Realty Europe Corp., a Maryland corporation (the “Spin-off”). The Company’s objective is to provide its stockholders with stable and recurring cash flow supplemented by capital growth over time.
The Company is externally managed and advised by an affiliate of the Manager. References to “the Manager” refer to NorthStar Asset Management Group Inc. (“NSAM”) for the period prior to the Mergers (refer below) and Colony NorthStar, Inc. (“Colony NorthStar” or “CLNS”), for the period subsequent to the Mergers. As part of the Mergers, NSAM changed its name to Colony NorthStar, Inc.
Substantially all of the Company’s assets, directly or indirectly, are held by, and the Company conducts its operations, directly or indirectly, through NorthStar Realty Europe Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the “Operating Partnership”). The Company has elected to be taxed, and will continue to conduct its operations so as to continue to qualify, as a REIT for U.S. federal income tax purposes.
All references herein to the Company refer to NorthStar Realty Europe Corp. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.
Merger Agreements among NSAM, NorthStar Realty and Colony Capital, Inc.
On January 10, 2017, the Company’s external manager, NSAM, completed a tri-party merger with NorthStar Realty and Colony Capital, Inc. (“Colony”), pursuant to which the companies combined in an all-stock merger (“the Mergers”) of equals transaction to create a diversified real estate and investment management company. Under the terms of the merger agreement, NSAM, Colony and NorthStar Realty, through a series of transactions, merged with and into NSAM, which was renamed Colony NorthStar (NYSE: CLNS). Colony NorthStar is a leading global equity REIT with an embedded investment management platform.
Amended and Restated Management Agreement
On November 9, 2017, the Company entered into an amended and restated management agreement (the “Amended and Restated Management Agreement”) with an affiliate of our Manager, effective as of January 1, 2018. Refer to Note 6 “Related Party Arrangements” for a description of the terms of the Amended and Restated Management Agreement.
2.
Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
The consolidated financial statements for the period January 1, 2015 to October 31, 2015 represent the Company’s activity prior to the spin-off by NorthStar Realty of its European real estate business (the “Spin-off”) and reflects the revenues and direct expenses of the Company and include material assets and liabilities of NorthStar Realty that are specifically identifiable to the European real estate business and contributed to the Company upon completion of the Spin-off.
The consolidated financial statements for the period prior to the Spin-off include an allocation of costs and expenses by NorthStar Realty related to the Company (primarily compensation and other general and administrative expense) based on an estimate of expenses as if the Company was managed as an independent entity. This allocation method is principally based on relative headcount and management’s knowledge of the operations of the Company. The amounts allocated in the accompanying consolidated financial statements are not necessarily indicative of the actual amount of such indirect expenses that would have been recorded had the Company been a separate independent entity. The Company believes the assumptions underlying its allocation of indirect expenses are reasonable. In addition, an estimate of management fees to the Manager of $0.3 million for the period from January 1, 2015 through the Spin-off are recorded as if the Company was managed as an independent entity and is included in general and administrative expense in the consolidated statements of operations. The Company began paying management fees to the Manager on November 1, 2015 pursuant to the terms of the Company’s management agreement with the Manager (refer to Note 6).

75
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“VIE”) where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.
Variable Interest Entities
A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.
The Company will evaluate its investments to determine whether they are a VIE. The Company analyzes new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.
Voting Interest Entities
A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party or through a simple majority vote.
The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.
Non-controlling Interests
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. A non-controlling interest is required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) and other comprehensive income (loss) (“OCI”) attributable to non-controlling interests. An allocation to a non-controlling interest may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents.
Reclassifications
Certain prior period amounts have been reclassified in the consolidated financial statements to conform to current period presentation including the gain (loss) on net cash on derivatives from unrealized gain (loss) on derivatives and other to realized gain (loss) on sales and other on the consolidated statements of operations for the year ended December 31, 2017 (refer to Note 10).

76
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions.
Comprehensive Income (Loss)
The Company reports consolidated comprehensive income (loss) in separate statements following the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and OCI. The components of OCI principally include the foreign currency translation adjustment, net.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with an original maturity date of three months or less and deposits held with third parties that are readily convertible to cash to be cash equivalents. Cash, including amounts restricted at certain banks and financial institutions, may at times exceed insurable amounts. The Company seeks to mitigate credit risk by placing cash and cash equivalents with major financial institutions. To date, the Company has not experienced any losses on cash and cash equivalents. Cash and cash equivalents exclude escrow arrangements entered into for specific warranties in relation to the real estate sales which are recorded in other assets in the consolidated financial statements.
Restricted Cash
Restricted cash primarily consists of amounts related to operating real estate such as escrows for taxes, insurance, capital expenditures, tenant security deposits and payments required under certain lease agreements and amounts related to the Company’s borrowings.
Operating Real Estate
Operating real estate is carried at historical cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred. Major replacements and improvements which extend the life of the asset are capitalized and depreciated over their useful life. Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets.
The Company accounts for purchases of operating real estate that qualify as business combinations using the acquisition method, where the purchase price is allocated to tangible assets such as land, building, tenant and land improvements and other identified intangibles, such as in-place leases, above/below-market leases and goodwill. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in the consolidated statements of operations.
Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:
Category:
 
Term:
Building
 
40 years
Building improvements
 
Lesser of the useful life or remaining life of the building
Building leasehold interests
 
Lesser of 40 years or remaining term of the lease
Tenant improvements
 
Lesser of the useful life or remaining term of the lease
Minimum rental amounts due under tenant leases are generally subject to scheduled adjustments. The following table presents approximate future minimum rental income under noncancelable operating leases to be received over the next five years and thereafter as of December 31, 2017 (dollars in thousands):
Years Ending December 31: (1)
 
 
2018
 
$
97,703

2019
 
100,373

2020
 
85,284

2021
 
74,694

2022
 
66,468

Thereafter
 
198,745

Total
 
$
623,267

_________________________
(1)    Translated to the U.S. dollar using the currency exchange rate as of December 31, 2017 .

77
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Preferred Equity Investments
Preferred equity investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium, discount and unfunded commitments, if any. Preferred equity investments that are deemed to be impaired are carried at amortized cost less a loan loss reserve, if deemed appropriate, which approximates fair value. Preferred equity investments where the Company does not intend to hold the investment for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or fair value.
Assets and Related Liabilities Held For Sale
Operating real estate which has met the criteria to be classified as held for sale is separately presented on the consolidated balance sheets. Such operating real estate is recorded at the lower of its carrying value or its estimated fair value less the cost to sell net of the intangible assets associated with the asset, with any write-down to fair value less cost to sell recorded as an impairment loss. Once a property is determined to be held for sale, depreciation and amortization is no longer recorded. The Company records a gain or loss on sale of real estate when title is conveyed to the buyer and the Company has no substantial economic involvement with the property. If the sales criteria for the full accrual method are not met, the Company defers some or all of the gain or loss recognition by applying the finance, leasing, profit sharing, deposit, installment or cost recovery method, as appropriate, until the sales criteria are met.
Deferred Costs
Deferred costs primarily include deferred financing costs and deferred lease costs. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. Costs related to revolving credit facilities are recorded in other assets and are amortized to interest expense using the straight-line basis over the term of the facility. Costs related to other borrowings are recorded net against the carrying value of such borrowings and are amortized into interest expense using the effective interest method or straight-line method depending on the type of financing. Unamortized deferred financing costs are expensed when the associated borrowing is repaid before maturity to realized gain (loss) on sales and other. Costs incurred in seeking financing transactions, which do not close, are expensed in the period in which it is determined that the financing will not occur. Deferred lease costs consist of fees incurred to initiate and renew operating leases, which are amortized on a straight-line basis over the remaining lease term and are recorded to depreciation and amortization in the consolidated statements of operations.
Intangible Assets and Intangible Liabilities
The Company records acquired identified intangibles, which includes intangible assets (such as value of the above-market leases, in-place leases, below-market ground leases, goodwill and other intangibles) and intangible liabilities (such as the value of below-market leases), based on estimated fair value. The value allocated to the above or below-market leases is amortized net to rental income, the value of below-market ground leases is amortized into properties - operating expense and in-place leases is amortized into depreciation and amortization expense, respectively, in the consolidated statements of operations on a straight-line basis over the respective remaining lease term.
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination and is not amortized. The Company analyzes goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit, related to such goodwill, is less than the carrying amount as a basis to determine whether the two-step impairment test is necessary. The first step in the impairment test compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds fair value, the second step is required to determine the amount of the impairment loss, if any, by comparing the implied fair value of the reporting unit goodwill with the carrying amount of such goodwill. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date, allocating the reporting unit’s estimated fair value to its net assets and identifiable intangible assets. The residual amount represents the implied fair value of goodwill. To the extent this amount is below the carrying value of goodwill, an impairment loss is recorded in the consolidated statements of operations.

78
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table presents identified intangibles as of December 31, 2017 and 2016 (dollars in thousands):
 
December 31, 2017 (1)
 
December 31, 2016 (1)
 
Gross Amount
 
Accumulated Amortization
 
Net
 
Gross Amount
 
Accumulated Amortization
 
Net
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
In-place lease
$
64,427

 
$
(24,290
)
 
$
40,137

 
$
80,924

 
$
(25,193
)
 
$
55,731

Above-market lease
34,882

 
(9,919
)
 
24,963

 
36,471

 
(7,965
)
 
28,506

Below-market ground lease
34,497

 
(1,109
)
 
33,388

 
51,876

 
(1,490
)
 
50,386

Goodwill (2)
15,697

 
N/A

 
15,697

 
13,780

 
 N/A

 
13,780

Total
$
149,503


$
(35,318
)

$
114,185


$
183,051


$
(34,648
)
 
$
148,403

 
 
 
 
 
 
 
 
 
 
 
 
Intangible liabilities:
 
 
 
 
 
 
 
 
 
 
 
Below-market lease
$
32,267

 
$
(8,964
)
 
$
23,303

 
$
34,163

 
$
(8,104
)
 
$
26,059

Above-market ground lease
5,513

 
(184
)
 
5,329

 
4,839

 
(96
)
 
4,743

Total
$
37,780

 
$
(9,148
)
 
$
28,632

 
$
39,002

 
$
(8,200
)
 
$
30,802

_______________________
(1)
As of December 31, 2017, the weighted average amortization period for above-market leases, below-market leases and in-place leases was 6.4 years , 9.2 years and 5.7 years , respectively. As of December 31, 2016 , the weighted average amortization period for above-market leases, below-market leases and in-place leases was 7.1 years , 9.8 years and 6.1 years , respectively.
(2)
Represents goodwill associated with certain acquisitions in exchange for shares in the underlying portfolios. The goodwill and a corresponding deferred tax liability was recorded at acquisition based on tax basis differences.

The following table presents a rollforward of goodwill for the year ended December 31, 2017 (dollars in thousands):
Balance as of December 31, 2015
 
$
22,852

Disposal of goodwill (1)
 
(8,561
)
Adjustments from foreign currency translation
 
(511
)
Balance as of December 31, 2016
 
13,780

Adjustments from foreign currency translation
 
1,917

Balance as of December 31, 2017
 
$
15,697

_______________________
(1)
Represents goodwill associated with certain disposals structured as share sales.

The following table presents amortization of acquired above-market leases, net of acquired below-market leases and below-market ground leases and amortization of other intangible assets for the years ended December 31, 2017 , 2016 and 2015 (dollars in thousands):
 
 
 
Years Ended December 31,
 
Statements of operations location:
 
2017
 
2016
 
2015
Amortization of above-market leases, net of acquired below-market leases
Rental income / properties - operating expenses
 
$
666

 
$
2,162

 
$
2,335

Amortization of other intangible assets
Depreciation and amortization expense
 
13,817

 
19,543

 
20,468


79
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table presents annual amortization of intangible assets and liabilities (dollars in thousands):
 
 
Intangible Assets
 
Intangible Liabilities
Years Ending December 31:
 
In-place Leases, Net
 
Above-market Leases, Net
 
Below-market Ground Lease Value, Net
 
Below-market Leases, Net
 
Above-market Ground Lease Value, Net
2018
 
$
9,272

 
$
4,030

 
$
399

 
$
2,839

 
$
75

2019
 
8,801

 
4,008

 
399

 
2,839

 
75

2020
 
7,094

 
3,860

 
399

 
2,805

 
75

2021
 
6,010

 
3,848

 
399

 
2,635

 
75

2022
 
4,169

 
3,848

 
399

 
2,626

 
75

Thereafter
 
4,791

 
5,369

 
31,393

 
9,559

 
4,954

Total
 
$
40,137


$
24,963


$
33,388


$
23,303


$
5,329


Other Assets and Other Liabilities
The following tables present a summary of other assets and other liabilities as of December 31, 2017 and 2016 (dollars in thousands):
 
December 31,
 
2017
 
2016
Other assets:
 
 
 
Prepaid expenses
$
1,936

 
$
1,951

Deferred leasing and other costs, net
6,019

 
3,029

Straight-line rent, net
10,969

 
10,182

Escrow receivable
3,286

 
6,168

Other
905

 
310

Total
$
23,115

 
$
21,640

 
 
 
 
 
December 31,
 
2017
 
2016
Other liabilities:

 
 
Deferred tax liabilities
$
8,548

 
$
8,916

Prepaid rent received and unearned revenue
8,406

 
13,585

Tenant security deposits
4,435

 
4,322

Prepaid escalation and other income
3,982

 
1,560

Other
386

 
535

Total
$
25,757

 
$
28,918

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Preferred Equity Investments
Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such investment is reclassified to held for sale.
Impairment on Investments
Operating Real Estate
The Company’s real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate expected future undiscounted cash flow to be generated by the property is less than the carrying value of the property. In conducting this review, the Company considers global macroeconomic factors, real estate sector conditions, together with investment specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value of the property and recorded in impairment losses in the consolidated statements of operations. For the years ended December 31, 2017 and 2015 , the Company did not recognize any impairment losses. For the year ended December 31, 2016 , the Company recognized $27.5 million of impairment losses.
An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of a tenant to make required rent and other payments contractually due. Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts.
Preferred Equity Investments
Preferred equity investments are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of the portfolio and adequacy of investment loss reserves on an annual basis or more frequently as necessary. Significant judgment of the Company is required in this analysis. The Company considers the estimated net recoverable value of the investment as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the investment, an investment loss reserve is recorded with a corresponding charge to provision for investment losses. The investment loss reserve for each investment is maintained at a level that is determined to be adequate by management to absorb probable losses.
Income recognition is suspended for an investment when, in the opinion of the Company, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired investment is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired investment is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the investment becomes contractually current and performance is demonstrated to be resumed. Interest accrued and not collected will be reversed against interest income. An investment is written off when it is no longer realizable and/or legally discharged. As of December 31, 2017 , the Company did not have any impaired preferred equity investments.
Equity-Based Compensation
The Company accounts for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award. Awards may be based on a variety of measures such as time, performance, market or a combination thereof. For time-based awards, fair value is determined based on the stock price on the grant date. The Company recognizes compensation expense over the vesting period on a straight-line basis or the attribution method depending if the grant is to an employee or non-employee. For performance-based awards, fair value is determined based on the stock price at the date of grant and an estimate of the probable achievement of such measure. The Company recognizes compensation expense over the requisite service period, net of estimated forfeitures, using the accelerated attribution expense method. For market-based measures, fair value is determined using a Monte Carlo analysis under a risk-neutral premise using a risk-free interest rate. The Company recognizes compensation expense, over the requisite service period, net of estimated forfeitures, on a straight-line basis. For awards with a combination of performance or market measures, the Company estimates the fair value as if it were two separate awards. First, the Company estimates the probability of achieving the performance measure. If it is not probable the performance condition will be met, the

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


Company records the compensation expense based on the fair value of the market measure, as described above. This expense is recorded even if the market-based measure is never met. If the performance-based measure is subsequently estimated to be achieved, the Company records compensation expense based on the performance-based measure. The Company would then record a cumulative catch-up adjustment for any additional compensation expense.
Equity-based compensation issued to non-employees is accounted for using the fair value of the award at the earlier of the performance commitment date or performance completion date. Time-based awards are remeasured every quarter based on the stock price as of the end of the reporting period until such awards vest, if any.
Derivatives
The Company seeks to use derivative instruments to manage exposure to interest rate risk and foreign currency exchange rate risk. The change in fair value for a derivative is recorded in unrealized gain (loss) on derivatives and other in the consolidated statements of operations.
The Company’s derivative instruments are recorded on the consolidated balance sheets at fair value and do not qualify as hedges under U.S. GAAP.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are translated into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency translation adjustment (“CTA”), net, is recorded as a component of accumulated OCI in the consolidated statements of equity. For the years ended December 31, 2017 , 2016 and 2015, the Company reclassified $(1.4) million , $17.7 million and $0.3 million , respectively, of CTA to realized gain (loss) on sales and other in the consolidated statements of operations due to the sale of certain real estate assets (refer to Note 3).
Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are remeasured into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency remeasurement adjustment is recorded in unrealized gain (loss) on derivatives and other in the consolidated statements of operations.
Earnings Per Share
The Company’s basic earnings per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common stock outstanding. Diluted EPS includes restricted stock and the potential dilution that could occur if outstanding restricted stock units (“RSUs”) or other contracts to issue common stock, assuming performance hurdles have been met, were converted to common stock (including limited partnership interests in the Operating Partnership owned by holders other than the Company (“Common Units”) and Common Units which are structured as profits interests (“LTIP Units” collectively referred to as Unit Holders) (refer to Note 8), where such exercise or conversion would result in a lower EPS. The dilutive effect of such RSUs and Unit Holders is calculated assuming all units are converted to common stock.
Income Taxes
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes with the initial filing of its 2015 U.S. federal tax return and will continue to comply with the related provisions of the Internal Revenue Code of 1986, as amended, the (“Internal Revenue Code”). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. The Company distributes to its stockholders 100% of its taxable income and therefore no provision for U.S. federal income taxes has been included in the accompanying consolidated financial statements for the years ended December 31, 2017 , 2016 and 2015 . Dividends distributed for the years ended December 31, 2017 and 2016 were characterized, for U.S. federal income tax purposes, as return of capital. Dividends distributed for the year ended December 31, 2015 was characterized, for U.S. federal income tax purposes, as ordinary income.
The Company conducts its business through foreign subsidiaries which may be subject to local level income tax in the European jurisdictions it operates. The Company has also elected taxable REIT subsidiary (“TRS”) status for one of the Company’s foreign subsidiaries. This enables the Company to provide services that would otherwise be considered impermissible for REITs and participate in activities that do not qualify as “rents from real property.” The TRS is not resident in the U.S. and, as such, not

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


subject to U.S. taxation but is subject to foreign income taxes only. As a result, the effective tax rate of less than 6.6% is due to those foreign taxes. In addition, the REIT will not generally be subject to any additional U.S. taxes on the repatriation of its earnings.
For the year ended December 31, 2017, the Company’s foreign subsidiaries recorded $0.6 million of current income tax benefit and $1.5 million of a deferred income tax benefit. For the year ended December 31, 2016 , the Company’s foreign subsidiaries recorded $7.7 million of current income tax expense and an offsetting $5.0 million of a deferred income tax benefit. For the year ended December 31, 2015 , the Company’s foreign subsidiaries recorded $2.3 million of current income tax expense and an offsetting $3.0 million of a deferred income tax benefit. For the Company’s foreign subsidiaries, including the Company’s foreign TRS, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the foreign tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. The Company evaluates the realizability of its deferred tax assets (e.g. net operating loss) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Due to past and projected losses in certain local jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company recognized net cumulative valuation allowances against the Company’s deferred tax assets. The Company will continue to review its deferred tax assets in accordance with U.S. GAAP. The valuation allowance at  December 31, 2017 , 2016 and 2015  of  $22.7 million , $26.6 million and $21.5 million , respectively, relates to deferred tax assets in jurisdictions that had not met the “more-likely-than-not” realization threshold criteria. The change to the valuation allowance is primarily due to disposals of operating real estate.
Changes in estimate of deferred tax asset realizability, if any, are included in income tax benefit (expense) in the consolidated statements of operations.
The following tables present a summary of the Company’s deferred   tax   assets and liabilities as of December 31, 2017 and 2016 (dollars in thousands):
    
 
December 31,
 
2017
 
2016
Deferred tax asset
 
 
 
Net operating losses
$
19,587

 
$
21,608

Interest deferral
5,598

 
4,356

Transaction costs capitalized to operating real estate
6,992

 
6,654

Operating real estate
2,852

 
2,028

Other
7,920

 
7,410

Total deferred tax asset
42,949

 
42,056

Valuation allowance
(22,666
)
 
(26,565
)
Deferred tax assets, net of valuation allowance
20,283

 
15,491

Deferred tax liabilities
 
 
 
Operating real estate
(23,126
)
 
(20,418
)
Other
(5,705
)
 
(3,989
)
Total deferred tax liabilities
(28,831
)
 
(24,407
)
Net deferred tax liability
$
(8,548
)
 
$
(8,916
)
The Company is allowed to carryforward its net operating losses indefinitely in most of the tax jurisdictions it files with some annual restrictions.
The Company has assessed its tax positions for all open tax years, which includes 2015 to 2017 and concluded there were no uncertain tax positions to be recognized.  The Company’s accounting policy with respect to interest and penalties is to classify these amounts as a component of income tax expense, where applicable. As of December 31, 2017 and 2016 , the Company has not recognized any such amounts related to uncertain tax positions, respectively.
Recent Accounting Pronouncements: Accounting Standards Adopted in 2017
In March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance (Accounting Standards Update “ASU” No. 2016-05) clarifying that an assessment of whether an embedded contingent put or call option is clearly and closely related to a borrowing requires only an analysis of the four-step decision sequence. Additionally, entities are not required to separately assess whether the contingency itself is clearly and closely related. Entities are required to apply the guidance to existing instruments in

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


scope using a modified retrospective transition method as of the date of adoption. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. The Company has adopted this guidance and it did not have any material impact on its consolidated financial position, results of operations and financial statement disclosures.
In March 2016, the FASB issued guidance (ASU No. 2016-09) which amends several aspects of the accounting for equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. The Company has adopted this guidance and has made a policy election to account for forfeitures upon occurrence. The adoption did not have a material impact on the Company’s consolidated financial position, results of operations and financial statement disclosures.
Recent Accounting Pronouncements: Future Application of Accounting Standards
Revenue Recognition - In May 2014, FASB issued an accounting update (ASU No. 2014-09) requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers. The Company has adopted the standard on its required effective date of January 1, 2018 using the modified retrospective approach and has applied the guidance to contracts not yet completed as of the date of adoption. The new revenue standard specifically excludes revenue streams for which specific guidance is stipulated in other sections of the codification and therefore it will not impact rental income or interest income generated on financial instruments such as preferred equity investments. The Company is the lessor for triple net and gross leases classified as operating leases in which rental income and tenant reimbursements are recorded. The revenue from these leases are scoped out of the new revenue recognition guidance. All leases are accounted for under ASC 840 until the adoption of the new leasing guidance within ASC 842. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.
Leases - In February 2016, the FASB issued an accounting update (ASU No. 2016-02) which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The update is expected to result in the recognition of a right-to-use asset and related liability to account for the Company’s future obligations under its ground lease arrangements for which it is the lessee. The update will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Under this guidance, allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained will no longer be capitalized as initial direct costs and instead will be expensed as incurred. Lessors will continue to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company expects to adopt the package of practical expedients under the guidance and the Company will not need to reassess whether any expired or expiring contracts contain leases; will not need to revisit lease classification for any expired or expiring leases; and will not need to reassess initial direct costs for any existing leases. In addition, the Company expects to adopt the practical expedient which allows lessors to consider lease and non-lease components as a single performance obligation to the extent that the timing and pattern of revenue recognition is the same and the lease is classified an operating lease. As of December 31, 2017, the Company has  two  ground lease agreements with annual payments of  $0.7 million . The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.
Financial Instruments - In June 2016, the FASB issued guidance (ASU No. 2016-13) that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments). The new guidance is effective for reporting periods beginning after December 15, 2019 and will be applied as a cumulative adjustment to retained earnings as of the effective date. The Company continues to assess the potential effect the adoption of this guidance will have on its consolidated financial statements and related disclosures.

