STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)

FOR THE THREE AND SIX MONTHS ENDED jUNE 30, 2019 (UNAUDITED)


			Accumulated		Noncontrolling
			Distributions	Total	Interest		Accumulated
	Common	Paid-in	in Excess of	Beneficial	Operating	Partially Owned	Comprehensive
	Shares	Capital	Earnings	Interest	Partnership	Properties	Income (Loss)	Total

	(in thousands)
BALANCE AT DECEMBER 31, 2018	8,967	$ 122,624	$ (24,741)	$ 97,883	$ 183,360	$ 2,538	$ (30)	$ 283,751
Shares/units redeemed	(11)	(197)	-	(197)	(629)	-	-	(826)
Dividends declared	-	-	(2,374)	(2,374)	(4,661)	-	-	(7,035)
Dividends reinvested - stock dividend	82	1,479	-	1,479	-	-	-	1,479
Issuance of shares under optional purchase plan	49	929	-	929	-	-	-	929
Change in fair value of interest rate swaps	-	-	-	-	-	-	4	4
Net income	-	-	1,288	1,288	2,532	(30)	-	3,790
Balance at March 31, 2019	9,087	$ 124,835	$ (25,827)	$ 99,008	$ 180,602	$ 2,508	$ (26)	$ 282,092
Shares/units redeemed	(9)	(154)	-	(154)	(273)	-	-	(427)
Dividends declared	-	-	(2,405)	(2,405)	(4,657)	-	-	(7,062)
Dividends reinvested - stock dividend	86	1,554	-	1,554	-	-	-	1,554
Issuance of shares under optional purchase plan	42	795	-	795	-	-	-	795
Change in fair value of interest rate swaps	-	-	-	-	-	-	3	3
Net income	-	-	1,647	1,647	3,191	(17)	-	4,821
BALANCE AT JUNE 30, 2019	9,206	$ 127,030	$ (26,585)	$ 100,445	$ 178,863	$ 2,491	$ (23)	$ 281,776

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH ~~FLOWS~~FLOWS

FOR THE ~~NINE~~SIX MONTHS ENDED ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (UNAUDITED)

Nine Months Ended

September 30,

2017

2016

(in thousands)
OPERATING ACTIVITIES

Net income

$
14,746

$
8,603
Adjustments to reconcile net income to net cash from operating activities

(Gain) loss on sale of real estate investments

(2,072)

316
Loss on sale of non-real estate investments

23

4
(Gain) loss on involuntary conversion

(189)

89
(Gain) on change in control of real estate investment

(2,186)

—
Loss on lease terminations

146

299
Equity in income of unconsolidated affiliates

(743)

(820)
Distributions of earnings of unconsolidated affiliates

80

816
Depreciation

14,270

13,882
Amortization

1,855

2,751
Amortization of debt issuance costs

561

517
Effects on operating cash flows due to changes in

Restricted deposits - tenant security deposits

(150)

(85)
Restricted deposits - real estate tax and insurance escrows

577

20
Due from related party

32

60
Receivables

(81)

(286)
Prepaid expenses

(430)

66
Other assets

24

135
Due to related party

(532)

(8)
Tenant security deposits payable

176

67
Accounts payable - trade

(96)

(561)
Accrued expenses and other liabilities

1,707

934
NET CASH PROVIDED BY OPERATING ACTIVITIES

27,718

26,799
INVESTING ACTIVITIES

Purchase of real estate investment properties

(3,718)

(7,352)
Capital expenditures and tenant improvements

(9,122)

(7,518)
Proceeds from sale of real estate investments

4,442

1,404
Restricted deposits - exchange escrow

(4,328)

—
Proceeds from involuntary conversion

1,937

915
Investment in unconsolidated affiliates

(294)

(67)
Distributions in excess of earnings received from unconsolidated affiliates

743

325
Restricted deposits - replacement reserve escrows

(952)

(819)
Notes receivable issued

—

(24)
Notes receivable payments received

642

7
NET CASH USED IN INVESTING ACTIVITIES

(10,650)