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


Cash Flow Classification - In August 2016, the FASB issued guidance (ASU No. 2016-15) that makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company does not expect the adoption of this standard to have a material impact on its consolidated statements of cash flows.
Restricted Cash - In November 2016, the FASB issued guidance (ASU No. 2016-18) which requires entities to show the changes in the total of cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer be permitted to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017 and will be applied retrospectively to all periods presented. The Company expects the new guidance will result in a change in presentation of restricted cash on the face of the consolidated statement of cash flows; otherwise this guidance will not have a significant impact on the consolidated statements of cash flows and disclosures.
Business Combination - In January 2017, the FASB issued guidance (ASU No. 2017-01) to clarify the definition of a business under ASC 805. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance is effective for fiscal years, and interim periods within those years, beginning December 15, 2017. The amendments in this update will be applied on a prospective basis. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets). A significant difference between the accounting for an asset acquisition and a business combination is that transaction costs are capitalized for an asset acquisition, rather than expensed for a business combination. The Company plans to adopt the standard on its required effective date of January 1, 2018. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.
Goodwill Impairment - In January 2017, the FASB issued guidance (ASU No. 2017-04) which removes Step 2 from the goodwill impairment test. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.
Derecognition and Partial Sales of Nonfinancial Assets - In February 2017, the FASB issued an accounting update (ASU No. 2017-05) which clarifies the scope of recently established guidance on nonfinancial asset derecognition, which applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets.  In addition, the guidance clarifies the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets to align with the new revenue recognition standard to be more consistent with the accounting for sale of a business. Specifically, in a partial sale to a noncustomer, when a noncontrolling interest is received or retained, the latter is considered a noncash consideration and measured at fair value, which would result in full gain or loss recognized upon sale. This guidance has the same effective date as the new revenue guidance, which is January 1, 2018, with early adoption permitted beginning January 1, 2017.  Both the revenue guidance and this update must be adopted concurrently.  While the options for transition are similar to the new revenue guidance, either full retrospective or modified retrospective, the transition approach need not be aligned between both updates. The Company plans to adopt the standard on its required effective date of January 1, 2018 using the modified retrospective approach. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.
Share-based Payments - In May 2017, the FASB issued guidance (ASU No. 2017-09) clarifying when to account for a change to the terms or conditions of a share-based payment award as a modification.  The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years.  The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.

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


3.
Operating Real Estate
The following table presents operating real estate, net as of December 31, 2017 and December 31, 2016 (dollars in thousands):
 
 
December 31, 2017
 
December 31, 2016
Land
 
$
393,691

 
$
360,555

Buildings and improvements
 
954,314

 
980,053

Building, leasehold interests and improvements
 
195,929

 
212,864

Furniture, fixtures and equipment
 
1,653

 
1,214

Tenant improvements
 
61,303

 
59,746

Operating real estate, gross
 
1,606,890

 
1,614,432

Less: accumulated depreciation
 
(95,356
)
 
(63,585
)
Operating real estate, net
 
$
1,511,534

 
$
1,550,847


For the years ended December 31, 2017, 2016 and 2015 depreciation expense was  $40.2 million , $45.2 million and  $35.8 million , respectively.
Real Estate Held for Sale
The following table summarizes the Company’s operating real estate held for sale as of December 31, 2017 (dollars in thousands):
 
 
 
 
 
 
Assets (1)
 
Liabilities (1)
Location
 
Type
 
Properties
 
Operating Real Estate, Net
 
Intangible Assets, Net
 
Other Assets
 
Total (2)
 
Intangible Liabilities, Net
 
Total
Lisbon, Portugal
 
Office
 
1
 
$
11,910

 
$
62

 
$
23

 
$
11,995

 
$
—

 
$
—

Rotterdam, Netherlands
 
Office
 
1
 
148,741

 
5,053

 
3,293

 
157,087

 
648

 
648

Total
 
 
 
2

$
160,651


$
5,115


$
3,316

 
$
169,082

 
$
648

 
$
648

___________________
(1)
The assets and liabilities classified as held for sale are expected to be sold on the open market as asset sales subject to standard industry terms and conditions. The assets contributed $13.2 million , $14.1 million and $10.8 million of revenue and $(7.5) million , $(7.3) million and $(18.9) million of income (loss) before income tax benefit (expense) for the years ended December 31, 2017 , 2016 and 2015 , respectively.
(2)
Represents operating real estate and intangible assets, net of accumulated depreciation and amortization of $18.7 million prior to being reclassified into held for sale.
Real Estate Sales
The following table summarizes the Company’s real estate sales for the years ended December 31, 2017 , 2016 and 2015 (dollars in thousands):
 
Years Ended December 31,  (1)
 
2017
 
2016
 
2015
Properties
6
 
18
 
3
Carrying Value (2)
$
109,366

 
$
386,122

 
$
15,226

Sales Price
$
137,509

 
$
412,107

 
$
21,895

Net Proceeds (3)
$
132,538

 
$
406,850

 
$
20,955

Realized Gain (4)
$
23,172

 
$
20,728

 
$
5,729

__________________
(1)
Years ended December 31, 2017 , 2016 and 2015 amounts are translated using the average exchange rate for the year ended December 31, 2017 .
(2)
Includes the assets and liabilities related to share sales.
(3)
Represents proceeds net of sales costs and excludes the associated property debt repayments of $76.2 million and $173.9 million for the years ended December 31, 2017 and 2016 , respectively. There were no property debt repayments for the year ended December 31, 2015.
(4)
The Company recorded an additional realized gain for the year ended December 31, 2017 of $2.3 million related to the release of escrow accounts from prior disposals.
As of December 31, 2017 , there were $1.8 million in certain escrow accounts that were not held by the Company which the Company could potentially record as a realized gain.

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


4.
Preferred Equity Investments
In May 2017, the Company partnered with a property developer in China to acquire 20 Gresham Street, a Class A office building in London, United Kingdom and the Company invested $35.3 million ( £26.2 million ) of preferred equity , which the Company accounts for as a debt investment.
The following table presents one preferred equity investment as of December 31, 2017 (dollars in thousands):
 
 
December 31, 2017
 
 
 
 
Asset Type
 
Principal Amount
 
Carrying Value
 
Fixed Rate
 
Mandatory Redemption
Preferred equity investment
 
$
35,347

 
$
35,347

 
8.00
%
 
May 2020
Credit Quality Monitoring
The Company’s preferred equity investment is secured by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its preferred equity investment at least quarterly and determines the relative credit quality principally based on: (i) whether the borrower is currently paying debt service in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity. The Company categorizes a preferred equity investment for which it expects to receive full payment of contractual principal and interest payments as “performing.” The Company will categorize a weaker credit quality preferred equity investment that is currently performing, but for which it believes future collection of all or some portion of principal and interest is in doubt, into a category called “performing with a loan loss reserve.” The Company will categorize a weaker credit quality preferred equity investment that is not performing, which the Company defines as a loan in maturity default and/or past due on its contractual debt service payments and deemed not to be collectible, as a non-performing loan (“NPL”).
As of December 31, 2017 , the Company’s preferred equity investment was performing in accordance with the contractual terms of its governing documents, in all material respects, and was categorized as a performing loan. For the year ended December 31, 2017 , the preferred equity investment contributed all interest income recorded on the consolidated statement of operations.
5.
Borrowings
The following table presents borrowings as of December 31, 2017 and 2016 (dollars in thousands):
 
 
 
 
 
 
December 31,
 
 
 
 
 
 
2017
 
2016
 
 
Final
Maturity
 
Contractual
Interest Rate (3)
 
Principal
Amount
 
Carrying
Value
 
Principal
Amount
 
Carrying
Value
Mortgage and other notes payable: (1)
 
 
 
 
 
 
 
 
 
 
 
 
U.K. Complex (2)
 
(2)
 
GBP LIBOR + 1.75%
 
$
—

 
$
—

 
$
50,116

 
$
49,284

U.K. Complex - Mezzanine (2)
 
(2)
 
8.325%
 
—

 
—

 
11,565

 
11,497

Trias Portfolio 1 (4)(6)
 
Apr-20
 
EURIBOR + 2.70%
 
10,378

 
10,116

 
13,724

 
13,301

Trias Portfolio 2 (4)(6)(8)
 
Dec-20
 
EURIBOR + 1.55%
 
91,577

 
90,880

 
78,952

 
78,708

Trias Portfolio 3 (4)(6)
 
Apr-20
 
EURIBOR + 1.65%
 
44,814

 
43,684

 
40,923

 
39,568

Trias Portfolio 4 (4)(6)
 
Apr-20
 
GBP LIBOR + 2.70%
 
17,326

 
17,123

 
15,843

 
15,446

SEB Portfolio 1 (6)
 
Jul-24 (9)
 
EURIBOR + 1.55% (9)
 
317,317

 
313,153

 
278,539

 
274,614

SEB Portfolio 2 (6)
 
Jul-24 (9)
 
GBP LIBOR + 1.55% (9)
 
250,825

 
247,902

 
229,353

 
226,078

SEB Portfolio - Preferred (5)
 
Apr-60
 
2.30%  
 
102,560

 
102,271

 
90,033

 
89,720

Trianon Tower (4)(6)
 
Jul-23
 
EURIBOR + 1.30%
 
395,294

 
393,763

 
347,012

 
345,422

Other - Preferred (7)
 
Oct-45
 
1.00%
 
4,551

 
4,551

 
6,151

 
5,481

Total mortgage and other notes payable
 
 
 
 
 
$
1,234,642


$
1,223,443


$
1,162,211


$
1,149,119

________________________
(1)
All mortgage notes and other notes payable are denominated in local currencies, and as such, the principal amount generally increased from 2016 to 2017 due to the change in the Euro or U.K. Pound Sterling compared to the U.S. dollar. All borrowings are non-recourse and are interest-only through maturity, subject to compliance with covenants of the respective borrowing, and denominated in the same currency as the assets securing the borrowing.
(2)
In November 2017, the Company repaid the mortgage notes upon the sale of the associated property.
(3)
All floating rate debt is subject to interest rate caps of 0.5% for EURIBOR and 2.0% for GBP LIBOR which are used to manage interest rate exposure.

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


(4)
Trias Portfolio represents the cross-collateralized borrowings among the IVG Portfolio, Internos Portfolio and Deka Portfolio.
(5)
Represents preferred equity certificates with a contractual interest rate of 2.3% through May 2019, which can be prepaid at that time without penalty in part or in full, which increases to EURIBOR plus 12.0% through May 2022 and subsequently to EURIBOR plus 15.0% through final maturity. Certain prepayments prior to May 2019 are subject to the payment of the unpaid coupon on outstanding principal amount through May 2019.
(6)
Prepayment provisions include a fee based on principal amount ranging from 0.25% to 1.0% through December 2019 for the Trias Portfolio borrowings and 1.0% to 2.0% through July 2020 for the SEB Portfolio borrowings and 0.60% through June 30, 2018 and 0.30% through June 30, 2019 for Trianon Tower borrowings.
(7)
Represents preferred equity certificates each with a fixed contractual interest rate of 1.0% per annum plus variable interest based on specified income levels associated with the German property companies of the Trias Portfolios which can be prepaid at any time without penalty through final maturity, which is thirty years from the issuance date.
(8)
In June 2017, the Company amended and restated the agreement to increase the loan amount by $5.9 million and reduce future minimum capital expenditure spending requirements.
(9)
In September 2017, the Company amended and restated the agreement to reduce the margin from 1.80% to 1.55% and extended the maturity date from April 1, 2022 to July 20, 2024.
The following table presents a reconciliation of principal amount to carrying value of the Company’s mortgage and other notes payable as of December 31, 2017 and 2016 (dollars in thousands):
 
 
December 31,
 
 
2017
 
2016
Principal amount
 
$
1,234,642

 
$
1,162,211

Deferred financing costs, net
 
(11,199
)
 
(13,092
)
Carrying value
 
$
1,223,443

 
$
1,149,119

The following table presents scheduled principal on borrowings, based on final maturity as of December 31, 2017 (dollars in thousands):
 
 
Mortgage
and Other Notes
Payable
Years ending December 31:
 
 
2018
 
$
—

2019
 
—

2020
 
164,095

2021
 
—

2022
 
—

2023 and thereafter
 
1,070,547

Total
 
$
1,234,642

As of December 31, 2017 and 2016 , the Company was in compliance with all of its financial covenants.
Senior Notes
In July 2015, the Company issued $340.0 million principal amount of 4.625% senior stock-settlable notes due December 2016 (the “Senior Notes”) for aggregate net proceeds of $331.0 million , after deducting the underwriters’ discount and other expenses. The Senior Notes were senior unsubordinated and unsecured obligations of the Company and NorthStar Realty and NorthStar Realty’s operating partnership guaranteed payments on the Senior Notes.
The proceeds from the issuance of the Senior Notes were distributed to subsidiaries of NorthStar Realty, which used such amounts for general corporate purposes, including, among other things, the funding of acquisitions, including the Trianon Tower and the repayment of NorthStar Realty’s borrowings. Such distribution to NorthStar Realty was recorded in equity in net transactions with NorthStar Realty. During 2016, the Company repurchased approximately $272.3 million of the Senior Notes, at a slight premium to par value, through privately negotiated transactions and settled the remaining Senior Notes in cash at maturity.

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


Credit Facility
In May 2016, the Company entered into a $75.0 million corporate revolving credit facility (the “Credit Facility”) with certain commercial bank lenders, with an initial one year term. The Credit Facility was secured by collateral relating to a borrowing base at that time and guarantees by certain subsidiaries of the Company. In October 2016, the Company permanently reduced the aggregate commitments under the Credit Facility to $35.0 million . In April 2017, the Company amended and restated the Credit Facility with aggregate commitments of $35.0 million and an initial two year term. The Credit Facility no longer contains a limitation on availability based on a borrowing base and the interest rate remains the same. The Credit Facility has an accordion feature, allowing the total facility to increase to $70 million . In March 2018, the Company amended the Credit Facility, increasing the size to $70 million and extending the term until April 2020 with one year extension option. The Credit Facility includes an accordion feature, providing for the ability to increase the facility to $105 million . As of December 31, 2017 , there is no outstanding balance on the Credit Facility.
6.    Related Party Arrangements
On November 9, 2017, the Company entered into an Amended and Restated Management Agreement with an affiliate of the Manager, effective as of January 1, 2018. The description of the management agreement included below relates to the original agreement that was entered into in November 2015 and which will be superseded as of January 1, 2018 by the Amended and Restated Management Agreement.
Colony NorthStar, Inc.
Management Agreement
The Company entered into a management agreement with an affiliate of the Manager in November 2015. As asset manager, the Manager is responsible for the Company’s day-to-day operations, subject to supervision and management of the Company’s board of directors (the “Board”). Through its global network of subsidiaries and branch offices, the Manager performs services and engages in activities relating to, among other things, investments and financing, portfolio management and other administrative services, such as accounting and investor relations, to the Company and its subsidiaries. The management agreement with the Manager provides for a base management fee and incentive fee.
Base Management Fee
For the years ended December 31, 2017 , 2016 and 2015 , the Company incurred $14.4 million , $14.1 million and $2.3 million , respectively, related to the base management fee. As of December 31, 2017 and 2016, $3.6 million and $3.5 million , respectively, was recorded in due to related party on the consolidated balance sheets. The base management fee to the Manager is calculated as 1.5% per annum of the sum of:
•
any equity the Company issues in exchange or conversion of exchangeable or stock-settlable notes;
•
any other issuances by the Company of common equity, preferred equity or other forms of equity, including but not limited to LTIP Units in the Operating Partnership (excluding units issued to the Company and equity-based compensation, but including issuances related to an acquisition, investment, joint venture or partnership); and
•
cumulative cash available for distribution (“CAD”), if any, of the Company in excess of cumulative distributions paid on common stock, LTIP Units or other equity awards which began with the Company’s fiscal quarter ended March 31, 2016.
Incentive Fee
For the years ended December 31, 2017 , 2016 and 2015 , the Company did not incur an incentive fee. The incentive fee is calculated and payable quarterly in arrears in cash, equal to:
•
the product of: (a) 15.0% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of $0.30 per share and up to $0.36 per share; plus
•
the product of: (a) 25.0% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of $0.36 per share;
•
multiplied by the Company’s weighted average shares outstanding for the calendar quarter.
Weighted average shares represents the number of shares of the Company’s common stock, LTIP Units or other equity-based awards (with some exclusions), outstanding on a daily weighted average basis. With respect to the base management fee, all equity issuances are allocated on a daily weighted average basis during the fiscal quarter of issuance. With respect to the incentive fee, such amounts will be appropriately adjusted from time to time to take into account the effect of any stock split, reverse stock split, stock dividend, reclassification, recapitalization or other similar transaction.

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


Additional Management Agreement Terms
The Company’s management agreement with the Manager provides that in the event of a change of control of the Manager or other event that could be deemed an assignment of the management agreement, the Company will consider such assignment in good faith and not unreasonably withhold, condition or delay the Company’s consent. The management agreement further provides that the Company anticipates consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over $ 10 billion of assets under management. The management agreement also provides that, notwithstanding anything in the agreement to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction by the Company or the Manager, directly or indirectly, the surviving entity will succeed to the terms of the management agreement.
Payment of Costs and Expenses and Expense Allocation
The Company is responsible for all of its direct costs and expenses and reimburses the Manager for costs and expenses incurred by the Manager on the Company’s behalf. In addition, the Manager may allocate indirect costs to the Company related to employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the Company’s management agreement with the Manager (the “G&A Allocation”). The Company’s management agreement with the Manager provides that the amount of the G&A Allocation will not exceed the following: (i) 20% of the total of: (a) the Company’s general and administrative expenses as reported in their consolidated financial statements excluding: (1) equity-based compensation expense, (2) non-recurring items, (3) fees payable to the Manager under the terms of the applicable management agreement and (4) any allocation of expenses to the Company (“NRE’s G&A”); and (b) the Manager’s general and administrative expenses as reported in its consolidated financial statements, excluding equity-based compensation expense and adding back any costs or expenses allocated to any managed company of the Manager; less (ii) NRE’s G&A. The G&A Allocation may include the Company’s allocable share of the Manager’s compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing the Company’s affairs, based upon the percentage of time devoted by such personnel to the Company’s affairs. The G&A Allocation may also include rental and occupancy, technology, office supplies, travel and entertainment and other general and administrative costs and expenses, which may be allocated based on various methodologies, such as weighted average employee count or the percentage of time devoted by personnel to the Company’s affairs. In addition, the Company will pay directly or reimburse the Manager for an allocable portion of any severance paid pursuant to any employment, consulting or similar service agreements in effect between the Manager and any of its executives, employees or other service providers.
The Company’s obligation to reimburse the Manager for the G&A Allocation and any severance, at the Manager’s discretion, and the 20% cap on the G&A Allocation, as described above, applies on an aggregate basis to the Company.
For the year ended December 31, 2017 , the Manager did not allocate any general and administrative expenses to the Company. For the years ended December 31, 2016 and 2015 , the Manager allocated $0.2 million and $0.4 million , respectively, to the Company. For the years ended December 31, 2017 , 2016 and 2015, the Manager did not allocate any severance to the Company.
In addition, the management agreement provides that the Company and any company spun-off from the Company, shall pay directly or reimburse the Manager for up to 50% of any long-term bonus or other compensation that the Manager’s compensation committee determines shall be paid and/or settled in the form of equity and/or equity-based compensation to executives, employees and service providers of the Managers’ during any year. Subject to this limitation and limitations contained in any applicable management agreement between the Manager and any company spun-off from the Company, the amount paid by the Company and any company spun-off from the Company will be determined by the Manager in its discretion. At the discretion of the Manager’s compensation committee, this compensation may be granted in shares of the Company’s restricted stock, restricted stock units, long-term incentive plan units or other forms of equity compensation or stock-based awards; provided that if at any time a sufficient number of shares of the Company’s common stock are not available for issuance under the Company’s equity compensation plan, such compensation shall be paid in the form of RSUs, LTIP Units or other securities that may be settled in cash. The Company’s equity compensation for each year may be allocated on an individual-by-individual basis at the discretion of the Manager’s compensation committee and, as long as the aggregate amount of the equity compensation for such year does not exceed the limits set forth in the management agreement, the proportion of any particular individual’s equity compensation may be greater or less than 50% .
The Company does not have employment agreements with its named executive officers, but the Company has generally agreed to pay directly or reimburse the Manager for the portion of any severance paid by the Manager or any of its affiliates to an individual pursuant to the terms of any employment, consulting or similar service agreement, including any employment agreements with Colony NorthStar or its subsidiaries and its named executive officers, that corresponds to or is attributable to: (i) the equity compensation that the Company is required to pay directly or reimburse the Manager pursuant to the management agreement; (ii)

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


any cash and/or equity compensation paid directly by the Company to such individual as an employee or other service provider of the Company; and (iii) any amounts paid to such individual by the Manager or any of its affiliates that the Company is obligated to reimburse the Manager pursuant to the management agreement. With respect to Mahbod Nia only, in lieu of the foregoing severance payment or reimbursement, the Company has agreed to pay directly or reimburse the Manager for 50% of any cash payments made by the Manager or any of its affiliates in connection with the termination of Mr. Nia’s employment either without cause or upon the non-renewal of Mr. Nia’s term of employment by the employer or by Mr. Nia for good reason; provided that the Board consented to the taking of such action (or, with respect to a termination for good reason, any action taken with the intent to create good reason). Because the Company’s obligation to pay these amounts is owed to the Manager and not directly to the Company’s named executive officers and the Company does not control the terms of the agreements between the Manager or its affiliates and the Company’s named executive officers, the discussion above does not include these amounts or a discussion of any arrangements that the Manager or its affiliates may have with the Company’s named executive officers pursuant to which our obligations to the Manager may arise.
Management Agreement Amendment
On November 9, 2017, the Company entered into an Amended and Restated Management Agreement with CNI NRE Advisors, LLC, a Delaware limited liability company (unless the context requires otherwise, together with its affiliates, the “Asset Manager”), an affiliate of Colony NorthStar, effective as of January 1, 2018.
Under the Amended and Restated Management Agreement, the Asset Manager is generally responsible to manage the Company’s day to day operations, subject to the supervision and management of the Board. The Asset Manager is required to provide the Company with a management team and other appropriate employees and resources necessary to manage the Company.
Term; Renewals
The Amended and Restated Management Agreement provides for an initial term (beginning January 1, 2018) of five years (the “Initial Term”), with subsequent automatic renewals for additional three year terms, unless either party provides notice to the other party of its intention to decline to renew the agreement at least six months prior to the expiration of the then-current term. During the Initial Term, the Amended and Restated Management Agreement is terminable only for cause (as described in the Amended and Restated Management Agreement).
If the Company elects not to renew the Amended and Restated Management Agreement at the end of a term, it will be obligated to pay the Asset Manager a termination fee (the “Termination Fee”) equal to three times the amount of the base management fees earned by the Asset Manager over the four most recent quarters immediately preceding the non-renewal. In addition, if at any time after the Initial Term, the Company undergoes a “change of control” (as described in the Amended and Restated Management Agreement), the Company may elect to terminate the agreement but upon any such termination it will be obligated to pay the Termination Fee to the Asset Manager.
Assignment
The Amended and Restated Management Agreement provides that in the event of a change of control of the Asset Manager or other event that could be deemed an assignment of the Amended and Restated Management Agreement, the Company will consider such assignment in good faith and not unreasonably withhold, condition or delay the Company’s consent. The Amended and Restated Management Agreement further provides that the Company anticipates consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over $ 10 billion of assets under management. The Amended and Restated Management Agreement also provides that, notwithstanding anything in the agreement to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction by the Company or the Asset Manager, directly or indirectly, the surviving entity will succeed to the terms of the Amended and Restated Management Agreement.
Base Management Fee
Pursuant to the Amended and Restated Management Agreement, beginning January 1, 2018, the Company is obligated to pay quarterly, in arrears, in cash, the Asset Manager a base management fee per annum equal to:
•
1.50% of the Company’s reported EPRA NAV (as described in the Amended and Restated Management Agreement) for EPRA NAV amounts up to and including $2.0 billion ; plus
•
1.25% of the Company’s reported EPRA NAV on any EPRA NAV amount exceeding $2.0 billion .
EPRA NAV is based on a U.S. GAAP balance sheet adjusted based on the Company’s interpretation of the European Public Real Estate Association (“EPRA”) guidelines, and similar as prior practices, including adjustments such as fair value of operating real estate, straight-line rent and deferred taxes and additional adjustments to be determined by the Company in good faith based on

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


any changes to U.S. GAAP, international accounting standards or EPRA guidelines. In calculating EPRA NAV, the liquidation preference of preferred securities outstanding shall not be included as a liability of the Company and shall not reduce EPRA NAV.
Incentive Fee
In addition to the base management fees, the Company is obligated to pay the Asset Manager an incentive fee, if any (the “Incentive Fee”), with respect to each measurement period equal to twenty percent ( 20% ) of: (i) the excess of (a) the Company’s Total Stockholder Return (as defined in the Amended and Restated Management Agreement, which includes stock price appreciation and dividends received and is subject to a high watermark price established when a prior incentive fee is realized) for the relevant measurement period above (b) a 10% cumulative annual hurdle rate, multiplied by (ii) the Company’s Weighted Average Shares (as defined in the Amended and Restated Management Agreement) during the measurement period. The first measurement period for the incentive fee will begin January 1, 2018 and end on December 31 of the applicable calendar year and subsequent measurement periods will begin on January 1 of the subsequent calendar year. Subject to the conditions set forth in Section 4(d) of the Amended and Restated Management Agreement for common stock payments, the Company may elect to pay the Incentive Fee, if any, in cash or in shares of restricted common stock or shares of unrestricted common stock repurchased by the Company in the open market or a combination thereof. Any shares of common stock delivered by the Company will be subject to lock-up restrictions that will be released in equal one-third increments on each anniversary of the end of the measurement period with respect to which such incentive fee was earned. In calculating the value of the shares of the Company’s common stock paid in satisfaction of the Incentive Fee obligation, the shares of restricted common stock will be valued at the higher of: (i) the volume weighted average trading price per share for the ten consecutive trading days (as defined in the Amended and Restated Management Agreement) ending on the trading day prior to the date the payment is due and (ii) the Company’s EPRA NAV per share, based on the Company’s most recently published EPRA NAV and the Weighted Average Shares as of the end of the period with respect to which such EPRA NAV was published.
Costs and Expenses
The Company is responsible to pay (or reimburse the Asset Manager) for all of the Company’s direct, out of pocket costs and expenses of the Company as a stand alone company incurred by or on behalf of the Company and its subsidiaries, all of which must be reasonable, customary and documented. Internalized Service Costs (as defined below) are not intended to be covered costs and expense under this provision and are subject to the limits described in the next paragraph.
In addition to the expenses described in the prior paragraph, for each calendar quarter, beginning with the first quarter of 2018, the Company is obligated to reimburse the Asset Manager for (i) all direct, reasonable, customary and documented costs and expenses incurred by the Asset Manager for salaries, wages, bonuses, payroll taxes and employee benefits for personnel employed by the Asset Manager: (a) who solely provide services to the Company which prior to January 1, 2018 were provided by unaffiliated third parties, including accounting and treasury services or (b) who were hired by the Asset Manager after January 1, 2018 but who solely provide services to the Company in respect of one of the categories of services previously internalized pursuant to clause (a) and who were not hired in connection with any event which otherwise resulted in an increase to the Company’s net asset value (such costs and expenses set forth in clauses (i) and (ii), the “Internalized Service Costs”), plus (ii) 20% of the amount calculated under clause (i) to cover reasonable overhead charges with respect to such personnel, provided that the Company shall not be obligated to reimburse the Asset Manager for such costs and expenses to the extent they exceed the following quarterly limits:
•
0.0375% of the Company’s aggregate gross asset value as of the end of the prior calendar quarter (excluding cash and cash equivalents and certain other exclusions) as calculated for purposes of determining EPRA NAV (“GAV”), for GAV amounts to and including $2.5 billion , plus
•
0.0313% of GAV amounts between $2.5 billion and $5.0 billion , plus
•
0.025% of GAV amounts exceeding $5.0 billion .
If the Asset Manager’s actual Internalized Service Costs during any quarter exceed the quarterly limit described in the preceding paragraph (the cumulative excess amounts, if any, in respect of each quarter during a calendar year, the (“Quarterly Cap Excess Amount”), the Company is obligated to reimburse the Asset Manager on an annual basis for an amount equal to the lesser of (i) the Quarterly Cap Excess Amount and (ii) the sum of the amounts, if any, determined for each quarter within such calendar year by which Internalized Services Costs in respect of such quarter were less than the quarterly limits described in the prior paragraph.

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


Equity Based Compensation
In addition, the Company expects to make annual equity compensation grants to management of the Company and other employees of the Asset Manager, provided that the aggregate annual grant amount, type and other terms of such equity compensation must be approved by the Company’s compensation committee. The Asset Manager will have discretion in allocating the aggregate grant among the Company’s management and other employees of the Asset Manager.
Under the Amended and Restated Management Agreement, beginning with the Company’s 2018 annual stockholders’ meeting, the Asset Manager will have the right to nominate one director (who is expected to be one of the Company’s current directors employed by the Asset Manager) to the Company’s board of directors.
Transaction Expenses
The Company agreed to pay for up to $2.5 million of fees and expenses payable by the Asset Manager to its external financial advisors in connection with the negotiation and execution of the Amended and Restated Management Agreement.
Colony NorthStar Ownership Waiver and Voting Agreement
In connection with the entry into the Amended and Restated Management Agreement, the Company provided Colony NorthStar with an ownership waiver under the Company’s Articles of Amendment and Restatement, allowing Colony NorthStar to purchase up to 45% of the Company’s stock. The waiver provides that if the Amended and Restated Management Agreement is terminated, Colony NorthStar may not purchase any shares of the Company’s common stock to the extent Colony NorthStar owns (or would own as a result of such purchase) more than 9.8% of the Company’s capital stock. In connection with the waiver, Colony NorthStar also agreed that for all matters submitted to a vote of the Company’s stockholders, to the extent Colony NorthStar owns more than 25% of the Company’s common stock (such shares owned by Colony NorthStar in excess of the 25% threshold, the “Excess Shares”), it will vote the Excess Shares in the same proportion that the remaining shares of the Company not owned by Colony NorthStar or its affiliates are voted. If the Amended and Restated Management Agreement is terminated, then beginning on the third anniversary of such termination, the threshold described in the prior sentence will be reduced from 25% to 9.8% .
Manager Ownership of Common Stock
As of December 31, 2017 , Colony NorthStar and its subsidiaries owned 5.6 million shares of the Company’s common stock, or approximately 10.2% of the total outstanding common stock.
7.
Compensation Expense
The following summarizes the equity-based compensation for the years ended December 31, 2017 , 2016 and 2015:
For the years ended December 31, 2017 , 2016 and 2015 the Company recorded $23.8 million , $19.3 million and $0.9 million , respectively, of equity-based compensation expense which is recorded in compensation expenses on the consolidated statements of operations. As of December 31, 2017 , equity-based compensation expense to be recognized over the remaining vesting period through January 2020 is $6.7 million , provided there are no additional forfeitures.
2015 Omnibus Stock Incentive Plan
Pursuant to the NorthStar Realty Europe Corp. 2015 Omnibus Stock Incentive Plan (the “2015 Plan”), the Company may issue equity awards to directors, officers, employees, co-employees, consultants and advisors of the Company, the Manager or of any parent or subsidiary who provides services to the Company. The number of shares that may be issued under the 2015 Plan equals 10 million shares of common stock, plus on January 1, 2017 and each January 1 thereafter, an additional 2% of the number of shares of common stock issued and outstanding on the immediately preceding December 31. In addition, shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise of a stock option or settlement of an award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of common stock or otherwise terminated (other than by exercise) will be added back to the shares of common stock available for issuance under the 2015 Plan. As of December 31, 2017 , under the 2015 Plan, a total of 1.2 million shares of common stock had been issued (net of forfeitures and shares held back for tax withholding), 1.7 million shares were reserved for issuance pursuant to outstanding equity awards (including 0.1 million reserved for issuance upon conversion of outstanding LTIP Units and 1.6 million reserved for issuance pursuant to the outstanding Absolute RSUs and Relative RSUs) and 8.2 million otherwise unreserved shares remained available for issuance.
All of the equity awards issued by the Company since the spin-off from NorthStar Realty on November 1, 2015 have been issued under the 2015 Plan. During the year ended December 31, 2017 , the Company issued 500,642 restricted shares of common stock under the 2015 Plan to employees of the Manager or its subsidiaries in accordance with the terms of the management agreement described above in Note 6, of which 379,594 vested in connection with the Mergers.

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


In March 2016, as contemplated in connection with the Spin-off, the Company granted an aggregate of 995,698 restricted shares of common stock and 1,493,551 restricted stock units (“RSUs”) to employees of the Manager or one of its subsidiaries under the 2015 Plan. The restricted shares of common stock were subject to vesting over the approximately four year period ending December 31, 2019, subject to continued employment with the Manager or one of its subsidiaries and the RSUs were market-based awards subject to the achievement of performance-based vesting conditions and continued employment with the Manager or one of its subsidiaries. Approximately one-half of these RSUs are subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return and continued employment with the Manager or one of its subsidiaries over the approximately four year period from the grant date through December 31, 2019 (the “Absolute RSUs”). The other approximately one-half of these RSUs are subject to the achievement of performance-based hurdles based on the Company’s total stockholder return relative to the MSCI US REIT Index and continued employment with the Manager or one of its subsidiaries over the approximately four year period from the grant date through December 31, 2019 (the “Relative RSUs”). Award recipients may earn up to 100% of the Absolute RSUs that were granted and up to 125% of the Relative RSUs that were granted. Upon vesting pursuant to the terms of the Absolute RSUs and Relative RSUs, the RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each share that vests) on or after the date the RSUs were initially granted. In accordance with their terms, all of these restricted shares of common stock that remained outstanding vested in connection with the Mergers. The Absolute and Relative RSUs were not affected by the Mergers and remain outstanding, subject to forfeitures occurring in connection with termination of employment with the Manager or one of its subsidiaries.
Pre-Spin-off NorthStar Realty Equity Awards
In addition to equity awards issued under the 2015 Plan, the Company also had equity subject to outstanding equity-based awards granted by NorthStar Realty prior to the Spin-Off. In connection with the Spin-Off, holders of shares of common stock of NorthStar Realty and LTIP units of NorthStar Realty’s operating partnership subject to outstanding equity awards received one share of the Company’s common stock or one Common Unit in the Operating Partnership, respectively, for every six shares of common stock of NorthStar Realty or LTIP units of NorthStar Realty’s operating partnership held. Other equity and equity-based awards relating to NorthStar Realty’s common stock, such as RSUs, were adjusted to also relate to one-sixth of a share of the Company’s common stock, but otherwise generally remained subject to the same vesting and other terms that applied prior to the Spin-off. Performance-based vesting conditions based on total stockholder return of NorthStar Realty or NorthStar Realty and NSAM were adjusted to refer to combined total stockholder return of NorthStar Realty and the Company or NorthStar Realty, NSAM and the Company, respectively, with respect to periods after the Spin-Off and references to a change of control or similar term in outstanding awards, which referred to a change of control of either NorthStar Realty or NSAM, were adjusted, to the extent such awards relate to common stock of the Company or Common Units in the Operating Partnership, to refer to a change of control of either the Company or NSAM.
Following the Spin-off, NorthStar Realty and the compensation committee of its Board continued to administer all awards granted by NorthStar Realty prior to the Spin-off, but the Company was obligated to issue shares of the Company’s common stock or other equity awards of its subsidiaries or make cash payments in lieu thereof or with respect to dividend or distribution equivalent obligations to the extent required by these awards. These awards continued to be governed by the NorthStar Realty equity plans, as applicable, and shares of the Company’s common stock issued pursuant to these awards were not be issued pursuant to, and did not reduce availability under, the 2015 Plan. In connection with the Mergers, all of these outstanding equity-based awards (other than an RSU relating to 83,333 shares of the Company’s common stock which vested in September 2017 upon a vesting event) vested or were forfeited.

94
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table presents activity related to the issuance, vesting, conversion and forfeitures of restricted stock and Common Units. The balance as of December 31, 2017 represents vested Common Units and unvested market-based RSUs (grants in thousands):
 
Year Ended December 31, 2017
 
Restricted Stock (1)
 
Common Units (3)
 
Restricted Stock Units (4)
 
Performance RSUs (5)
 
Total Grants
 
Weighted
Average
Grant Price
December 31, 2016
1,139

 
688

 
83

 
1,868

 
3,778

 
$
11.29

Granted
501

 
—

 
—

 
—

 
501

 
12.69

Converted
—

 
(268
)
 
—

 
—

 
(268
)
 
21.10

Vested (2)
(1,519
)
 
—

 
(83
)
 
(178
)
 
(1,780
)
 
10.35

Forfeited (6)
—

 
—

 
—

 
(237
)
 
(237
)
 
4.87

December 31, 2017
121

 
420

 
—

 
1,453

 
1,994

 
$
11.95

___________________
(1)
Represents restricted stock included in common stock.
(2)
Vested primarily includes the acceleration of substantially all outstanding equity awards of the Company in connection with the change of control of NSAM as a result of the Mergers.
(3)
Includes vested and unvested Common Units in the Operating Partnership issued in the Spin-off with respect to equity-based awards granted by NorthStar Realty prior to the Spin-off. As of December 31, 2017 , all of these Common Units in the Operating Partnership were vested.
(4)
Relates to an equity-based award granted by NorthStar Realty prior to the Spin-off and represents a non-employee grant subject to service-based vesting conditions, which was scheduled to vest on January 22, 2019, however, in September 2017, pursuant to the terms of the RSU award, a vesting event occurred and on October 2, 2017, the Company issued 83,333 shares of common stock in settlement of these RSUs. The RSUs were entitled to dividend equivalents prior to vesting and the dividends were settled in cash.
(5)
As of December 31, 2017 , represented outstanding Absolute and Relative RSUs.
(6)
Includes the forfeiture of performance based RSUs issued to NSAM executives as part of historical bonus plans in connection with the change of control of NSAM.
8.
Stockholders’ Equity
Spin-off
In connection with the Spin-off, NorthStar Realty distributed to its common stockholders all of the common stock of the Company in a pro rata distribution of one share of the Company’s common stock for each six shares of NorthStar Realty common stock.
Share Repurchase
In November 2015, the Company’s board of directors authorized the repurchase of up to $100 million of its outstanding common stock. That authorization expired in November 2016 and at such time the Board authorized an additional repurchase of up to $100 million of its outstanding common stock through November 2017. In March 2018, the Company’s board of directors authorized the repurchase of up to $100 million of its outstanding common stock. The authorization expires in March 2019, unless otherwise extended by the Company’s board of directors. For the year ended December 31, 2017 , the Company did not repurchase any shares of its common stock. For the year ended December 31, 2016 , the Company repurchased 5.7 million shares of its common stock for approximately $58.6 million . For the year ended December 31, 2015 , the Company repurchased 3.6 million shares of its common stock for approximately $41.4 million . From the original authorization in November 2015 through December 31, 2017 , the Company repurchased 9.3 million shares of its common stock for approximately $100.0 million .
Director Grants
In July 2016, the Company issued 15,368 shares of restricted common stock with a fair value at the date of grant of $0.1 million to one of its board of directors as an initial grant of equity. The stock will generally vest over three years.
In November 2016, the Company issued 43,518 shares of common stock with a fair value at the date of grant of $0.5 million to its non-employee directors in connection with their re-election to the Company’s board of directors as part of their annual grants. The stock vested immediately.
In August 2017, the Company issued 30,340 shares of common stock with a fair value at the date of grant of $0.4 million to its independent directors as an annual grant of equity. The stock fully vested at issuance.