(13,129)
FINANCING ACTIVITIES

Payments for financing, debt issuance and lease costs

(442)

(431)
Principal payments on special assessments payable

(420)

(657)
Proceeds from issuance of mortgage notes payable and subordinated debt

23,916

20,271
Principal payments on mortgage notes payable

(16,632)

(9,857)
Advances on lines of credit

—

6,669
Payments on lines of credit

—

(6,669)
Proceeds from issuance of shares under optional purchase plan

2,192

1,599
Shares/units redeemed

(1,530)

(1,765)
Dividends/distributions paid

(15,195)

(13,126)
NET CASH USED IN FINANCING ACTIVITIES

(8,111)

(3,966)
NET CHANGE IN CASH AND CASH EQUIVALENTS

8,957

9,704
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

12,034

6,461
CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
20,991

$
16,165


	Six Months Ended
	June 30,
	2020		2019

	(in thousands)
OPERATING ACTIVITIES
Net income	$	11,624	$	8,611
Adjustments to reconcile net income to net cash from operating activities
Gain on sale of real estate investments		(1,456)		—
Gain on involuntary conversion		(52)		(329)
Equity in income of unconsolidated affiliates		(238)		(394)
Distributions of earnings of unconsolidated affiliates		238		394
Allowance for uncollectible accounts receivable		40		200
Depreciation		9,755		9,906
Amortization		733		959
Amortization of debt issuance costs		301		310
Effects on operating cash flows due to changes in
Other assets		1,976		1,136
Tenant security deposits payable		361		235
Accrued expenses and other liabilities		(1,761)		(1,892)
NET CASH PROVIDED BY OPERATING ACTIVITIES		21,521		19,136
INVESTING ACTIVITIES
Purchase of real estate investment properties		(375)		—
Capital expenditures and tenant improvements		(15,437)		(4,005)
Proceeds from sale of real estate investments and non-real estate investments		5,483		—
Proceeds from involuntary conversion		774		1,065
Investment in unconsolidated affiliates		(501)		—
Distributions in excess of earnings received from unconsolidated affiliates		141		50
Notes receivable issued		(763)		(1,006)
NET CASH USED IN INVESTING ACTIVITIES		(10,678)		(3,896)
FINANCING ACTIVITIES
Payments for financing, debt issuance and lease costs		(228)		—
Principal payments on special assessments payable		(290)		(239)
Proceeds from issuance of mortgage notes payable and subordinated debt		18,876		—
Principal payments on mortgage notes payable		(12,138)		(10,160)
Proceeds from issuance of shares under optional purchase plan		1,814		1,724
Shares/units redeemed		(2,485)		(1,253)
Dividends/distributions paid		(11,285)		(10,828)
NET CASH USED IN FINANCING ACTIVITIES		(5,736)		(20,756)
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS		5,107		(5,516)
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD		17,382		30,065
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD	$	22,489	$	24,549

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD
Cash and cash equivalents	$	8,697	$	16,617
Restricted deposits		13,792		7,932
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD	$	22,489	$	24,549

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE ~~NINE~~SIX MONTHS ENDED ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (UNAUDITED) ~~(Continued)~~

Nine Months Ended

September 30,

2017

2016

(in thousands)
SCHEDULE OF CASH FLOW INFORMATION

Cash paid during the period for interest, net of capitalized interest

$
13,954

$
13,776

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Dividends reinvested

$
3,836

$
3,543
Dividends declared and not paid

2,067

1,893
UPREIT distributions declared and not paid

4,336

3,912
UPREIT units converted to REIT common shares

133

435
Stock issued pursuant to trustee compensation plan

59

60
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT

14,378

16,940
Increase in land improvements due to increase in special assessments payable