95
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Dividends
The following table presents dividends declared (on a per share basis) with respect to the years ended December 31, 2017 , 2016 and 2015 :
Common Stock
Declaration Date
 
Dividend Per Share
2017
 
 
March 7
 
$
0.15

May 1
 
$
0.15

August 2
 
$
0.15

November 6
 
$
0.15

2016
 
 
March 15
 
$
0.15

May 10
 
$
0.15

August 3
 
$
0.15

November 1
 
$
0.15

2015
 
 
November 23
 
$
0.15

Earnings Per Share
The following table presents EPS for the years ended December 31, 2017 , 2016 and 2015 (dollars and shares in thousands, except per share data):
 
Years Ended December 31,
 
2017
 
2016
 
2015
Numerator:
 
 
 
 
 
Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
$
(31,125
)
 
$
(61,753
)
 
$
(143,136
)
Net income (loss) attributable to Unit Holders non-controlling interest
(372
)
 
(778
)
 
(1,052
)
Net income (loss) attributable to common stockholders and Unit Holders (1)
$
(31,497
)
 
$
(62,531
)
 
$
(144,188
)
Denominator: (2)
 
 
 
 
 
Weighted average shares of common stock
55,073

 
57,875

 
62,184

Weighted average Unit Holders (1)
526

 
690

 
681

Weighted average shares of common stock and Unit Holders (2)
55,599

 
58,565

 
62,865

Earnings (loss) per share:
 
 
 
 
 
Basic
$
(0.57
)
 
$
(1.07
)
 
$
(2.30
)
Diluted
$
(0.57
)
 
$
(1.07
)
 
$
(2.30
)
____________________________________________________________
(1)
The EPS calculation takes into account Unit Holders, which receive non-forfeitable dividends from the date of grant, share equally in the Company’s net income (loss) and convert on a one -for-one basis into common stock.
(2)
Excludes the effect of restricted stock and RSUs outstanding that were not dilutive as of December 31, 2017 . These instruments could potentially impact diluted EPS in future periods, depending on changes in the Company’s stock price and other factors.
9.
Non-controlling Interests
Operating Partnership
Non-controlling interests include the aggregate Unit Holders’ interest in the Operating Partnership. Net income (loss) attributable to the non-controlling interest is based on the weighted average Unit Holders’ ownership percentage of the Operating Partnership for the respective period. The issuance of additional common stock, Common Units or LTIP Units changes the percentage ownership of both the Unit Holders and the Company. Since a Common Unit or LTIP Unit is generally redeemable for cash or common stock at the option of the Company, it is deemed to be equivalent to common stock. Therefore, such transactions are treated as capital transactions and result in an allocation between stockholders’ equity and non-controlling interests on the accompanying consolidated balance sheets to account for the change in the ownership of the underlying equity in the Operating Partnership. On a quarterly basis, the carrying value of such non-controlling interest is reallocated based on the number of Unit Holders in total in proportion

96
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


to the number of Units Holders plus the number of shares of common stock outstanding. As of December 31, 2017 and 2016, the Company allocated $1.8 million and $2.3 million , respectively from stockholders’ equity to non-controlling interest on the consolidated balance sheets and consolidated statement of equity.
As of December 31, 2017 , 420,359 Common Units and LTIP Units were outstanding, representing a 0.8% ownership and non-controlling interest in the Operating Partnership. Net income (loss) attributable to the Operating Partnership non-controlling interest for the years ended December 31, 2017 , 2016 and 2015 was a net loss of $0.4 million , $0.8 million and $1.1 million , respectively.
Redeemable Non-controlling Interest
In connection with the acquisition of the Trianon Tower in July 2015, the Company sold a 5.5% non-controlling interest in certain subsidiaries that own the Trianon Tower for $1.5 million . In conjunction with the sale, the Company entered into a put option whereby the holder may redeem its interest for cash at the greater of fair market value of such non-controlling interest or €2.1 million beginning in November 2020 through January 2021. The Company recorded the non-controlling interest at its acquisition date fair value as temporary equity due to the redemption option. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in additional paid-in capital.
10.
Risk Management and Derivative Activities
Derivatives
The Company uses derivative instruments primarily to manage interest rate and currency risk and such derivatives are not considered speculative. These derivative instruments are in the form of interest cap agreements where the primary objective is to minimize interest rate risks associated with investment and financing activities and foreign currency forward agreements where the primary objective is to minimize foreign currency exchange rate risks associated with operating activities. The counterparties of these arrangements are major financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties and it monitors their financial condition; however, the Company currently does not anticipate that any of the counterparties will fail to meet their obligations.
The following tables present derivative instruments that were not designated as hedges under U.S. GAAP as of December 31, 2017 and December 31, 2016 (dollars in thousands):

Number (1)

Notional
Amount

Fair Value
Asset (Liability)

Range of
Fixed GBP LIBOR / EURIBOR

Range of Maturity
As of December 31, 2017:
 
 
 
 
 
 
 
 
 
Interest rate caps
31

 
$
1,193,012

 
$
7,024

 
(2)
 
April 2020 - July 2023
Foreign currency forwards, net (3)
4

 
58,647

 
(5,270
)
 
N/A
 
February 2018 - November 2018
Total
35

 
$
1,251,659

 
$
1,754

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016:


 


 


 
 
 
 
Interest rate caps
32

 
$
1,107,400

 
$
8,659

 
(2)
 
January 2020 - July 2023
Foreign currency forwards (3)
20

 
72,806

 
5,070

 
N/A
 
February 2017 - November 2017
Total
52

 
$
1,180,206

 
$
13,729

 
 
 
 
_____________________________
(1)    Represents number of transactions.
(2)    Includes a range of interest rate caps of 0.5% for EURIBOR and 2.0% for GBP LIBOR.
(3)    Includes Euro currency forwards as of December 31, 2017 and Euro and U.K. Pounds Sterling currency forwards as of December 31, 2016.
The following table presents the fair value of derivative instruments, as well as their classification on the consolidated balance sheets, as of December 31, 2017 and December 31, 2016 (dollars in thousands):
 
Balance Sheet
 
December 31,
2017
 
December 31,
2016

Location
 
 
Interest rate caps
Derivative assets
 
$
7,024

 
$
8,659

Foreign currency forwards
Derivative assets
 
$
—

 
$
5,070

Foreign currency forwards
Derivative liabilities
 
$
5,270

 
$
—


97
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table presents the effect of derivative instruments in the consolidated statements of operations for the years ended December 31, 2017 , 2016 and 2015 (dollars in thousands):
 
 
 
Years Ended December 31,

 

2017
 
2016
 
2015
Amount of gain (loss) recognized in earnings:
Statements of operations location:

 
 
 
 
 
Adjustment to fair value of interest rate caps
Unrealized gain (loss) on derivatives and other (1)

$
(2,726
)
 
$
(14,936
)
 
$
(8,897
)
Adjustment to fair value of foreign currency forwards held at the end of the reporting period
Unrealized gain (loss) on derivatives and other  (1)
 
(5,270
)
 
4,872

 
417

Adjustment to fair value of foreign currency forwards settled during the period
Unrealized gain (loss) on derivatives and other  (1)
 
(5,070
)
 
(219
)
 
—

Net cash receipt (payment) on derivatives
Realized gain (loss) on sales and other
 
979

 
(787
)
 
—

_____________________________
(1)    Excludes the unrealized gain (loss) relating to foreign currency remeasurement adjustments.
The Company’s counterparties held no cash margin as collateral against the Company’s derivative contracts as of December 31, 2017 and December 31, 2016 . The Company had no derivative financial instruments that were designated as hedges in qualifying hedging relationships as of December 31, 2017 and December 31, 2016 .
11.
Fair Value
Fair Value Measurement
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities are recorded at fair value on the consolidated balance sheets and are categorized based on the inputs to the valuation techniques as follows:
Level 1.
Quoted prices for identical assets or liabilities in an active market.
Level 2.
Financial assets and liabilities whose values are based on the following:
(a)
Quoted prices for similar assets or liabilities in active markets.
(b)
Quoted prices for identical or similar assets or liabilities in non-active markets.
(c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
(d)
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
Level 3.
Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following is a description of the valuation techniques used to measure fair value of assets and liabilities accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.
Derivative Instruments
Derivative instruments consist of interest rate caps and foreign currency exchange contracts that are traded over-the-counter, and are valued using a third-party service provider. These quotations are not adjusted and are generally based on valuation models with observable inputs such as contractual cash flow, yield curve, foreign currency rates and credit spreads and as such, are classified as Level 2 of the fair value hierarchy. Derivative instruments are also assessed for credit valuation adjustments due to the risk of non-performance by the Company and derivative counterparties.

98
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Fair Value of Financial Instruments
In addition to the above disclosures regarding financial assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.
The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of December 31, 2017 and 2016 (dollars in thousands):
 
December 31, 2017
 
December 31, 2016
 
Principal/Notional
Amount
 
Carrying
Value
 
Fair
Value
 
Principal/Notional
Amount
 
Carrying
Value
 
Fair
Value
Financial assets: (1)
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
1,193,012

 
$
7,024

 
$
7,024

 
$
1,180,206

 
$
13,729

 
$
13,729

Preferred equity investment
35,347

 
35,347

 
35,783

 
—

 
—

 
—

Financial liabilities: (1)
 
 
 
 
 
 
 
 
 
 
 
Mortgage and other notes payable, net
$
1,234,642

 
$
1,223,443

 
$
1,231,321

 
$
1,162,211

 
$
1,149,119

 
$
1,146,134

Derivative liabilities
58,647

 
5,270

 
5,270

 
—

 
—

 
—

_____________________________
(1)
The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of the reporting date. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
Mortgage and Other Notes Payable
For mortgage and other notes payable, the Company primarily uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using rates as of the end of the reporting period or market credit spreads over the rate payable on fixed rate of like maturities. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
Preferred Equity Investments
For preferred equity investments, fair value was computed by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment. Fair value was determined assuming fully-extended maturities regardless of structural or economic tests required to achieve such extended maturities. These fair value measurements are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy.
12.
Commitments and Contingencies
The Company is involved in various litigation matters arising in the ordinary course of its business. Although the Company is unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, the current legal proceedings are not expected to have a material adverse effect on the Company’s financial position or results of operations.
The Company engages third-party service providers for its portfolio who are remunerated based on either a fixed fee or a percentage of rental income. The contract terms vary by party and are subject to termination options. These costs are recorded in properties - operating expense and other expenses in the consolidated statements of operations.

99
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


As part of the terms of agreements relating to certain assets the Company disposed, as is customary for such transactions in Europe, the Company agreed to provide certain warranties to the buyer.
Obligations Under Ground Leases
The following table presents minimum future rental payments under the Company’s contractual ground lease obligations for certain building leaseholds for the year ended December 31, 2017 (dollars in thousands):
Years ending December 31:
 
Total (1)
2018
 
$
705

2019
 
705

2020
 
705

2021
 
705

2022
 
705

Thereafter
 
46,828

Total minimum lease payments
 
$
50,353

__________________
(1)
Represent two ground leases with an average expiry of 2095. None of these are paid directly by the tenants.
Risk Management
Concentrations of credit risk arise when a number of tenants related to the Company’s investments are engaged in similar business activities or located in the same geographic region to be similarly affected by changes in economic conditions. The Company monitors its portfolios to identify potential concentrations of credit risks. For the year ended December 31, 2017 , one tenant, DekaBank Deutsche Girozentrale, accounted for more than 10% of the Company’s total revenue. This tenant has 6.4 years remaining on its lease. Otherwise, the Company has no other tenant that generates 10% or more of its total revenue. Additionally, for the year ended December 31, 2017 , Germany, France and the United Kingdom each accounted for more than 10% of the Company’s total revenue. The Company believes the remainder of its portfolio is well diversified and does not contain any unusual concentrations of credit risks.
13.
Quarterly Financial Information (Unaudited)
The following presents selected quarterly information for the years ended December 31, 2017 and 2016 (dollars in thousands, except per share data):
 
 
Three Months Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
 
2017
 
2017
 
2017
 
2017
Rental income
 
$
26,041

 
$
27,747

 
$
26,025

 
$
25,536

Escalation income
 
5,265

 
5,641

 
5,558

 
5,161

Interest income
 
705

 
704

 
297

 
—

Interest expense
 
6,203

 
6,536

 
6,722

 
6,383

Management fee, related party
 
3,692

 
3,585

 
3,572

 
3,559

Transaction costs
 
4,552

 
332

 
973

 
260

Depreciation and amortization
 
14,535

 
14,396

 
12,520

 
12,563

Other, net (1)
 
15,893

 
13,906

 
12,720

 
27,760

Unrealized gain (loss) on derivatives and other
 
(795
)
 
(3,472
)
 
(7,655
)
 
(941
)
Realized gain (loss) on sales and other
 
13,735

 
1,681

 
1,981

 
4,970

Income (loss) before income tax benefit (expense)
 
76

 
(6,454
)
 
(10,301
)
 
(15,799
)
Net income (loss)
 
2,537

 
(6,806
)
 
(10,538
)
 
(15,526
)
Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
 
1,442

 
(6,770
)
 
(10,447
)
 
(15,350
)
Earnings (loss) per share: (2)
 
 
 
 
 
 
 
 
Basic
 
$
0.02

 
$
(0.12
)
 
$
(0.19
)
 
$
(0.28
)
Diluted
 
$
0.02

 
$
(0.12
)
 
$
(0.19
)
 
$
(0.28
)
__________________
(1)
Primarily relates to properties - operating expenses, general and administrative expense, other expenses and compensation expense offset by other income.
(2)
The total for the year may differ from the sum of the quarters as a result of weighting.

100
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
 
Three Months Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
 
2016
 
2016
 
2016
 
2016
Rental income
 
$
25,700

 
$
29,798

 
$
33,990

 
$
34,833

Escalation income
 
5,347

 
7,828

 
5,908

 
6,090

Interest expense
 
7,955

 
9,301

 
11,641

 
12,542

Management fee, related party
 
3,520

 
3,548

 
3,500

 
3,500

Transaction costs
 
(23
)
 
150

 
1,652

 
831

Depreciation and amortization
 
13,715

 
13,989

 
18,404

 
18,871

Other, net (1)
 
20,531

 
19,585

 
44,271

 
16,962

Unrealized gain (loss) on derivatives and other
 
8,319

 
(4,982
)
 
1,159

 
(15,753
)
Realized gain (loss) on sales and other
 
20,460

 
3,814

 
4,622

 
(2,448
)
Income (loss) before income tax benefit (expense)
 
14,128

 
(10,115
)
 
(33,789
)
 
(29,984
)
Net income (loss)
 
13,902

 
(12,770
)
 
(34,309
)
 
(29,325
)
Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
 
13,859

 
(12,721
)
 
(33,909
)
 
(28,982
)
Earnings (loss) per share: (2)
 
 
 
 
 
 
 
 
Basic
 
$
0.25

 
$
(0.22
)
 
$
(0.57
)
 
$
(0.49
)
Diluted
 
$
0.24

 
$
(0.22
)
 
$
(0.57
)
 
$
(0.49
)
__________________
(1)
Primarily relates to properties - operating expenses, general and administrative expense, impairment loss, other expenses and compensation expense offset by other income.
(2)
The total for the year may differ from the sum of the quarters as a result of weighting.
14.
Segment Reporting
The Company currently conducts its business through the following three segments, based on how management reviews and manages its business:
•
Real Estate Equity- Focused on European prime office properties located in key cities within Germany, the United Kingdom and France.
•
Preferred Equity - Represents the Company’s preferred equity investment secured by interest in a European prime office property.
•
Corporate - The corporate segment significantly includes corporate level interest expense, management fee and general and administrative expenses.

101
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following tables present segment reporting for the years ended December 31, 2017 , 2016 and 2015 (dollars in thousands):
 
Year Ended December 31, 2017
Statement of Operations:
Real Estate Equity
 
Preferred Equity
 
Corporate

Total
Revenues
 
 
 
 
 
 
 
Rental income
$
105,349

 
$
—

 
$
—

 
$
105,349

Escalation income
21,625

 
—

 
—

 
21,625

Interest income
—

 
1,706

 
—

 
1,706

Expenses
 
 
 
 
 
 
 
Interest expense (1)
24,989

 
—

 
855

 
25,844

Management fee, related party
—

 
—

 
14,408

 
14,408

Transaction costs (4)
—

 
538

 
5,579

 
6,117

Depreciation and amortization
54,014

 
—

 
—

 
54,014

Other, net
20,887

(2)  
72

 
39,816

(3)  
60,775

Income (loss) before income tax benefit (expense)
27,084


1,096


(60,658
)
 
(32,478
)
Income tax benefit (expense)
2,145

 
—

 
—

 
2,145

Net income (loss)
$
29,229


$
1,096


$
(60,658
)
 
$
(30,333
)
Balance Sheets:
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Total Assets
$
1,901,282

 
$
37,133

 
$
2,502

 
$
1,940,917

___________________________________
(1)
Includes $2.4 million and $0.4 million of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
(2)
Primarily relates to properties - operating expenses and unrealized loss on interest rate caps offset by other income and realized gain on sales.
(3)
Primarily relates to general and administrative expense and unrealized loss on foreign currency forwards.
(4)
Transaction costs relates to costs associated with amending the management agreement in our corporate segment and other transaction costs in our preferred equity segment.
 
Year Ended December 31, 2016
Statement of Operations: (1)
Real Estate Equity
 
Corporate
 
Total
Revenues
 
 
 
 
 
Rental income
$
124,321


$
—

 
$
124,321

Escalation income
25,173


—

 
25,173

Expenses
 
 
 
 
 
Interest expense (2)
30,974

 
10,465

 
41,439

Management fee, related party
—

 
14,068

 
14,068

Transaction costs (5)
—

 
2,610

 
2,610

Depreciation and amortization
64,979

 
—

 
64,979

Other, net
57,546

(3)  
28,612

(4)  
86,158

Income (loss) before income tax benefit (expense)
(4,005
)
 
(55,755
)
 
(59,760
)
Income tax benefit (expense)
(2,742
)
 
—

 
(2,742
)
Net income (loss)
$
(6,747
)

$
(55,755
)
 
$
(62,502
)
Balance Sheets:
 
 
 
 
 
December 31, 2016
 
 
 
 
 
Total Assets
$
1,835,531

 
$
9,861

 
$
1,845,392

___________________________________
(1)
The Company did not have a preferred equity segment for the year ended December 31, 2016.
(2)
Includes $3.7 million and $3.4 million of amortization of deferred financing costs in the real estate and corporate segments, respectively.
(3)
Primarily relates to properties - operating expense, realized loss on the sale of real estate and impairment loss on real estate offset by the realized gain on foreign currency translation and other.
(4)
Primarily relates to general and administrative expense and unrealized loss on foreign currency forwards. Includes an allocation of general and administrative expense from the Manager of $0.2 million .
(5)
Transaction costs primarily relate to costs associated the Mergers in our corporate segment.


102
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
Year Ended December 31, 2015
Statement of Operations:
Real Estate Equity
 
Corporate
 
Total
Revenues
 
 
 
 
 
Rental income
$
101,023

 
$
—

 
$
101,023

Escalation income
18,822

 
—

 
18,822

Expenses
 
 
 
 
 
Interest expense (1)
25,365

 
10,764

 
36,129

Management fee, related party
—

 
2,333

 
2,333

Transaction costs (4)
120,101

 
—

 
120,101

Depreciation and amortization
56,283

 
—

 
56,283

Other, net
24,237

(2)  
25,580

(3)  
49,817

Income (loss) before income tax benefit (expense)
(106,141
)

(38,677
)
 
(144,818
)
Income tax benefit (expense)
675

 
—

 
675

Net income (loss)
$
(105,466
)
 
$
(38,677
)
 
$
(144,143
)
Balance Sheets:
 
 
 
 
 
December 31, 2015
 
 
 
 
 
Total Assets
$
2,544,992

 
$
138,058

 
$
2,683,050

___________________________________
(1)
Includes $2.9 million and $3.0 million of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
(2)
Primarily relates to properties - operating expense, unrealized loss on interest rate caps and impairment loss on goodwill offset by the realized gain on the sale of real estate and other income.
(3)
Primarily relates to general and administrative expense, compensation expense and unrealized loss on foreign currency forwards.
(4)
Transaction costs primarily represents expenses such as real estate transfer tax and professional fees related to the acquisitions in 2015 in our real estate equity segment.
Geography
The following table presents geographic information about the Company's total rental and escalation income for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
Years Ended December 31,
 
2017
 
2016
 
2015
Office
 
 
 
 
 
Germany
$
51,241

 
$
53,743

 
$
31,969

United Kingdom
36,984

 
38,483

 
36,882

France
20,051

 
19,551

 
13,802

Other
14,167

(1)  
30,656

 
31,001

Subtotal
122,443


142,433


113,654

Other
4,531

 
7,061

 
6,191

Total
$
126,974

 
$
149,494

 
$
119,845

__________________
(1)
Includes an asset in Portugal and an asset in the Netherlands which are classified as held-for-sale as of December 31, 2017.
15.
Subsequent Events
Dividends
On March 7, 2018 , the Company declared a dividend of $0.15 per share of common stock. The common stock dividend is expected be paid on March 23, 2018 to stockholders of record as of the close of business on March 19, 2018 .
Share Repurchase
In March 2018, the Company’s board of directors authorized the repurchase of up to $100 million of its outstanding common stock. The authorization expires in March 2019, unless otherwise extended by the Company’s board of directors.

103

Disposals
In February 2018, the Company agreed a definitive sale and purchase agreement to sell the Maastoren property, the Company’s largest non-core asset, for approximately $190 million . The Company expects to release approximately $60 million of net equity after repayment of financing (including release premium) and transaction costs.
Credit Facility
In March 2018, the Company amended the Credit Facility, increasing the size to $70 million and extending the term until April 2020 with one year extension option. The Credit Facility includes an accordion feature, providing for the ability to increase the facility to $105 million .




104

NORTHSTAR REALTY EUROPE AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2017
(Dollars in Thousands)
Column A
Column B
 
Column C Initial Cost
 
Column D Capitalized Subsequent to Acquisition
 
Column E Gross Amount Carried at Close of Period
 
Column F
 
Column G
 
Column H
Asset
 
Location
Encumbrances (1)
 
Land
 
Building & Improvements
 
Land, Buildings & Improvements
 
Land
 
Building & Improvements
 
Total
 
Accumulated Depreciation
 
Total (2)(4)
 
Date Acquired
 
Life on Which Depreciation is Computed
Germany (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trianon
 
Frankfurt
$
395,293

 
$
89,410

 
$
518,441

 
$
10,388

 
$
89,410

 
$
528,829

 
$
618,239

 
$
(39,122
)
 
$
579,117

 
7/15/2015
 
40 years
Valentinskamp
 
Hamburg
34,646

 
24,609

 
30,086

 
4,653

 
24,609

 
34,739

 
59,348

 
(2,851
)
 
56,497

 
4/1/2015
 
40 years
Parexel
 
Berlin
30,912

 
8,425

 
37,703

 
1

 
8,425

 
37,704

 
46,129

 
(2,799
)
 
43,330

 
4/8/2015
 
40 years
Drehbahn
 
Hamburg
29,251

 
27,287

 
10,628

 
726

 
27,287

 
11,354

 
38,641

 
(1,430
)
 
37,211

 
4/1/2015
 
40 years
Ludwigstrasse
 
Cologne
19,696

 
12,435

 
20,026

 
486

 
12,435

 
20,512

 
32,947

 
(1,736
)
 
31,211

 
4/8/2015
 
40 years
Dammtorwall
 
Hamburg
15,105

 
7,046

 
14,082

 
132

 
7,046

 
14,214

 
21,260

 
(1,275
)
 
19,985

 
4/1/2015
 
40 years
Uhlandstrasse
 
Frankfurt
12,576

 
4,504

 
15,916

 
1,998

 
4,504

 
17,914

 
22,418

 
(1,454
)
 
20,964

 
4/8/2015
 
40 years
Munster
 
Germany
5,998

 
2,811

 
5,689

 
1,515

 
2,811

 
7,204

 
10,015

 
(499
)
 
9,516

 
4/8/2015
 
40 years
Subtotal
 
 
543,477


176,527


652,571


19,899


176,527


672,470


848,997


(51,166
)

797,831

 
 
 
 
France
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Berges de Seine
 
Paris, Issy
96,129

 
100,198

 
55,317

 
134

 
100,198

 
55,451

 
155,649

 
(5,400
)
 
150,249

 
4/1/2015
 
40 years
Mac Donald
 
Paris, Other
54,742

 
34,505

 
44,831

 
7

 
34,505

 
44,838

 
79,343

 
(4,214
)
 
75,129

 
4/1/2015
 
40 years
Marceau
 
Paris, CBD
26,209

 
35,505

 
13,586

 
1,357

 
35,505

 
14,943

 
50,448

 
(1,378
)
 
49,070

 
4/8/2015
 
40 years
Joubert
 
Paris, CBD
6,959

 
10,547

 
4,353

 
57

 
10,547

 
4,410

 
14,957

 
(390
)
 
14,567

 
4/8/2015
 
40 years
Subtotal
 
 
184,039


180,755


118,087


1,555


180,755


119,642


300,397


(11,382
)

289,015

 
 
 
 
United Kingdom
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portman Square
 
London, West End
140,144

 
—

 
188,366

 
2,229

 
—

 
190,595

 
190,595

 
(14,569
)
 
176,026

 
4/1/2015
 
40 years
Condor House
 
London, City
110,682

 
16,767

 
126,575

 
1,582

 
16,767

 
128,157

 
144,924

 
(10,670
)
 
134,254

 
4/1/2015
 
40 years
Glasgow
 
Other
5,054

 
2,474

 
7,043

 
—

 
2,474

 
7,043

 
9,517

 
(560
)
 
8,957

 
4/8/2015
 
40 years
Chiswick
 
Greater London
8,385

 
6,906

 
6,641

 
12

 
6,906

 
6,653

 
13,559

 
(532
)
 
13,027

 
4/8/2015
 
40 years
St Albans
 
Greater London
3,887

 
2,083

 
4,830

 
7

 
2,083

 
4,837

 
6,920

 
(454
)
 
6,466

 
4/8/2015
 
40 years
Subtotal
 
 
268,152


28,230


333,455


3,830


28,230


337,285


365,515


(26,785
)

338,730

 
 
 
 
Other (5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IC Hotel
 
Germany, Berlin
12,148

 
864

 
22,919

 
129

 
864

 
23,048

 
23,912

 
(1,572
)
 
22,340

 
4/8/2015
 
40 years
Ibis Berlin
 
Germany, Berlin
8,432

 
903

 
12,474

 
—

 
903

 
12,474

 
13,377

 
(853
)
 
12,524

 
4/8/2015
 
40 years
Neuermarkt
 
Germany, Werl
1,815

 
995

 
2,748

 
99

 
995

 
2,847

 
3,842

 
(240
)
 
3,602

 
4/8/2015
 
40 years
Marly
 
France, Greater Paris
22,024

 
5,069

 
44,034

 
5

 
5,069

 
44,039

 
49,108

 
(3,094
)
 
46,014

 
4/8/2015
 
40 years
Kirchheide
 
Germany, Other
—

 
348

 
1,394

 
—

 
348

 
1,394

 
1,742

 
(264
)
 
1,478

 
4/8/2015
 
40 years
Subtotal
 
 
44,419


8,179


83,569


233


8,179


83,802


91,981


(6,023
)

85,958

 
 
 
 
Grand Total
 
 
$
1,040,087


$
393,691


$
1,187,682


$
25,517


$
393,691


$
1,213,199


$
1,606,890


$
(95,356
)

$
1,511,534

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office123
 
Portugal
$
—

 
$
670

 
$
12,000

 
$
114

 
$
670

 
$
12,114

 
$
12,784

 
$
(874
)
 
$
11,910

 
4/8/2015
 
40 years
Maastoren
 
Netherlands
87,444

 
11,441

 
148,534

 
561

 
11,441

 
149,095

 
160,536

 
(11,795
)
 
148,741

 
4/1/2015
 
40 years
Grand Total
 
 
$
87,444


$
12,111


$
160,534


$
675


$
12,111


$
161,209


$
173,320


$
(12,669
)

$
160,651


 
 
 
______________________
(1)
Excludes the preferred equity certificates of $107.1 million .
(2)
Aggregate cost for federal income tax purposes is $1.7 billion as of December 31, 2017 .
(3)
German office properties comprise nine buildings.
(4)
Excludes intangibles.
(5)
Represents retail, industrial and hotel (net lease) assets.

105

NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2017
(Dollars in Thousands)
The following table presents changes in the Company’s operating real estate portfolio as of December 31, 2017 , 2016 and 2015 (dollars in thousands):
 
 
2017
 
2016
 
2015
Beginning balance
 
$
1,614,432

 
$
2,120,460

 
$
55,413

Property acquisitions
 
—

 
—

 
2,080,038

Reclassification
 
—

 
(733
)
 
—

Transfers to held for sale
 
(173,320
)
 
(23,138
)
 
(5,330
)
Improvements
 
18,033

 
10,792

 
3,414

Retirements and disposals
 
(60,234
)
 
(353,883
)
 
(14,514
)
Foreign currency translation
 
207,979

 
(139,066
)
 
1,439

Ending balance
 
$
1,606,890

 
$
1,614,432

 
$
2,120,460

The following table presents changes in accumulated depreciation as of December 31, 2017 , 2016 and 2015 (dollars in thousands):
 
 
2017
 
2016
 
2015
Beginning balance
 
$
(63,585
)
 
$
(35,303
)
 
$
(517
)
Depreciation expense
 
(40,196
)
 
(45,219
)
 
(35,842
)
Assets held for sale
 
12,669

 
811

 
31

Retirements and disposals
 
5,722

 
10,635

 
213

Foreign currency translation
 
(9,966
)
 
5,491

 
812

Ending balance
 
$
(95,356
)
 
$
(63,585
)
 
$
(35,303
)



106

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.  Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, management conducted an evaluation as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended, or Exchange Act, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Internal Control over Financial Reporting
(a) Management’s annual report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2017 based on the “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework).
Based upon this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.
(b) Changes in internal control over financial reporting.
Our Manager has substantially completed the process of integrating the systems, processes and internal controls of Colony, NSAM and NorthStar Realty Finance. The Company leverages these systems, processes and internal controls to conduct its operations. We will continue to review our internal control practices, in conjunction with our Manager, in consideration of future integration and post merger activities.
Except as described above in the preceding paragraph, during the quarter ended December 31, 2017 , there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
On March 9, 2018 NorthStar Realty Europe Corp. (“NRE”), as parent guarantor, amended its senior secured revolving credit facility (as amended, the “Credit Agreement”), originally dated as of April 6, 2017, with NorthStar Realty Europe Limited Partnership, as borrower (the “Borrower”), Merrill Lynch, Pierce, Fenner & Smith Incorporated as sole lead arranger and bookrunner and Bank of America, N.A. (“Bank of America”) as administrative agent and a lender providing for a revolving loan facility (the “Loan Facility”) to (i) add Deutsche Bank AG, New York Branch as a Lender, (ii) increase total Lender commitments from $35 million to $70 million, (iii) to provide an uncommitted accordion feature where the facility amount may be increased up to an aggregate amount of $105 million after giving effect to such increase and (iv) to extend the Credit Agreement’s maturity date by a year to April 6, 2020. The Credit Agreement contains a one year extension at the Borrower’s option upon satisfaction of the extension conditions contained therein. The Credit Agreement otherwise has not been substantively modified and continues to contain substantially the same economic terms, security, covenants and events of default as prior to the amendment.

107

PART III
Item 10. Directors, Executive Officers and Corporate Governance
Certain information relating to our code of business conduct and ethics and code of ethics for senior financial officers (as defined in the code) is included in Part I, Item 1. “Business” of this Annual Report on Form 10-K.
Our Directors
Our board of directors presently consists of seven members. On August 17, 2017, each of Messrs. Richard B. Saltzman, Mario Chisholm, Oscar Junquera, Wesley D. Minami, and Mses. Judith A. Hannaway and Dianne Hurley were elected to serve on our board of directors until the 2018 annual meeting of our stockholders and until his or her successor is duly elected and qualified. On November 6, 2017, Mr. Mahbod Nia was elected to serve on our board of directors from January 11, 2018 until the 2018 annual meeting of our stockholders and until his successor is duly elected and qualified. Set forth below is each director’s name and age as of the date of this Annual Report on Form 10-K and his or her principal occupation, business history and public company directorships held during the past five years. Also set forth below are the specific experience, qualifications, attributes and skills of the directors that led our board of directors to conclude that each such person should serve as our director:
Name
 
Age
 
Position
Richard B. Saltzman
 
61
 
Chairman
Mahbod Nia
 
41
 
Director
Mario Chisholm
 
34
 
Independent Director
Judith A. Hannaway
 
65
 
Independent Director
Oscar Junquera
 
64
 
Independent Director
Wesley D. Minami
 
61
 
Independent Director
Dianne Hurley
 
55
 
Independent Director
Richard B. Saltzman.  Mr. Saltzman, has served as our director since February 2017 and as Chairman since January 2018. Mr. Saltzman also serves as the President and Chief Executive Officer and a member of the Board of Directors of CLNS, having previously held the positions of President and Chief Executive Officer and a member of the Board of Directors of Colony Capital, Inc., the predecessor to CLNS. In addition, he is Chairman of the Board of Directors of Colony NorthStar Credit Real Estate, Inc. (NYSE: CLNC), a company that is externally managed by CLNS.
Prior to joining the Colony Capital business in 2003, Mr. Saltzman spent 24 years in the investment banking business primarily specializing in real estate-related businesses and investments. Most recently, he was a 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 also serves on the Board of Directors of Kimco Realty Corporation (NYSE: KIM). Previously, he served on the Board of Trustees of Colony Starwood Homes (NYSE: SFR) from January 2016 to June 2017. He was also previously a member of the Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT), 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.
Consideration for Recommendation : Mr. Saltzman’s expertise in real estate-related businesses, investments and capital markets, developed through more than 38 years of real estate principal investing and investment banking experience, provides a valuable perspective to our board of directors in developing, leading and overseeing our business. Mr. Saltzman’s current and past service on the boards of a real estate investment trust and other real estate-based organizations also provides our board of directors with valuable perspectives into the real estate industry.
Mahbod Nia . Mr. Nia has served as our Chief Executive Officer and President since June 2015 and as a director since January 2018. Mr. Nia also serves as Managing Director at CLNS, a position he has held since January 2017 and served as Managing Director and Head of European Investments at NSAM, a position he held from July 2014 to January 2017.
Prior to joining NSAM, from 2010 to July 2014, Mr. Nia acted as an independent advisor, including for PanCap Investment Partners, a European real estate investment and advisory firm with clients including Goldman Sachs (Real Estate Principal

108

Investments Area) and other blue chip institutions. From 2007 to 2009, Mr. Nia was a Senior Executive Director in the Real Estate Banking Group at Goldman Sachs. Prior to 2007, Mr. Nia served in various positions at Citigroup Inc. (formerly Salomon Brothers).
Mr. Nia holds a Masters in Economics and Finance from the University of Warwick and a First Class Honors degree in Economics for Business.
Consideration for Recommendation:  As our Chief Executive Officer and President, Mr. Nia offers our board an intuitive perspective of our business and operations as a whole. Mr. Nia also has significant experience in all aspects of the commercial real estate markets, with a particular focus in Europe. Mr. Nia is able to draw on his extensive knowledge to develop and articulate sustainable initiatives, operational risk management and strategic planning, which qualifies him to serve as our director.
Mario Chisholm.  Mr. Chisholm has served as our independent director since October 2015. Mr. Chisholm is the Founding Principal of Sandman Ventures Ltd. (SVS Real Estate), which he founded in July 2014. SVS Real Estate is a London based company specializing in real estate, hospitality and PropTech. SVS Real Estate acts as an investor, advisor, asset manager and/or operating partner in real estate related transactions across the world. Additionally, in July 2014, SVS Real Estate invested in Spanish Real Estate asset manager Urban Input S.L. and Mr. Chisholm joined the investment committee of the group. In July 2014, Mr. Chisholm co-founded Uniq Residential S.L., a real estate development company focused on residential and hospitality developments in Spain, and continues to serve as a board member. Prior to SVS Real Estate’s founding, Mr. Chisholm served as a real estate investor at Och-Ziff Capital Management Europe Ltd from July 2011 to June 2014, during which time he negotiated and completed various pan-European real estate transactions across a wide array of asset classes, multiple geographies and across the capital structure. From March to 2011, Mr. Chisholm served as a real estate professional at Benson Elliot Services Ltd, where he managed various real estate development projects in the Iberian Region and in Hungary.
Between 2005 and 2009, Mr. Chisholm also served as a real estate finance banker at Goldman Sachs International, served as a real estate finance/securitization analyst at Citigroup Global Markets Ltd, (Citigroup) and carried out a real estate related study for the European Central Bank monetary policy division in Frankfurt, Germany.
Mr. Chisholm also holds a position as a board member of Spanish high-street retail REIT, Tander Inversiones SOCIMI S.A., and PropTech start-ups EnergyDeck Ltd and Lavalocker S.L.
Mr. Chisholm has a Bachelor of Economic Science, with Honours, and a Masters of Science in Economics and Econometrics with Merit, each received from the University of Manchester.
Consideration for Recommendation : Mr. Chisholm has acquired a deep knowledge of the international investment market through his substantial experience in pan-European real estate development and finance transactions across a wide array of asset classes, multiple geographies and across the capital structure. Mr. Chisholm’s significant international real estate experience and strong finance and banking background qualify him to serve as our director.
Judith A. Hannaway.  Ms. Hannaway has served as our lead independent director since October 2015. During the past five years, Ms. Hannaway has acted as a consultant to various financial institutions. Prior to acting as a consultant, Ms. Hannaway was previously employed by Scudder Investments, a wholly-owned subsidiary of Deutsche Bank Asset Management, as a Managing Director. Ms. Hannaway joined Scudder Investments in 1994 and was responsible for Special Product Development including closed-end funds, off shore funds and REIT funds. Prior to joining Scudder Investments, Ms. Hannaway was employed by Kidder Peabody as a Senior Vice President in Alternative Investment Product Development. She joined Kidder Peabody in 1980 as a Real-Estate Product Manager. Ms. Hannaway also serves as an independent director of Fortress Transportation & Infrastructure LLC since January 2018, and previously served as an independent director of NorthStar Realty Finance Corp. and NorthStar Asset Management Group Inc. from September 2004 and June 2014, respectively through January 2017.
Ms. Hannaway holds a Bachelor of Arts from Newton College of the Sacred Heart and a Master of Business Administration from Simmons College Graduate Program in Management.
Consideration for Recommendation:  Ms. Hannaway has had significant experience at major financial institutions and has broad ranging financial services expertise and experience in the areas of financial reporting, risk management and alternative investment products. Ms. Hannaway’s financial-related experience qualifies her to serve as our director.
Oscar Junquera.  Mr. Junquera has served as an independent director since October 2015. Mr. Junquera also serves on the board of directors of Toroso Investments LLC and has previously served on the board of directors of NSAM from June 2014 through January 2017. Mr. Junquera has also previously served on the board of directors of HF2 Financial Management Inc. from February 2013 until March 2015. Mr. Junquera is the founder of PanMar Capital llc., a private equity firm specializing in the financial services industry and has been a Managing Partner since its formation in January 2008. Mr. Junquera worked on matters related to the formation of PanMar Capital llc. from July 2007 until December 2008. From 1980 until June 2007, Mr. Junquera was at PaineWebber, which was sold to UBS AG in 2000. He began at PaineWebber in the Investment Banking Division and was appointed Managing Director in 1988, Group Head-Financial Institutions in 1990 and a member of the Investment Banking Executive Committee in 1995. Following the sale of PaineWebber to UBS in 2000, Mr. Junquera was appointed Global Head of

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Asset Management Investment Banking at UBS and was responsible for establishing and building the bank’s franchise with mutual fund, institutional, high net worth and alternative asset management firms, as well as banks, insurance and financial services companies active in asset management. Mr. Junquera has served on the Board of Trustees of the Long Island Chapter of the Nature Conservancy and is a supporter of various other charitable organizations.
Mr. Junquera holds a Bachelor of Science from the University of Pennsylvania’s Wharton School and a Master of Business Administration from Harvard Business School.
Consideration for Recommendation:  Mr. Junquera has over 25 years of investment banking experience, most recently as a Managing Director in the Global Financial Institutions Group at UBS Investment Bank and Global Head of Asset Management Investment Banking. Mr. Junquera’s experience covers a unique cross-section of strategic advisory and capital markets activities, including the structuring and distribution of investment funds and permanent capital vehicles, which qualifies him to serve as our director.
Wesley D. Minami.  Mr. Minami has served as our independent director since October 2015. Mr. Minami serves as Principal of Billy Casper Golf LLC, a position he has held since March 2012, and served as President of Billy Casper Golf LLC from 2003 until March 2012. From 2001 to 2002, he served as President of Charles E. Smith Residential Realty, Inc., a REIT that was listed on the NYSE. In this capacity, Mr. Minami was responsible for the development, construction, acquisition and property management of over 22,000 high-rise apartments in five major U.S. markets. He resigned from this position after completing the transition and integration of Charles E. Smith Residential Realty, Inc. from an independent public company to a division of Archstone-Smith Trust, an apartment company that was listed on the NYSE. From 1997 to 2001, Mr. Minami worked as Chief Financial Officer and then Chief Operating Officer of Charles E. Smith Residential Realty, Inc. Prior to 1997, Mr. Minami served in various financial service capacities for numerous entities, including Ascent Entertainment Group, Comsat Corporation, Oxford Realty Services Corporation and Satellite Business Systems. Mr. Minami also served as a director of NorthStar Realty and NSAM from September 2004 and June 2014, respectively, through January 2017.
Mr. Minami holds a Bachelor of Arts in Economics, with honors, from Grinnell College and a Master of Business Administration in Finance from the University of Chicago.
Consideration for Recommendation:  Mr. Minami, who has served as president of a publicly-traded REIT, chief financial officer and chief operating officer of a real estate company and in various financial service capacities, brings corporate finance, operations, public company and executive leadership expertise to our Board. Mr. Minami’s diverse experience, real estate background and understanding of financial statements qualify him to serve as our director.
Dianne Hurley. Ms. Hurley has served as our independent director since July 2016. Ms. Hurley has served as an independent director and member of the audit committee of NorthStar/RXR New York Metro Real Estate since February 2015, as an independent director and audit committee chair of Griffin-American Healthcare REIT IV, Inc. since February 2016, and as an independent director and audit committee chair of NorthStar Real Estate Capital Income Fund since March 2016.
Ms. Hurley is the Chief Administrative Officer of A&E Real Estate, an owner/operator of multifamily properties in the New York City Metropolitan area, where she has worked on all aspects related to the firm’s management since March 2017. Prior, from January 2015, she was an operational consultant to startup asset management firms including Stonecourt Capital LP, Imperial Companies and RedBird Capital Partners. Previously, Ms. Hurley served from November 2011 to January 2015, as Managing Director of SG Partners, a boutique executive search firm, where her responsibilities included business development private equity, hedge fund, real estate and investor relations recruiting efforts. From September 2009 to November 2011, Ms. Hurley served as the Chief Operating Officer, Global Distribution, at Credit Suisse Asset Management, where she was responsible for overall management of the sales business, strategic initiatives, financial and client reporting, and regulatory and compliance oversight. From 2004 to September 2009, Ms. Hurley served as the founding Chief Administrative Officer of TPG-Axon Capital, where she was responsible for investor relations and fundraising, human capital management, compliance policy implementation, joint venture real estate investments and corporate real estate. Earlier in her career, Ms. Hurley worked in real estate and corporate finance at Edison Schools Inc. and in the real estate department at Goldman Sachs.
Ms. Hurley holds a Bachelor of Arts from Harvard University and a Master of Business Administration from Yale School of Management.
Consideration for Recommendation: Ms. Hurley’s knowledge of real estate finance and operations qualify her to serve as a director. Our board of directors also believe that her regulatory and compliance experience will bring valuable insight to us. With her extensive background in real estate finance and real estate operations, Ms. Hurley brings valuable business skills to our board of directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors and persons who own more than 10% of a registered class of our equity securities to file reports of beneficial ownership of such securities on Forms 3, 4 and 5 with the SEC. Officers, directors and persons who own more than 10% of a registered class of our equity securities are required to furnish us with copies