1,141

772
Unrealized gain on interest rate swaps

57

28
Acquisition of assets with new financing

3,264

2,662
Acquisition of assets through assumption of debt and liabilities

1,367

78
Capitalized interest and real estate taxes related to construction in progress

126

66
Acquisition of assets with accounts payable

572

413
Acquisition of assets with 1031 exchange funds

4,278

—


	Six Months Ended
	June 30,
	2020		2019

	(in thousands)
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	8,297	$	9,024

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	$	3,192	$	3,033
Dividends declared and not paid		2,544		2,405
UPREIT distributions declared and not paid		4,828		4,657
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT		9,031		—
Increase in land improvements due to increase in special assessments payable		72		213
Unrealized (loss) gain on interest rate swaps		(2,108)		7
Acquisition of assets with new financing		3,225		—
Acquisition of assets through assumption of debt and liabilities		265		23
Capitalized interest and real estate taxes related to construction in progress		329		—

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

Note 1 - Organization

Sterling previously established an operating partnership (“Sterling Properties, LLLP”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner of Sterling Properties, LLLP, Sterling has management responsibility for all activities of the operating partnership. As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, Sterling owned approximately ~~32.28%~~34.51% and ~~32.41%~~34.63%, respectively, of the operating partnership.

NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2016,~~2019, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of ~~September~~June 30, ~~2017~~2020 and consolidated statements of operations and other comprehensive income, consolidated ~~statement~~statements of shareholders’ equity, and consolidated statements of cash flows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial statements as of and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2020 and 2019. These adjustments are of a normal recurring nature.

Principles of Consolidation

The consolidated financial statements include the accounts of Sterling, Sterling Properties, LLLP, and wholly-owned limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.

Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (“VIE”) for which we have both: a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

Principal Business Activity

Sterling currently owns directly and indirectly ~~164~~177 properties. The Trust’s ~~115~~131 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings. The Trust owns 4946 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska ~~Texas~~ and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently, the Trust’s mix of properties is ~~71.0%~~74.2% residential and ~~29.0%~~25.8% commercial (based on cost) and total ~~$648,856~~$671,477 in real estate investments at ~~September~~June 30, ~~2017. Effective January 1, 2016,~~2020. Sterling’s current acquisition strategy and primary focus is ~~solely~~ on multifamily apartment properties. We currently have no plans to ~~dispose of~~actively market our existing commercial ~~properties.~~properties for sale. We will consider unsolicited offers for purchase of non-multifamily properties on a case by case basis.


Residential Property	Location	No. of Properties	Units
	North Dakota	111	6,348
	Minnesota	16	3,033
	Missouri	1	164
	Nebraska	3	495
		131	10,040

Commercial Property	Location	No. of Properties	Sq. Ft
	North Dakota	20	780,000
	Arkansas	2	28,000
	Colorado	1	17,000
	Iowa	1	33,000
	Louisiana	1	15,000
	Michigan	1	12,000
	Minnesota	13	664,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		46	1,646,000

Residential Property

Location

No. of Properties

Units

North Dakota

96

5,828

Minnesota

16

3,027

Missouri

1

164

Nebraska

2

316

115

9,335

Commercial Property

Location

No. of Properties

Sq. Ft

North Dakota

20

805,000

Arkansas

2

29,000

Colorado

1

13,000

Iowa

1

33,000

Louisiana

1

15,000

Michigan

1

12,000

Minnesota

15

683,000

Mississippi

1

15,000

Nebraska

1

16,000

Texas

1

7,000

Wisconsin

5

63,000

49

1,691,000

Concentration of Credit Risk

Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Real Estate Investments

Real estate investments are recorded at cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred.