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of all Forms 3, 4 and 5 that they file. Based solely on our review of the copies of such forms we received or written representations from certain reporting persons that no filings on such forms were required for those persons, we believe that all such filings required to be made during and with respect to the fiscal year ended December 31, 2017 by Section 16(a) of the Exchange Act were timely made.
Corporate Governance Profile
We are committed to good corporate governance practices and, as such, we have adopted the corporate governance guidelines and codes of ethics discussed below to enhance our effectiveness.
Code of Ethics for Senior Financial Officers
We adopted a code of ethics for senior financial officers applicable to our Chief Executive Officer, Chief Financial Officer and all our other senior financial officers. The code is available on our website at  www.nrecorp.com  under the heading “Investor Relations-Corporate Governance.” Amendments to, and waivers from, the code of ethics for senior financial officers will be disclosed on our website at  www.nrecorp.com  under the heading “Investor Relations-Corporate Governance.”
Code of Business Conduct and Ethics
We adopted a code of business conduct and ethics relating to the conduct of our business by our employees, officers and directors. We intend to maintain high standards of ethical business practices and compliance with all laws and regulations applicable to our business, including those relating to doing business outside the United States. Specifically, among other things, our code of business conduct and ethics prohibits employees from providing gifts, meals or anything of value to government officials or employees or members of their families without prior written approval from our General Counsel. The code is available on our website at  www.nrecorp.com  under the heading “Investor Relations-Corporate Governance” and is also available without charge to stockholders upon written request to: NorthStar Realty Europe Corp., 590 Madison Avenue, 34th Floor, New York, New York 10022, Attn: General Counsel.
Corporate Governance Guidelines
Our board of directors adopted our Corporate Governance Guidelines to assist in the exercise of its responsibilities. These guidelines set forth our practices and policies with respect to among other things, board composition, board member qualifications, responsibilities and education, management succession and self-evaluation. The full text of our Corporate Governance Guidelines will be available on our website at www.nrecorp.com on or prior to the date of the Spin-off. A copy will also be able to be obtained by writing to NorthStar Realty Europe Corp., 590 Madison Avenue, 34th Floor, New York, New York 10022, Attn: General Counsel.
Board Committees
Our board has appointed an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee and each of these standing committees has adopted a committee charter. Each of these committees is composed exclusively of independent directors, as defined by the listing standards of the NYSE. Moreover, the Compensation Committee is composed exclusively of individuals referred to as “non-employee directors” in Rule 16b-3 of the Exchange Act, and “outside directors” in Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code.
The following table shows the current membership of the various committees:
Audit
 
Compensation
 
Nominating and Corporate Governance
Wesley D. Minami*^
 
Oscar Junquera*
 
Judith A. Hannaway*
Mario Chisholm
 
Judith A. Hannaway
 
Wesley D. Minami
Oscar Junquera
 
Mario Chisholm
 
Dianne Hurley
__________________________
*    Denotes chairperson
^    Denotes Audit Committee Financial Expert

Audit Committee
Our board of directors has determined that all three members of the Audit Committee are independent and financially literate under the rules of the NYSE and that at least one member, Mr. Minami, who chairs the Audit Committee is an “audit committee financial expert,” as that term is defined by the SEC. The Audit Committee is responsible for, among other things, engaging an independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm, reviewing the independence of the independent registered public accounting firm, considering the range of audit and non-audit fees and assisting our board of directors in its oversight of our internal controls over financial reporting.

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A copy of the Audit Committee charter is available on our website at  www.nrecorp.com  under the heading “Investor Relations-Corporate Governance” and is also available without charge to stockholders upon written request to: NorthStar Realty Europe Corp., 590 Madison Avenue, 34th Floor, New York, New York 10022, Attn: General Counsel.
Compensation Committee
Our board of directors has determined that all members of the Compensation Committee are independent under the rules of the NYSE. Mr. Junquera chairs the Compensation Committee. The Compensation Committee is responsible for, among other things, determining compensation for our executive officers, administering and monitoring our equity compensation plans, evaluating the performance of our executive officers and producing an annual report on executive compensation for inclusion in our annual meeting proxy statement. The Compensation Committee may delegate some or all of its duties to a subcommittee comprising one or more members of the Compensation Committee.
A copy of the Compensation Committee charter is available on our website at  www.nrecorp.com  under the heading “Investor Relations-Corporate Governance” and is also available without charge to stockholders upon written request to: NorthStar Realty Europe Corp., 590 Madison Avenue, 34th Floor, New York, New York 10022, Attn: General Counsel.
Nominating and Corporate Governance Committee
Ms. Hannaway chairs the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is responsible for, among other things, seeking, considering and recommending to our board of directors qualified candidates for election as directors and recommending a slate of nominees for election as directors at the annual meeting. It also periodically prepares and submits to our board of directors for adoption the Nominating and Corporate Governance Committee’s selection criteria for director nominees. It reviews and makes recommendations on matters involving the general operation of our board of directors and our corporate governance, and annually recommends to our Board nominees for each committee of our board of directors. In addition, the Nominating and Corporate Governance Committee annually facilitates the assessment of our board of director’s performance as a whole and of the individual directors and reports thereon to our board of directors.
A copy of the Nominating and Corporate Governance Committee charter is available on our website at  www.nrecorp.com  under the heading “Investor Relations-Corporate Governance” and is also available without charge to stockholders upon written request to: NorthStar Realty Europe Corp., 590 Madison Avenue, 34th Floor, New York, New York 10022, Attn: General Counsel.
Executive Officers
Our executive officers are appointed annually by our board of directors and serve at the discretion of our board of directors. Set forth below is information regarding the individuals who serve as our executive officers, other than Mr. Nia, whose biographical information is provided under “Board of Directors.”
Name
 
Age
 
Position
Mahbod Nia
 
41
 
Chief Executive Officer and President
Keith A. Feldman
 
41
 
Chief Financial Officer and Treasurer
Trevor K. Ross
 
40
 
General Counsel and Secretary

Keith Feldman. Mr. Feldman has served as our Chief Financial Officer and Treasurer since May 2017. Mr. Feldman also serves as a managing director of Colony NorthStar, Inc., a position he has held since January 2017 and served as a managing director of NorthStar Asset Management Group Inc., a predecessor company of Colony NorthStar, Inc., from July 2014 to January 2017, as a managing director of NorthStar Realty Finance Corp. from January 2014 to July 2014 and as a director of NorthStar Realty Finance Corp. from January 2012 to December 2013. In each of these roles, Mr. Feldman’s responsibilities included capital markets, corporate finance, and investor relations. Earlier in his career, Mr. Feldman held various financial positions at NorthStar Realty Finance Corp., Goldman Sachs, J.P. Morgan Chase and KPMG LLP. Mr. Feldman received a Bachelor of Science in accounting from Binghamton University. Mr. Feldman is a CFA charterholder.
Trevor K. Ross .   Mr. Ross has served as our General Counsel and Secretary since September 2015. Mr. Ross is responsible for the management of legal affairs and generally provides legal and other support to the operations of NorthStar Realty Europe Corp. Mr. Ross also serves as Managing Director, Deputy General Counsel, Europe at Colony NorthStar, Inc., a position he has held since January 2017. Mr. Ross is responsible for the management of European legal affairs and generally provides legal and other support to the European operations of Colony NorthStar.
Prior to joining us, Mr. Ross was a partner in the Real Estate Capital Markets practice at the law firm of Hunton & Williams LLP. Mr. Ross practiced at Hunton & Williams from September 2002 until August 2015 where he advised numerous REITs and other specialty finance companies and specialized in capital markets transactions, mergers and acquisitions, securities law compliance and corporate governance matters. Mr. Ross holds a Bachelor of Business Administration in finance and accounting from Mercer

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University and a Juris Doctor, cum laude, from the Mercer University School of Law where he served as the Articles Editor of the Mercer Law Review.
Item 11. Executive Compensation
We currently have no employees. Our day-to-day management functions are performed by the Asset Manager. For purposes of this disclosure, our named executive officers include Messrs. Nia, Feldman and Ross, all of whom are employees of the Asset Manager utilized by the Asset Manager to provide management services for us. During 2017, all of the compensation that we paid to our named executive officers consisted of equity compensation issued pursuant to the terms of the management agreement with the Asset Manager.
We are an “emerging growth company” as defined under the Jumpstart Our Business Startups (JOBS) Act. As such, we are permitted to meet the disclosure requirements of Item 402 of Regulation S-K by providing the reduced disclosures required of a smaller reporting company.
Compensation Paid Pursuant to Management Agreement
Management Agreement
Pursuant to the terms of the management agreement that we entered into with the Asset Manager in connection with the Spin-off, we, together with NorthStar Realty, were obligated to pay directly or reimburse the Asset Manager for up to 50% of any long-term bonus or other compensation that NSAM’s compensation committee determined should be paid and/or settled in the form of equity and/or equity-based compensation to executives, employees and service providers of the Asset Manager during any year. Subject to this overall limitation, the management agreement provided that the specific amount to be paid by us was to be determined by NSAM’s compensation committee in its discretion. NSAM’s compensation committee also had the discretion to determine whether this compensation was to be granted in shares of our restricted stock, restricted stock units, LTIP Units or other forms of equity compensation or stock-based awards; provided that if at any time a sufficient number of shares of our common stock were not available for issuance under our equity compensation plan, we retained the right to pay such compensation in the form of RSUs, LTIP Units or other securities that may be settled in cash. The management agreement provided for the equity compensation payable by us each year to be allocated on an individual-by-individual basis at the discretion of NSAM’s compensation committee and, as long as the aggregate amount of the equity compensation for such year did not exceed the limits set forth in the management agreement, the proportion of any particular individual’s equity compensation payable by us could be greater or less than 50% of that individual’s total equity compensation.
2017 Equity Awards under the Management Agreement
In recognition of our named executive officers’ performance in 2016, NSAM’s compensation committee decided to award long-term bonuses in equity to our named executive officers in early 2017 consisting in part of restricted shares of our common stock. As a result, in order to fulfill our obligations under the management agreement, we issued restricted shares of our common stock to our named executive officers under the NorthStar Realty Europe Corp. 2015 Omnibus Stock Incentive Plan, or the 2015 Plan, on January 2, 2017, as follows: Mr. Nia - 80,064 shares; Mr. Feldman - 30,323 shares; and Mr. Ross - 9,608 shares. Based on the terms established by NSAM, which were consistent with the terms of the restricted shares of our common stock granted in 2015, these shares were subject to vesting in three substantially equal annual installments on December 31, 2017, 2018 and 2019 or, for Mr. Feldman, 12 substantially equal quarterly installments from April 2017 through January 2020, based on the named executive officer’s continued employment with NSAM or one of its subsidiaries through such dates, subject to acceleration upon a change of control of NRE or NSAM. The Mergers constituted a change of control of NSAM and, as a result, all of our unvested equity awards that were granted to our named executive officers prior to the closing of the Mergers that were scheduled to vest based solely on continued employment, including the restricted shares of our common stock granted in January 2017, were, in accordance with their terms, 100% vested upon the closing of the Mergers.
In addition, in June 2017, the compensation committee of Colony NorthStar (as the successor to NSAM following the Mergers) granted a retention stock award to Mr. Nia and, consistent with the terms of the management agreement, determined that a portion should be paid in restricted shares of our common stock. As a result, in order to fulfill our obligations under the management agreement, we issued 121,048 restricted shares of our common stock under the 2015 Plan to Mr. Nia in June 2017. Based on the terms established by Colony NorthStar, one-third of these shares were scheduled to vest on January 10, 2019 and the remaining two-thirds were scheduled to vest on January 10, 2020, subject to Mr. Nia’s continued service to us, Colony NorthStar, a company managed by Colony NorthStar or any of their subsidiaries through such dates, subject to acceleration in certain circumstances. The restricted shares are subject to a clawback provision that applies in the event we are required to prepare an accounting restatement due to material noncompliance, as a result of misconduct, with any financial reporting requirement under the securities laws relating to the amount of the award earned or accrued during the twelve-month period following the first public issuance or filing of the noncompliant financial document. Additionally, if Mr. Nia takes actions in violation or breach of or in conflict with any of our policies or procedures or agreement with or obligation to us, Colony NorthStar, a company managed by Colony NorthStar

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or any of their subsidiaries then we have the right to cause the forfeiture of any unvested restricted shares and repayment to us of any restricted shares that vested during the two-year period prior to such actions.
Amended and Restated Management Agreement
On November 9, 2017, we entered into an amended and restated management agreement with the Asset Manager effective as of January 1, 2018. Pursuant to the amended and restated management agreement, the Asset Manager continues to be solely responsible for determining and paying all non-equity compensation to our named executive officers. With respect to equity compensation, each year our Compensation Committee will, in its sole discretion, determine the aggregate amount, type and the terms of an equity compensation pool (which may include shares of our restricted stock, RSUs, LTIP Units or other applicable forms of equity or other stock-based awards in our company) to be allocated among members of management of our company and other employees of the Asset Manager. The Asset Manager will then have the discretion to allocate this annual equity compensation pool for each year among the members of management of our company, including our named executive officers, and other employees of the Asset Manager. In addition, as described below, we have agreed to pay or reimburse the Asset Manager for 50% of any cash severance payable by the Asset Manager to Mr. Nia in the event his employment is terminated in certain circumstances; provided that, in most circumstances, our payment or reimbursement obligation only applies if our Board has consented to the termination or actions resulting in the termination.
Compensation Paid by the Asset Manager
We generally do not pay any compensation to our named executive officers or specifically reimburse the Asset Manager for compensation it pays to our named executive officers, except for equity compensation as described above, and we are not responsible for determining the amount of any compensation paid to our named executive officers by the Asset Manager. As described below, we have agreed to pay or reimburse the Asset Manager for 50% of any cash severance payable by the Asset Manager to Mr. Nia in the event his employment is terminated in certain circumstances; provided that, in most circumstances, our payment or reimbursement obligation only applies if our Board has consented to the termination or actions resulting in the termination. The management agreement with the Asset Manager did not require, and the amended and restated management agreement with the Asset Manager does not require, that any specified amount or percentage of the management fees that we pay to the Asset Manager be allocated to our named executive officers. However, in order to allow us to provide our stockholders with more information regarding the compensation of our named executive officers, the Asset Manager has informed us that it estimates that the aggregate compensation paid by the Asset Manager to our named executive officers that may reasonably be associated with their management of our company totaled $4.2 million for 2017, including cash compensation and the value of equity compensation. This aggregate amount represents approximately 29% of the $14.4 million in total management fees (including the base management fee and incentive fee, if any) paid by us to the Asset Manager for 2017. Of this aggregate amount, the Asset Manager has informed us that approximately 25% represented fixed compensation (e.g., salaries) and 75% represented variable compensation (e.g., performance-based bonuses and long-term equity-based compensation). The Asset Manager has informed us that it does not use a specific formula to calculate the variable compensation it pays to our named executive officers’ compensation and that, generally, in determining each named executive officer’s variable compensation, the Asset Manager takes into account factors such as the individual’s position, experience and contribution to our business and the Asset Manager’s business, such individual’s performance and the performance of our company and the Asset Manager, the management fees generated by the Asset Manager from our company, competitive market dynamics and any contractual commitments the Asset Manager has with such individual.
Summary Compensation Table
The following table sets forth the compensation for each of our named executive officers in accordance with Item 402(n) of Regulation S-K.
Name and Principal Position
 
Year($) (1)
 
Stock Awards
($) (2)
 
Total Compensation
($)
Mahbod Nia
 
2017
 
$
2,550,100

 
$
2,550,100

Chief Executive Officer and President
 
2016
 
4,894,629

 
4,894,629

 
 
2015
 
—

 
—

Keith A. Feldman
 
2017
 
384,496

 
384,496

Chief Financial Officer and Treasurer
 
 
 
 
 
 
Trevor K. Ross
 
2017
 
121,829

 
121,829

General Counsel and Secretary
 
2016
 
586,827

 
586,827

___________________
(1)
During 2015, the only one of our executive officers who was a “named executive officer” for whom compensation related disclosures were required to be provided was our Chief Executive Officer and President, Mahbod Nia. We did not pay Mr. Nia for serving in his position in 2015, and accordingly, no compensation was reportable for that year.

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(2)
Represents the grant date fair value, computed in accordance with FASB ASC Topic 505, of awards that were granted to our named executive officers in the applicable year.
Outstanding Equity Awards at Fiscal Year-End 2017
The following table sets forth certain information with respect to all outstanding equity awards held by each named executive officer as of December 31, 2017.
 
 
Stock Awards
Name
 
Number of Shares or Units of Stock That Have Not Vested
(#) (1)
 
Market or Payout Value of Shares or Units of Stock That Have Not Vested
($) (2)
 
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#) (3)
 
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($) (2)
Mahbod Nia
 
121,048

 
1,625,675

 
290,323

 
3,899,038

Keith A. Feldman
 
—

 
—

 
54,435

 
731,062

Trevor K. Ross
 
—

 
—

 
36,290

 
487,375

___________________
(1)
All equity awards granted prior to the Mergers which were subject to the named executive officer’s continued employment through the applicable vesting date were vested in full in accordance with their terms upon the closing of the Mergers. With respect to Mr. Nia only, represents the unvested portion of restricted shares of our common stock that were granted on June 30, 2017 as a retention award in connection with his entry into an Amended and Restated Employment Agreement with Colony NorthStar UK, Ltd. Such shares are scheduled to vest as follows: one-third of the shares will vest on January 10, 2019 and the remaining two-thirds of the shares will vest on January 10, 2020, in each case subject to his continued employment through each such vesting date.

(2)
The value of the awards reflected in the table is based on a price per share or unit of $13.43 per share, which was the closing price on the NYSE of one share of our common stock as of December 29, 2017.
(3)
Represents Absolute TSR RSUs and Relative TSR RSUs that were granted in connection with the Spin-off that will only be earned based upon the achievement of cumulative performance goals for the four-year period ending December 31, 2019. Assuming our performance for the four-year performance period applicable to these awards continues at the same annualized rate as we experienced from the beginning of each performance period through December 31, 2017, each named executive officer would fully earn the Absolute TSR RSUs and Relative TSR RSUs. As a result, the table reflects 100% of the Absolute TSR RSUs and 125% of the Relative TSR RSUs, which represents the number of RSUs that would be earned if the respective “maximum” performance goal was achieved for each of the Absolute TSR RSUs and Relative TSR RSUs. See “Spin-Off Grants-Absolute TSR RSUs and -Relative TSR RSUs” below for additional information relating to these equity awards.
Spin-Off Grants
In connection with the Spin-off, on March 7, 2016, our Compensation Committee granted RSUs subject to the achievement of performance-based vesting conditions under the NorthStar Realty Europe Corp. 2015 Omnibus Stock Incentive Plan, or the 2015 Plan, to our named executive officers and other executives or employees of the Asset Manager. These grants were made in order to provide long-term incentives to the recipients following the Spin-off and align their interests with those of our stockholders. Approximately 50% of the RSUs, which we refer to as the Absolute TSR RSUs, are subject to the achievement of performance-based hurdles relating to our absolute total stockholder return, or TSR. The other 50% of the RSUs, which we refer to as the Relative TSR RSUs, are subject to the achievement of performance-based hurdles based on our TSR relative to the MSCI US REIT Index. The terms of these grants are described in further detail below.
Absolute TSR RSUs
The Absolute TSR RSUs will only vest if and to the extent our TSR during the period from the grant date through December 31, 2019 exceeds specific hurdles and the recipient remains employed by Colony NorthStar or one of its subsidiaries through the end of such period. In order for all of the RSUs to vest, our annual compounded TSR must equal or exceed 15% during this period. An amount equal to at least 25% but less than 100% of the RSUs will vest if our annual compounded TSR equals or exceeds 8% and is less than 15%, which amount shall be determined through linear interpolation. None of the RSUs will vest if our annual compounded TSR for this period is less than 8%. Upon vesting pursuant to the terms of the Absolute RSUs, the RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each RSU that vests) on or after the date the RSUs were initially granted.
Relative TSR RSUs
The Relative TSR RSUs will only vest if and to the extent our relative TSR compared to the MSCI US REIT Index during the period from the grant date through December 31, 2019 exceeds specific hurdles and the recipient remains employed by Colony NorthStar or one of its subsidiaries through the end of such period. The recipient will vest in 125% of the number of RSUs granted if our annual compounded TSR equals or exceeds 150% of the annual compounded total return generated by the MSCI US REIT Index during this period. An amount equal to at least 25% but less than 125% of the RSUs will vest and be earned if our annual compounded TSR equals or exceeds 50% and is less than 150% of the annual compounded total return generated by the MSCI