910

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

The ~~Company~~Trust allocates the purchase price of each acquired investment property accounted for as ~~a business combination~~an asset acquisition based upon the estimated acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, and (v) any assumed financing that is determined to be above or below market, ~~(vi) the value of customer relationships and (vii) goodwill,~~ if any. Transaction costs related to acquisitions accounted for as ~~business combinations~~asset acquisitions are ~~expensed~~capitalized as incurred and included ~~within “Administration of REIT expenses” in the~~

~~accompanying consolidated statements of operations and other comprehensive income.~~

~~The Company elected to early adopt ASU 2017-01, Business Combinations, on~~as a prospective basis as of July 1, 2017. This new guidance clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not considered a business and, thus, accounted for as an asset acquisition as opposed to a business combination. Refer to the “Recent Accounting Pronouncements” section within Note 2 to the consolidated financial statements. Under this new guidance, the Company expects most acquisitions of investment property will meet this screen and, thus, be accounted for as asset acquisitions. The Company allocates the purchase price of each acquired investment property that is accounted for as an asset acquisition based upon the relative fair valuecost of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, (v) any assumed financing that is determined to be above or below market and (vi)Building in the ~~value of customer relationships. Asset acquisitions do not give rise to goodwill and the related transaction costs are capitalized and included with the allocated purchase price.~~accompanying balance sheet.

For tangible assets acquired, including land, building and other improvements, the ~~Company~~Trust considers available comparable market and industry information in estimating fair value on the acquisition ~~date fair value.~~date. Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs. The ~~Company~~Trust allocates a portion of the purchase price to the estimated acquired in-place lease value intangibles based on factors available in third party appraisals or cash flow estimates of the property prepared by our internal analysis. These estimates are based upon cash flow projections for the property, existing leases, lease origination costs for similar leases as well as lost rental payments during an assumed lease-up period. The ~~Company~~Trust also evaluates each acquired lease as compared to current market rates. If an acquired lease is determined to be above or below market, the ~~Company~~Trust allocates a portion of the purchase price to such above or below market leases based upon the present value of the difference between the contractual lease payments and estimated market rent payments over the remaining lease term. Renewal periods are included within the lease term in the calculation of above and below market lease values if, based upon factors known at the acquisition date, market participants would consider it reasonably assured that the lessee would exercise such options. Fair value estimates used in acquisition accounting, including the discount rate used, require the ~~Company~~Trust to consider various factors, including, but not limited to, market knowledge, demographics, age and physical condition of the property, geographic location, and size and location of tenant spaces within the acquired investment property.

The portion of the purchase price allocated to acquired in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The ~~Company~~Trust incurred amortization expense pertaining to acquired ~~inplace~~in-place lease value intangibles of ~~$370~~$315 and ~~$459~~$418 for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively and ~~$1,141~~$656 and ~~$1,567~~$847 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

The portion of the purchase price allocated to acquired above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to real estate rental income. Amortization pertaining to above market lease intangibles of ~~$56~~$47 and ~~$57~~$54 for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively, was recorded as a reduction to ~~income from~~real estate rental ~~operations.~~income. Amortization pertaining to below market lease intangibles of ~~$70~~$54 and ~~$78~~$66 for

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively, was recorded as an increase to ~~income from~~real estate rental ~~operations.~~income. Amortization pertaining to above market lease intangibles of ~~$169~~$99 and ~~$174~~$107 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively, was recorded as a reduction to ~~income from~~real estate rental ~~operations.~~income. Amortization pertaining to below market lease intangibles of ~~$214~~$110 and ~~$253~~$133 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively, was recorded as an increase to ~~income from~~real estate rental ~~operations.~~income.

Furniture and fixtures are stated at cost less accumulated depreciation. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expense as incurred.

Table of ~~September~~Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, ~~2017, we were~~2020 and 2019 (UNAUDITED)

(Dollar amounts in ~~compliance with all covenants.~~thousands, except share and per share data)

NOTE 86 - MORTGAGE NOTES PAYABLE

The following table summarizes the ~~Company’s~~Trust’s mortgage notes payable.


	Principal Balance At
	June 30,		December 31,
	2020		2019

	(in thousands)
Fixed rate mortgage notes payable (a)	$	405,001	$	395,038
Less unamortized debt issuance costs		1,833		1,874
	$	403,168	$	393,164

Principal Balance At

September 30,

December 31,

2017

2016

(in thousands)
Fixed rate mortgage notes payable (a)

$
405,355

$
393,511
Less unamortized debt issuance costs

2,890

3,032

$
402,465

$
390,479

(a)

~~(a)~~

Includes ~~$2,975~~$26,205 and ~~$3,056~~$12,960 of variable rate mortgage debt that was swapped to a fixed rate at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively.