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US REIT Index, which amount shall be determined through linear interpolation. None of the RSUs will vest or be earned if our annual compounded TSR is less than 50% of the annual compounded total return generated by the MSCI US REIT Index. In the event that our TSR or the total return generated by the MSCI US REIT Index is negative during this period, these percentages will be calculated in a manner that measures the difference in absolute value between our annual compounded TSR and the annual compounded total return generated by MSCI US REIT Index as compared to the absolute value of the annual compounded total return generated by MSCI US REIT Index. Upon vesting pursuant to the terms of the Relative RSUs, the RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each RSU that vests) on or after the date the RSUs were initially granted.
Termination and Change of Control Arrangements
We do not have any contracts, plans or arrangements that provide for payment to any of our named executive officers in connection with any termination, change of control of NRE or change in such officer’s responsibilities, other than those as discussed below.
Spin-off Grants
In the event that the employment of either Mr. Nia or Mr. Feldman with the Asset Manager is terminated without cause, by such executive for good reason or as a result of death or disability, then Messrs. Nia and Feldman will retain a pro rata percentage of the Absolute TSR RSUs and Relative TSR RSUs and vesting of the remaining amount will remain subject to the same performance-based criteria and will be determined at the end of the performance period; provided that the named executive officer executes a general release of claims in favor of our company and related persons and entities. With respect to Mr. Ross, in the event his employment is terminated for any reason prior to the conclusion of the performance period, he will forfeit the Absolute TSR RSUs and Relative TSR RSUs in full upon termination.
Upon a change of control of NRE, each named executive officer will be entitled to vesting of a pro rata percentage of the Absolute TSR RSUs and Relative TSR RSUs based on the greater of the percentage of the performance period that has elapsed or the percentages of such awards that would have been earned if our stock price at the end of the performance period had been the same as the stock price on the date of the change of control of NRE.
Reimbursement Agreement
We do not have employment agreements with our named executive officers, but we have entered into a Reimbursement Agreement, dated June 30, 2017, under which we have agreed to pay or directly reimburse the Asset Manager for severance paid to Mr. Nia. In the event that Mr. Nia’s employment with the Asset Manager is terminated either without cause, for good reason or as a result of the Asset Manager electing not to renew his current employment agreement at the expiration of its term, then we will be obligated to pay or directly reimburse the Asset Manager for 50% of any cash payments made by the Asset Manager in connection with such qualifying terminations of employment. Notwithstanding the foregoing, we will not be responsible for the reimbursement of any cash payments if our Board has not consented to the termination, non-renewal or other action taken by the Asset Manager with the intent to create good reason, as applicable.
Restricted Stock Award
Pursuant to the terms of the restricted shares of our common stock that we granted to Mr. Nia in June 2017, all of then unvested restricted shares will become fully vested in the event of a termination of Mr. Nia’s service without cause by us, Colony NorthStar, a company managed by Colony NorthStar or any of their subsidiaries, Mr. Nia’s resignation for good reason (as defined in his employment agreement with the Asset Manager) or a termination of Mr. Nia’s service due to his death or disability.
In addition, upon the occurrence of a change of control of our company or Colony NorthStar, all restricted shares will also become fully vested (i) if such shares are not assumed or equivalent securities substituted by our company or its successor or (ii) if so assumed or substituted, then upon a termination of Mr. Nia’s service without cause by us, Colony NorthStar, a company managed by Colony NorthStar or any of their subsidiaries or Mr. Nia’s resignation for good reason, in either case, within the 12-month period following the consummation of the change in control.
Director Compensation
The following sets forth the compensation that we pay to each director who is not an employee of ours or Colony NorthStar (i.e., each director other than Messrs. Saltzman and Nia, and, prior to their resignation, Messrs. Hamamoto and Tylis), whom we refer to collectively as non-management directors.
Our non-management directors’ fees are as follows: (i) Board members receive an annual director’s cash retainer fee of $75,000; (ii) the chairperson of the Audit Committee receives an additional annual fee of $25,000; (iii) the chairpersons of the Compensation Committee and Nominating and Corporate Governance Committee receive an additional annual fee of $15,000; (iv) members of the Audit Committee (other than the chairperson) receive an additional annual fee of $15,000; (v) members of the Compensation Committee and Nominating and Corporate Governance Committee (other than the chairpersons) receive an additional annual fee of $7,500; (vi) the Lead Non-Management Director of our Board receives an additional annual fee of $40,000; (vii) each Board

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member receives an additional $1,000 for attendance at Board meetings in excess of ten meetings per year; and (viii) each member of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee receives an additional $1,000 for attendance at each committee meeting that exceeds six meetings per year. In addition, the non-management directors received a fee of $1,000 for attending each meeting of the Special Committee held during 2017 in connection with the amendment of the management agreement.
In connection with their re-election to our Board, our non-management directors automatically receive equity awards with a value of approximately $75,000. These annual equity awards are granted on the first business day following each annual meeting of our stockholders and are fully vested upon grant.
We will also automatically grant to any person who first becomes a non-management director an initial equity award with a value of approximately $75,000. These initial equity awards are granted on the date such non-management director first becomes a director and are fully vested upon grant.
Equity awards to our non-management directors may be in the form of restricted common stock, restricted stock units (“RSUs”) or units of partnership interest which are structured as profits interest in our LTIP units. The actual number of shares, RSUs or LTIP units that we grant is determined by dividing the fixed value of the grant by the closing sale price of our common stock on the NYSE on the grant date.
The following table provides information concerning the compensation of our directors for 2017.
Name
 
Fees Earned or Paid in
Cash (1)
 
Stock
Awards (2)
 
Total
 
 
 
 
 
 
 
Mario Chisholm
 
$
119,495

 
$
75,000

 
$
194,495

Judith A. Hannaway
 
160,289

 
75,000

 
235,289

Dianne Hurley
 
105,289

 
75,000

 
180,289

Oscar Junquera
 
126,789

 
75,000

 
201,789

Wesley D. Minami
 
129,003

 
75,000

 
204,003

Charles W. Schoenherr (3)
 
3,151

 
—

 
3,151

David T. Hamamoto (5)(6)
 
—

 
810,798

(4)  
810,798

Albert Tylis (5)(6)
 
—

 
568,584

(4)  
568,584

___________________________________
(1)
Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of awards that were granted to our directors in 2017. The grant date fair value of awards granted to our non-management directors was determined based on the closing price of our common stock on the grant date. As of December 31, 2017, none of the non-management directors nor Mr. Saltzman held any options or unvested stock awards in our company. For additional information with respect to Messrs. Hamamoto and Tylis, see note 4 below.
(2)
Mr. Saltzman did not receive any cash fees or equity awards from us during his service on our Board during 2017.
(3)
Mr. Schoenherr resigned from our Board and all committees thereof, effective as of January 10, 2017.
(4)
Represents the grant date fair value, computed in accordance with FASB ASC Topic 718, of awards that were granted in 2017 to Messrs. Hamamoto and Tylis. During 2017, Messrs. Hamamoto and Tylis were employees of Colony NorthStar or one of its subsidiaries and provided services to us pursuant to the management agreement. The awards granted to Messrs. Hamamoto and Tylis related to these services and included grants made in order to fulfill our obligations under the management agreement with the Asset Manager in connection with long-term bonuses that NSAM’s compensation committee determined should be paid in equity. These grants were comprised of the following:
Name
 
Time-Based Restricted Stock (a)
 
Performance-Based Restricted Stock (b)
David T. Hamamoto
 
51,363

 
12,379

Albert Tylis
 
36,019

 
8,681

___________________
(a)
Represents restricted shares of our common stock that were allocated by NSAM’s compensation committee as long-term bonus for 2016 that we were obligated to grant pursuant to the terms of the management agreement with the Asset Manager, which were scheduled to vest in substantially equal installments on the grant date and December 31, 2017, 2018 and 2019, subject to continued employment through the applicable vesting date and subject to acceleration upon a change of control of NRE or NSAM. The grant date fair value of the restricted shares of our common stock was based on the closing price of our common stock on the grant date. In accordance with the terms of the restricted stock award agreements, vesting of these awards accelerated in full upon the closing of the Mergers because the transaction resulted in a change of control of NSAM.
(b)
Represents restricted shares of our common stock that were allocated by NSAM’s compensation committee as long-term bonus for 2016 that we were obligated to grant pursuant to the terms of the management agreement with the Asset Manager. These shares were scheduled to vest immediately prior to the consummation of the Mergers, subject to the director’s continued employment with NSAM or one of its

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subsidiaries, or NorthStar Realty or one of its subsidiaries, though such vesting date and were subject to forfeiture if the Mergers did not occur.
(5)
As of December 31, 2017, Mr. Hamamoto held 158,065 unvested Absolute TSR RSUs and 158,064 unvested Relative TSR RSUs and Mr. Tylis held 125,807 Absolute TSR RSUs and 125,806 Relative TSR RSUs. The maximum number of shares of our common stock that may be issuable pursuant to these RSUs is equal to the number of RSUs outstanding, except, as described above under “Executive Compensation-Spin-off Grants-Relative TSR RSUs,” up to 125% of the outstanding Relative TSR RSUs could be earned.
(6)
Mr. Tylis resigned from our Board and all committees thereof, effective as of February 13, 2017. Mr. Hamamoto resigned from our Board and all committees thereof, effective as of January 11, 2018. In December 2017, in connection with Mr. Hamamoto’s resignation, we agreed to modify Mr. Hamamoto’s Absolute TSR RSUs and Relative TSR RSUs to remove the employment-based vesting conditions originally contained in such RSUs, although the original performance-based vesting conditions will continue to apply.
Director Compensation
Our Board adopted the following minimum stock ownership guidelines for non-management members of our Board:
Title
Guideline
Non-management Directors
A multiple of 3x annual director cash retainer
Ownership will include: (i) shares or LTIP units owned individually and by a person’s immediate family members or trusts for the benefit of his or her immediate family members; (ii) RSUs or LTIP units not yet vested; (iii) shares or LTIP units held in a 401(k) plan; and (iv) shares or LTIP units held in deferred or other compensation plans. Directors will not be permitted to sell or otherwise transfer any shares or LTIP units unless and until such time as they meet these stock ownership guidelines. We believe that requiring ownership of our stock creates alignment between directors and stockholders and encourages directors to act to increase stockholder value. As of December 31, 2017, all of the directors are in compliance with our stock ownership guidelines and there are currently no pledges of stock, RSUs, LTIP units or other equity awards by directors.
Compensation Committee Interlocks and Insider Participation
During 2017, the following directors, all of whom are independent directors, served on our Compensation Committee: Messrs. Chisholm and Junquera and Ms. Hannaway. None of our executive officers serve as a member of a board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our Board or Compensation Committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Beneficial Ownership of Stock
The following table set forth as of March 8, 2018 , the number and percentage of shares of our common stock beneficially owned by:
•
each director;
•
each of our named executive officers; and
•
all of our directors and named executive officers as a group.
The following table also sets forth the number and percentage of shares of our common stock beneficially owned by each person, known to us, to be the beneficial owner of more than five percent (5%) of the outstanding shares of our common stock in each case, based solely on, and as of the date of, such person’s filing of Schedule 13D or Schedule 13G (or an amendment thereto) with the SEC:  

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Amount and Nature of
Beneficial Ownership
Name and Address of Beneficial Owner (1)(2)
 
Number
 
Percentage
Principal Stockholders
 
 
 
 
Colony Capital Operating Company, LLC
 
 
 
 
Colony NorthStar, Inc.
 
5,636,537

(3)  
 
The Vanguard Group
 
5,465,032

(4)  
 
Senvest Management, LLC
 
 
 
 
Richard Mashaal
 
4,757,009

(5)  
 
BlackRock, Inc.
 
4,230,972

(6)  
 
Vanguard Specialized Funds - Vanguard REIT Index Fund
 
3,532,827

(7)  
 
Directors, Director Nominees and Executive Officers:
 
 
 
 
Richard B. Saltzman
 
—

 
*
Mario Chisholm
 
32,799

 
*
Judith A. Hannaway
 
33,776

(8)  
*
Dianne Hurley
 
28,689

 
*
Oscar Junquera
 
35,789

(9)  
*
Wesley D. Minami
 
40,991

(10)  
*
Mahbod Nia
 
313,091

(11)  
*
Keith A. Feldman
 
11,683

(12)  
*
Trevor K. Ross
 
29,757

(13)  
*
All directors and executive officers as a group
 
526,575

 
*
____________
*Less than one percent.
(1)
Each listed person’s beneficial ownership includes: all shares of our common stock and vested common units in our Operating Partnership over which the person has or shares direct or indirect voting or dispositive control and all other shares of our common stock over which the person has the right to acquire direct or indirect voting or dispositive control within 60 days. Unless otherwise described in a footnote below, each person has sole voting and dispositive control over the securities beneficially owned.
(2)
The address of each of the directors and executive officers is 399 Park Avenue, 18th Floor, New York, NY 10022.
(3)
Based on information included in the Schedule 13D/A filed by Colony Capital Operating Company, LLC and Colony NorthStar, Inc. (collectively, “CLNS”) on December 1, 2017 (the “CLNS 13D”). According to the CLNS 13D, each of Colony Capital Operating Company, LLC and Colony NorthStar, Inc. beneficially owns 5,636,537 shares of our common stock and have shared voting power and shared dispositive power over such shares. The address of CLNS is 515 S. Flower Street, 44th Floor, Los Angeles, California 90071.
(4)
Based on information included in the Schedule 13G/A filed by The Vanguard Group on February 9, 2018 (the “Vanguard 13G”). According to the Vanguard 13G, The Vanguard Group beneficially owns 5,465,032 shares of our common stock, with sole voting power over 60,284 shares, shared voting power over 17,260 shares, sole dispositive power over 5,391,149 shares and shared dispositive power over 73,883 shares. The address of The Vanguard Group is 100 Vanguard Blvd., Malvern, PA 19355.
(5)
Based on information included in the Schedule 13G/A filed by Senvest Management, LLC and Richard Mashaal (collectively, “Senvest”) on February 12, 2018 (the “Senvest 13G”). According to the Senvest 13G, each of Senvest Management, LLC and Richard Mashaal beneficially owns 4,757,009 shares of our common stock and have shared voting power and shared dispositive power over such shares. The address of Senvest is 540 Madison Avenue, 32nd Floor, New York, NY 10022.
(6)
Based on information included in the Schedule 13G/A filed by BlackRock, Inc. on January 29, 2018 (the “BlackRock 13G”). According to the BlackRock 13G, BlackRock, Inc. beneficially owns 4,230,972 shares of our common stock, with sole voting power over 4,116,970 shares and sole dispositive power over 4,230,972 shares. The address of BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055.
(7)
Based on information included in the Schedule 13G/A filed by Vanguard Specialized Funds - Vanguard REIT Index Fund (“Vanguard Specialized Funds”) on February 2, 2018 (the “Vanguard Specialized Funds 13G”). According to the Vanguard Specialized Funds 13G, Vanguard Specialized Funds beneficially owns 3,532,827 shares of our common stock, with sole voting power over such shares. The address of Vanguard Specialized Funds is 100 Vanguard Blvd., Malvern, PA 19355.
(8)
Includes: (i) 2,383 Common Units and (ii) 17,528 LTIP Units.
(9)
Includes 17,528 LTIP Units.
(10)
Includes: (i) 2,383 Common Units and (ii) 17,528 LTIP Units.
(11)
Excludes 258,065 shares of our common stock subject to RSUs previously issued by us, which will only be issued if and to the extent future performance conditions are met.
(12)
Includes 5,780 Common Units. Excludes 48,387 shares of our common stock subject to RSUs previously issued by us, which will only be issued if and to the extent future performance conditions are met. Mr. Feldman was appointed as our Chief Financial Officer and Treasurer effective on May 10, 2017.
(13)
Includes 1,773 Common Units. Excludes 32,258 shares of our common stock subject to RSUs previously issued by us, which will only be issued if and to the extent future performance conditions are met.


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Equity Compensation Plan Information
The following table provides summary information on the securities issuable under our equity compensation plans as of December 31, 2017:
Plan Category
 
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants,
and Rights (1)
 
Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants, and
Rights (1)
 
Number of Securities
Remaining Available
for Future Issuance Under Equity Incentive Plans (2)
Equity Compensation Plan Approved by Stockholders     
 
1,872,619

 
—

 
8,172,533

Equity Compensation Plans Not Approved by Stockholders
 
N/A

 
N/A

 
N/A

Total
 
1,872,619

 
—

 
8,172,533

___________________________________
(1)
As of December 31, 2017, represents shares of our common stock issuable (i) in exchange for 350,247 Common Units that were distributed in connection with the Spin-off with respect to units in the operating partnership of NorthStar Realty that were originally granted as equity compensation awards, (ii) in exchange for common units in our Operating Partnership into which 70,112 LTIP units may be converted conditioned on minimum allocations to the capital accounts of the LTIP units for federal income tax purposes and (iii) in exchange for 1,452,260 RSUs granted subsequent to the Spin-off, which remain to performance-based vesting hurdles and represent the number of shares of our common stock issuable at maximum performance. Each of the common units in our Operating Partnership is redeemable at the election of the holder; provided that upon receipt of a redemption request we may elect to exchange the tendered units for either (i) cash equal to the then fair value of one share of our common stock or (ii) one share of our common stock, at our option in our capacity as general partner of our Operating Partnership.
(2)
Represents shares of our common stock available for issuance pursuant to the 2015 Plan.
Item 13. Certain Relationships and Related Transactions and Director Independence
On November 9, 2017, the Company entered into an Amended and Restated Management Agreement with an affiliate of the Manager, effective as of January 1, 2018. The description of the management agreement included below relates to the original agreement that was entered into in November 2015 and which will be superseded as of January 1, 2018 by the Amended and Restated Management Agreement.
Management Agreement with our Manager
The Company entered into a management agreement with an affiliate of the Manager in November 2015. As asset manager, the Manager is responsible for the Company’s day-to-day operations, subject to supervision and management of the Company’s board of directors (the “Board”). Through its global network of subsidiaries and branch offices, the Manager performs services and engages in activities relating to, among other things, investments and financing, portfolio management and other administrative services, such as accounting and investor relations, to the Company and its subsidiaries. The management agreement with the Manager provides for a base management fee and incentive fee.
Base Management Fee
For the years ended December 31, 2017 , 2016 and 2015 , the Company incurred $14.4 million , $14.1 million and $2.3 million , respectively, related to the base management fee. As of December 31, 2017 and 2016, $3.6 million and $3.5 million , respectively, was recorded in due to related party on the consolidated balance sheets. The base management fee to the Manager is calculated as 1.5% per annum of the sum of:
•
any equity the Company issues in exchange or conversion of exchangeable or stock-settlable notes;
•
any other issuances by the Company of common equity, preferred equity or other forms of equity, including but not limited to LTIP Units in the Operating Partnership (excluding units issued to the Company and equity-based compensation, but including issuances related to an acquisition, investment, joint venture or partnership); and
•
cumulative cash available for distribution (“CAD”), if any, of the Company in excess of cumulative distributions paid on common stock, LTIP Units or other equity awards which began with the Company’s fiscal quarter ended March 31, 2016.
Incentive Fee
For the years ended December 31, 2017 , 2016 and 2015 , the Company did not incur an incentive fee. The incentive fee is calculated and payable quarterly in arrears in cash, equal to:

120

•
the product of: (a) 15.0% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of $0.30 per share and up to $0.36 per share; plus
•
the product of: (a) 25.0% and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of $0.36 per share;
•
multiplied by the Company’s weighted average shares outstanding for the calendar quarter.
Weighted average shares represents the number of shares of the Company’s common stock, LTIP Units or other equity-based awards (with some exclusions), outstanding on a daily weighted average basis. With respect to the base management fee, all equity issuances are allocated on a daily weighted average basis during the fiscal quarter of issuance. With respect to the incentive fee, such amounts will be appropriately adjusted from time to time to take into account the effect of any stock split, reverse stock split, stock dividend, reclassification, recapitalization or other similar transaction.
Additional Management Agreement Terms
The Company’s management agreement with the Manager provides that in the event of a change of control of the Manager or other event that could be deemed an assignment of the management agreement, the Company will consider such assignment in good faith and not unreasonably withhold, condition or delay the Company’s consent. The management agreement further provides that the Company anticipates consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over $ 10 billion of assets under management. The management agreement also provides that, notwithstanding anything in the agreement to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction by the Company or the Manager, directly or indirectly, the surviving entity will succeed to the terms of the management agreement.
Payment of Costs and Expenses and Expense Allocation
The Company is responsible for all of its direct costs and expenses and reimburses the Manager for costs and expenses incurred by the Manager on the Company’s behalf. In addition, the Manager may allocate indirect costs to the Company related to employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the Company’s management agreement with the Manager (the “G&A Allocation”). The Company’s management agreement with the Manager provides that the amount of the G&A Allocation will not exceed the following: (i) 20% of the total of: (a) the Company’s general and administrative expenses as reported in their consolidated financial statements excluding: (1) equity-based compensation expense, (2) non-recurring items, (3) fees payable to the Manager under the terms of the applicable management agreement and (4) any allocation of expenses to the Company (“NRE’s G&A”); and (b) the Manager’s general and administrative expenses as reported in its consolidated financial statements, excluding equity-based compensation expense and adding back any costs or expenses allocated to any managed company of the Manager; less (ii) NRE’s G&A. The G&A Allocation may include the Company’s allocable share of the Manager’s compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing the Company’s affairs, based upon the percentage of time devoted by such personnel to the Company’s affairs. The G&A Allocation may also include rental and occupancy, technology, office supplies, travel and entertainment and other general and administrative costs and expenses, which may be allocated based on various methodologies, such as weighted average employee count or the percentage of time devoted by personnel to the Company’s affairs. In addition, the Company will pay directly or reimburse the Manager for an allocable portion of any severance paid pursuant to any employment, consulting or similar service agreements in effect between the Manager and any of its executives, employees or other service providers.
The Company’s obligation to reimburse the Manager for the G&A Allocation and any severance, at the Manager’s discretion, and the 20% cap on the G&A Allocation, as described above, applies on an aggregate basis to the Company.
For the year ended December 31, 2017 , the Manager did not allocate any general and administrative expenses to the Company. For the years ended December 31, 2016 and 2015 , the Manager allocated $0.2 million and $0.4 million , respectively, to the Company. For the years ended December 31, 2017 and 2016 , the Manager did not allocate any severance to the Company.
In addition, the management agreement provides that the Company and any company spun-off from the Company, shall pay directly or reimburse the Manager for up to 50% of any long-term bonus or other compensation that the Manager’s compensation committee determines shall be paid and/or settled in the form of equity and/or equity-based compensation to executives, employees and service providers of the Managers’ during any year. Subject to this limitation and limitations contained in any applicable management agreement between the Manager and any company spun-off from the Company, the amount paid by the Company and any company spun-off from the Company will be determined by the Manager in its discretion. At the discretion of the Manager’s compensation committee, this compensation may be granted in shares of the Company’s restricted stock, restricted stock units, long-term incentive plan units or other forms of equity compensation or stock-based awards; provided that if at any time a sufficient number of shares of the Company’s common stock are not available for issuance under the Company’s equity compensation plan, such compensation shall be paid in the form of RSUs, LTIP Units or other securities that may be settled in

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cash. The Company’s equity compensation for each year may be allocated on an individual-by-individual basis at the discretion of the Manager’s compensation committee and, as long as the aggregate amount of the equity compensation for such year does not exceed the limits set forth in the management agreement, the proportion of any particular individual’s equity compensation may be greater or less than 50% .
The Company does not have employment agreements with its named executive officers, but the Company has generally agreed to pay directly or reimburse the Manager for the portion of any severance paid by the Manager or any of its affiliates to an individual pursuant to the terms of any employment, consulting or similar service agreement, including any employment agreements with Colony NorthStar or its subsidiaries and its named executive officers, that corresponds to or is attributable to: (i) the equity compensation that the Company is required to pay directly or reimburse the Manager pursuant to the management agreement; (ii) any cash and/or equity compensation paid directly by the Company to such individual as an employee or other service provider of the Company; and (iii) any amounts paid to such individual by the Manager or any of its affiliates that the Company is obligated to reimburse the Manager pursuant to the management agreement. With respect to Mahbod Nia only, in lieu of the foregoing severance payment or reimbursement, the Company has agreed to pay directly or reimburse the Manager for 50% of any cash payments made by the Manager or any of its affiliates in connection with the termination of Mr. Nia’s employment either without cause or upon the non-renewal of Mr. Nia’s term of employment by the employer or by Mr. Nia for good reason; provided that the Board consented to the taking of such action (or, with respect to a termination for good reason, any action taken with the intent to create good reason). Because the Company’s obligation to pay these amounts is owed to the Manager and not directly to the Company’s named executive officers and the Company does not control the terms of the agreements between the Manager or its affiliates and the Company’s named executive officers, the discussion above does not include these amounts or a discussion of any arrangements that the Manager or its affiliates may have with the Company’s named executive officers pursuant to which our obligations to the Manager may arise.
Management Agreement Amendment
On November 9, 2017, the Company entered into an Amended and Restated Management Agreement with CNI NRE Advisors, LLC, a Delaware limited liability company (unless the context requires otherwise, together with its affiliates, the “Asset Manager”), an affiliate of Colony NorthStar, effective as of January 1, 2018.
Under the Amended and Restated Management Agreement, the Asset Manager is generally responsible to manage the Company’s day to day operations, subject to the supervision and management of the Board. The Asset Manager is required to provide the Company with a management team and other appropriate employees and resources necessary to manage the Company.
Term; Renewals
The Amended and Restated Management Agreement provides for an initial term (beginning January 1, 2018) of five years (the “Initial Term”), with subsequent automatic renewals for additional three year terms, unless either party provides notice to the other party of its intention to decline to renew the agreement at least six months prior to the expiration of the then-current term. During the Initial Term, the Company can only terminate the Amended and Restated Management Agreement for cause (as described in the Amended and Restated Management Agreement).
If the Company elects not to renew the Amended and Restated Management Agreement at the end of a term, it will be obligated to pay the Asset Manager a termination fee (the “Termination Fee”) equal to three times the amount of the base management fees earned by the Asset Manager over the four most recent quarters immediately preceding the non-renewal. In addition, if at any time after the Initial Term, the Company undergoes a “change of control” (as described in the Amended and Restated Management Agreement), the Company may elect to terminate the agreement but upon any such termination it will be obligated to pay the Termination Fee to the Asset Manager.
Assignment
The Amended and Restated Management Agreement provides that in the event of a change of control of the Asset Manager or other event that could be deemed an assignment of the Amended and Restated Management Agreement, the Company will consider such assignment in good faith and not unreasonably withhold, condition or delay the Company’s consent. The Amended and Restated Management Agreement further provides that the Company anticipates consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over $ 10 billion of assets under management. The Amended and Restated Management Agreement also provides that, notwithstanding anything in the agreement to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction by the Company or the Asset Manager, directly or indirectly, the surviving entity will succeed to the terms of the Amended and Restated Management Agreement.
Base Management Fee
Pursuant to the Amended and Restated Management Agreement, beginning January 1, 2018, the Company is obligated to pay quarterly, in arrears, in cash, the Asset Manager a base management fee per annum equal to:

122

•
1.50% of the Company’s reported EPRA NAV (as described in the Amended and Restated Management Agreement) for EPRA NAV amounts up to and including $2.0 billion; plus
•
1.25% of the Company’s reported EPRA NAV on any EPRA NAV amount exceeding $2.0 billion.
EPRA NAV is based on a U.S. GAAP balance sheet adjusted based on the Company’s interpretation of the European Public Real Estate Association (“EPRA”) guidelines, and similar as prior practices, including adjustments such as fair value of operating real estate, straight-line rent and deferred taxes and additional adjustments to be determined by the Company in good faith based on any changes to U.S. GAAP, international accounting standards or EPRA guidelines. In calculating EPRA NAV, the liquidation preference of preferred securities outstanding shall not be included as a liability of the Company and shall not reduce EPRA NAV.
Incentive Fee
In addition to the base management fees, the Company is obligated to pay the Asset Manager an incentive fee, if any (the “Incentive Fee”), with respect to each measurement period equal to twenty percent (20%) of: (i) the excess of (a) the Company’s Total Stockholder Return (as defined in the Amended and Restated Management Agreement, which includes stock price appreciation and dividends received and is subject to a high watermark price established when a prior incentive fee is realized) for the relevant measurement period above (b) a 10% cumulative annual hurdle rate, multiplied by (ii) the Company’s Weighted Average Shares (as defined in the Amended and Restated Management Agreement) during the measurement period. The first measurement period for the incentive fee will begin January 1, 2018 and end on December 31 of the applicable calendar year and subsequent measurement periods will begin on January 1 of the subsequent calendar year. Subject to the conditions set forth in Section 4(d) of the Amended and Restated Management Agreement for common stock payments, the Company may elect to pay the Incentive Fee, if any, in cash or in shares of restricted common stock or shares of unrestricted common stock repurchased by the Company in the open market or a combination thereof. Any shares of common stock delivered by the Company will be subject to lock-up restrictions that will be released in equal one-third increments on each anniversary of the end of the measurement period with respect to which such incentive fee was earned. In calculating the value of the shares of the Company’s common stock paid in satisfaction of the Incentive Fee obligation, the shares of restricted common stock will be valued at the higher of: (i) the volume weighted average trading price per share for the ten consecutive trading days (as defined in the Amended and Restated Management Agreement) ending on the trading day prior to the date the payment is due and (ii) the Company’s EPRA NAV per share, based on the Company’s most recently published EPRA NAV and the Weighted Average Shares as of the end of the period with respect to which such EPRA NAV was published.
Costs and Expenses
The Company is responsible to pay (or reimburse the Asset Manager) for all of the Company’s direct, out of pocket costs and expenses of the Company as a stand alone company incurred by or on behalf of the Company and its subsidiaries, all of which must be reasonable, customary and documented. Internalized Service Costs (as defined below) are not intended to be covered costs and expense under this provision and are subject to the limits described in the next paragraph.
In addition to the expenses described in the prior paragraph, for each calendar quarter, beginning with the first quarter of 2018, the Company is obligated to reimburse the Asset Manager for (i) all direct, reasonable, customary and documented costs and expenses incurred by the Asset Manager for salaries, wages, bonuses, payroll taxes and employee benefits for personnel employed by the Asset Manager: (a) who solely provide services to the Company which prior to January 1, 2018 were provided by unaffiliated third parties, including accounting and treasury services or (b) who were hired by the Asset Manager after January 1, 2018 but who solely provide services to the Company in respect of one of the categories of services previously internalized pursuant to clause (a) and who were not hired in connection with any event which otherwise resulted in an increase to the Company’s net asset value (such costs and expenses set forth in clauses (i) and (ii), the “Internalized Service Costs”), plus (ii) 20% of the amount calculated under clause (i) to cover reasonable overhead charges with respect to such personnel, provided that the Company shall not be obligated to reimburse the Asset Manager for such costs and expenses to the extent they exceed the following quarterly limits:
•
0.0375% of the Company’s aggregate gross asset value as of the end of the prior calendar quarter (excluding cash and cash equivalents and certain other exclusions) as calculated for purposes of determining EPRA NAV (“GAV”), for GAV amounts to and including $2.5 billion, plus
•
0.0313% of GAV amounts between $2.5 billion and $5.0 billion, plus
•
0.025% of GAV amounts exceeding $5.0 billion.
If the Asset Manager’s actual Internalized Service Costs during any quarter exceed the quarterly limit described in the preceding paragraph (the cumulative excess amounts, if any, in respect of each quarter during a calendar year, the (“Quarterly Cap Excess Amount”), the Company is obligated to reimburse the Asset Manager on an annual basis for an amount equal to the lesser of (i) the Quarterly Cap Excess Amount and (ii) the sum of the amounts, if any, determined for each quarter within such calendar year by which Internalized Services Costs in respect of such quarter were less than the quarterly limits described in the prior paragraph.

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Equity Based Compensation
In addition, the Company expects to make annual equity compensation grants to management of the Company and other employees of the Asset Manager, provided that the aggregate annual grant amount, type and other terms of such equity compensation must be approved by the Company’s compensation committee. The Asset Manager will have discretion in allocating the aggregate grant among the Company’s management and other employees of the Asset Manager.
Under the Amended and Restated Management Agreement, beginning with the Company’s 2018 annual stockholders’ meeting, the Asset Manager will have the right to nominate one director (who is expected to be one of the Company’s current directors employed by the Asset Manager) to the Company’s board of directors.
Transaction Expenses
The Company agreed to pay for up to $2.5 million of fees and expenses payable by the Asset Manager to its external financial advisors in connection with the negotiation and execution of the Amended and Restated Management Agreement.
Colony NorthStar Ownership Waiver and Voting Agreement
In connection with the entry into the Amended and Restated Management Agreement, the Company provided Colony NorthStar with an ownership waiver under the Company’s Articles of Amendment and Restatement, allowing Colony NorthStar to purchase up to 45% of the Company’s stock. The waiver provides that if the Amended and Restated Management Agreement is terminated, Colony NorthStar may not purchase any shares of the Company’s common stock to the extent Colony NorthStar owns (or would own as a result of such purchase) more than 9.8% of the Company’s capital stock. In connection with the waiver, Colony NorthStar also agreed that for all matters submitted to a vote of the Company’s stockholders, to the extent Colony NorthStar owns more than 25% of the Company’s common stock (such shares owned by Colony NorthStar in excess of the 25% threshold, the “Excess Shares”), it will vote the Excess Shares in the same proportion that the remaining shares of the Company not owned by Colony NorthStar or its affiliates are voted. If the Amended and Restated Management Agreement is terminated, then beginning on the third anniversary of such termination, the threshold described in the prior sentence will be reduced from 25% to 9.8%.

Relationship with NorthStar Realty
Separation Agreement
We entered into a separation agreement with NorthStar Realty which set forth, among other things, our agreements with NorthStar Realty regarding the principal transactions necessary for NorthStar Realty to distribute our common stock. Under the separation agreement, NorthStar Realty distributed our common stock to its common stockholders and our management and certain NorthStar Realty employees as a result of their ownership of certain equity awards of NorthStar Realty entitling them to the same benefits as holders of NorthStar Realty common stock.
The separation agreement also set forth the other agreements that govern certain aspects of our relationship with NorthStar Realty after the Spin-off. These other agreements are described in additional detail below.
Transfer of Assets and Assumption of Liabilities
The separation agreement identified assets to be transferred, liabilities to be assumed and contracts to be performed by each of us and NorthStar Realty as part of the Spin-off and it provides for when and how these transfers, assumptions and assignments will occur.
Legal Matters
In general, NorthStar Realty assumed liability for all pending, threatened and unasserted legal claims relating to actions or omissions occurring prior to the Spin-off and we are responsible for all claims relating to actions or omissions occurring after the Spin-off that relate to our business. To the extent a claim relates to a series of actions relating to our business occurring both before and after the Spin-off, we allocated liability for such claims between us and NorthStar Realty on a pro rata basis. In the event of any third-party claims that name both companies as defendants but that do not primarily relate to either our business or NorthStar Realty’s business, each party cooperated with the other party to defend against such claims. Each party cooperated in defending any claims against the other for events that are related to the Spin-off, but may have taken place prior to, on or after such date.
Insurance
The separation agreement provides for all pre-Spin-off claims to be made under NorthStar Realty’s existing insurance policies and post-Spin-off claims to be made under our insurance policies. In addition, the separation agreement allocated between the parties the right to proceeds and the obligation to incur certain deductibles under certain insurance policies. On or prior to the Spin-off, we were required to have in place all insurance programs to comply with our contractual obligations and as reasonably necessary for our business. NorthStar Realty was required, subject to the terms of the agreement, to obtain certain director and officer insurance policies to apply against pre-Spin-off claims.

124

Tax Matters
We have agreed to use our reasonable best efforts to qualify for taxation as a REIT for our taxable year ending December 31, 2016 . NorthStar Realty has agreed to use its reasonable best efforts to maintain its REIT status for its taxable year ending December 31, 2016 , unless NorthStar Realty obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS, on which we can rely, substantially to the effect that NorthStar Realty’s failure to maintain its REIT status will not prevent us from making a valid REIT election for any taxable year, or otherwise cause us to fail to qualify for taxation as a REIT for any taxable year, pursuant to Section 856(g)(3) of the Code. We have also agreed to use commercially reasonable efforts to cooperate with NorthStar Realty as necessary to enable NorthStar Realty to qualify for taxation as a REIT and receive customary legal opinions concerning our qualification and taxation as a REIT, including by providing information and representations to NorthStar Realty and its tax counsel with respect to the composition of our income and assets, the composition of the holders of our stock and our organization, operation and qualification as a REIT for our taxable year ending December 31, 2016 .
We have also agreed to indemnify NorthStar Realty against all taxes attributable to the Spin-off (other than taxes incurred by NorthStar Realty under Code section 311(b)). Additionally, we have agreed to indemnify NorthStar Realty against all taxes due with respect to NorthStar Realty, its subsidiaries, business or assets that are attributable to our failure to qualify as a REIT for our taxable year ending December 31, 2016 , unless such failure was wholly or primarily attributable to NorthStar Realty, its subsidiaries, its business or its assets. NorthStar Realty has agreed to indemnify us against all taxes due with respect to us, our subsidiaries, our business and our assets relating to periods prior to the Distribution and for any taxes due with respect to us, our subsidiaries, our business and our assets that are attributable to NorthStar Realty’s failure to qualify as a REIT for its taxable year ending December 31, 2016 unless such failure was wholly or primarily attributable to us, our subsidiaries, our business or our assets.
Other Matters
Other matters governed by the separation agreement includes, but are not limited to, access to financial and other records and information, intellectual property, legal privilege, confidentiality, access to and provision of records and treatment of outstanding guarantees and the Senior Notes. Pursuant to the separation agreement, we have also agreed to issue shares of our common stock or LTIP Units in our Operating Partnership that may be issuable in the future as a result of equitable adjustments made to outstanding restricted stock units issued by NorthStar Realty prior to the Spin-off and pay any dividend equivalents owed with respect to such shares or LTIP Units.
The separation agreement also provides that NorthStar Realty has the sole and absolute discretion to determine whether to proceed with the Spin-off, including the form, structure and terms of any transactions to effect the Spin-off and the timing of and satisfaction of conditions to the consummation of the Spin-off.
Contribution Agreement
We entered into a contribution agreement and related agreements with NorthStar Realty pursuant to which NorthStar Realty contributed to our Operating Partnership, on or prior to the effective date of the contribution agreement, as the case may be, our European Real Estate Business, as set forth in the contribution agreement and $250 million in cash (in addition to any cash currently at the underlying entities to be contributed to us). Any additional expenses incurred in connection with the Spin-off are paid by NorthStar Realty.
Item 14. Principal Accountant Fees and Services
Aggregate fees billed by PricewaterhouseCoopers our principal accountant, for the fiscal years ended December 31, 2017 and 2016 were as follows (dollars in thousands):
 
 
Years Ended December 31,
Type of Fee
 
2017
 
2016
Audit fees (1)
 
$
3,076

 
$
3,716

Audit-related fees
 
—

 
—

Tax fees
 
—

 
—

All other fees
 
—

 
—

Total
 
$
3,076

 
$
3,716

________________
(1)
Audit fees consisted principally of fees for the audit of our financial statements and registration statement-related services performed pursuant to SEC filing requirements and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
Fees for audit services for the fiscal years ended December 31, 2017 and 2016 include fees billed associated with the annual audits, the quarterly review of the Form 10-Q for the three month periods ended March 31, 2017, June 30, 2017, September 30, 2017, March 31, 2016, June 30, 2016 and September 30, 2016 and for other attest services, including issuance of consents and other documents filed by us with the SEC.

125

Audit Committee Pre-Approval Policy
In accordance with applicable laws and regulations, the Audit Committee reviews and pre-approves any audit and non-audit services to be performed by PricewaterhouseCoopers, Société coopérative to ensure that the work does not compromise its independence in performing audit services. The responsibility for pre-approval of audit and permitted non-audit services includes pre-approval of the fees for such services and the other terms of the engagement. The Audit Committee annually reviews and pre-approves all audit, audit-related, tax and all other services that are performed by our independent registered public accounting firm. The Audit Committee pre-approved all of the services listed in the table above. In some cases, the Audit Committee may pre-approve the provision of a particular category or group of services for up to a year, subject to a specified budget.

126

PART IV.

Item 15.   Exhibits and Financial Statements Schedules
(a) 1. Consolidated Financial Statements and (a) 2. Financial Statement Schedules are included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017 , 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017 , 2016 and 2015
Consolidated Statements of Equity for the years ended December 31, 2017 , 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017 , 2016 and 2015
Notes to the Consolidated Financial Statements
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2017

(a) 3. Exhibit Index:

127

Exhibit
Number
 
Description of Exhibit
2.1

 
3.1

 
3.2

 
10.1

*
10.2

*
10.3

 

10.4

 
10.5

 
10.6

 
10.7

 
10.8

 
10.9

 
10.10

+
10.11

+
12.1

*
21.1

*
23.1

*
24.1

*
31.1

*
31.2

*
32.1

*
32.2

*
99.1

*
101.0

*
The following materials from the NorthStar Realty Europe Corp. Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016; (ii) Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015; (iv) Consolidated Statements of Equity for the years ended December 31, 2017, 2016 and 2015; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015; and (vi) Notes to Consolidated Financial Statements
____________________________________________________________
* Filed herewith.
+ Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.


128

Item 16.   Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
NorthStar Realty Europe Corp.
Date:
March 13, 2018
 
By:
 
/s/ MAHBOD NIA
 
 
 
 
 
Name:
 
Mahbod Nia
 
 
 
 
 
Title:
 
Chief Executive Officer and President
 
 
 
 
 
 
 
 
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Keith A. Feldman and Trevor K. Ross and each of them severally, her or his true and lawful attorney-in-fact with power of substitution and re-substitution to sign in her or his name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as she or he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and her or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant in the capacities and on the dates indicated.
Signature
 
Title
 
Date
/s/ MAHBOD NIA
 
Chief Executive Officer and President
 
March 13, 2018
Mahbod Nia
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ KEITH A. FELDMAN
 
Chief Financial Officer and Treasurer
 
March 13, 2018
Keith A. Feldman
 
(Principal Financial Officer and Principal Accounting Officer)
 
 
 
 
 
 
 
/s/ RICHARD B. SALTZMAN
 
Chairman and Director
 
March 13, 2018
Richard B. Saltzman
 
 
 
 
 
 
 
 
 
/s/ JUDITH A. HANNAWAY
 
Director
 
March 13, 2018
Judith A. Hannaway
 
 
 
 
 
 
 
 
 
/s/ WESLEY D. MINAMI
 
Director
 
March 13, 2018
Wesley D. Minami
 
 
 
 
 
 
 
 
 
/s/ MARIO CHISHOLM
 
Director
 
March 13, 2018
Mario Chisholm
 
 
 
 
 
 
 
 
 
/s/ OSCAR JUNQUERA
 
Director
 
March 13, 2018
Oscar Junquera
 
 
 
 
 
 
 
 
 
/s/ DIANNE HURLEY
 
Director
 
March 13, 2018
Dianne Hurley
 
 
 
 

129
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