As of ~~September~~June 30, ~~2017,~~2020, we had ~~127~~122 mortgage loans with effective interest rates ranging from ~~2.57%~~2.43% to 6.85% per annum and a weighted average effective interest rate of 4.18% per annum.

As of December 31, 2019, we had 121 mortgage loans with effective interest rates ranging from 3.15% to 7.25% per annum, and a weighted average effective interest rate of ~~4.25%~~4.31% per annum.

~~As of December 31, 2016, we had 116 mortgage loans with effective interest rates ranging from 2.57% to 7.25% per annum, and a weighted average effective interest rate of 4.43% per annum.~~

The majority of the ~~Company’s~~Trust’s mortgages payable require monthly payments of principal and interest. Certain mortgages require reserves for real estate taxes and certain other costs. Mortgages are secured by the respective properties, assignment of rents, business assets, deeds to secure debt, deeds of trust and/or cash deposits.

Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. We are not required to determine compliance with our covenants as of June 30, 2020; however, we have not received any notice of non-compliance with our covenants through the date of this filing. As of December 31, ~~2016, five~~2019, 10 loans on residential properties were out of compliance with annual loan covenants due to various unit renovation and parking lot repair and maintenance ~~costs.~~costs, bad debts and increased vacancies in the North Dakota markets. The loans were secured by properties located in Bismarck, Fargo and ~~Bismarck,~~Grand Forks, North Dakota with a total outstanding balance of ~~$8,336~~$16,361 at December 31, ~~2016.~~2019. Annual waivers ~~have been~~were received from the ~~lenders. As~~lenders on $10,435 of ~~September 30, 2017, we~~the loans out of compliance. Annual waivers were not received from 1 lender on loans with a balance of $5,926. The Trust elected to pay the loans off in ~~compliance~~March 2020 with ~~all covenants.~~ no penalty.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

We are required to make the following principal payments on our outstanding mortgage notes payable for each of the five succeeding fiscal years and thereafter as follows:



Years ending December 31,	Amount		Amount
	(in thousands)
2017 (October 1, 2017 to December 31, 2017)	$	5,000
2018		20,095
2019		25,322
2020		28,001
			(in thousands)
2020 (July 1, 2020 - December 31, 2020)			$	11,468
2021		45,897		31,705
2022				27,435
2023				50,228
2024				17,662
Thereafter		281,040		266,503
Total payments	$	405,355	$	405,001

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

NOTE 97 – DERIVATIVES AND HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we have used derivative instruments to ~~minimize significant unanticipated earnings fluctuations that may arise from rising variable~~manage our exposure to interest rate ~~costs associated with existing borrowings. To meet these objectives, we have entered into~~movements and add stability to interest expense. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Trust making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.

As of June 30, 2020, the Trust used 7 interest rate swaps to hedge the variable cash flows associated with variable rate debt. Changes in fair value of the derivatives that are designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive loss and are reclassified into interest expense as interest payments are made on the Trust’s variable rate debt. Over the next six months, the Trust estimates that an additional $160 will be reclassified as a $160 increase to interest expense.

The following table summarizes the Trust’s interest rate swaps as of June 30, 2020, which effectively convert on month floating rate LIBOR to a fixed rate:

The following table summarizes the Trust’s interest rate swaps that were designated as cash flow hedges of interest rate risk:


			Fixed
Effective Date		Notional	Interest Rate	Maturity Date
April 15, 2005	$	—	7.25%	April 15, 2020
November 1, 2019	$	7,073	3.15%	November 1, 2029
November 1, 2019	$	4,913	3.28%	November 1, 2029
January 10, 2020	$	3,191	3.39%	January 10, 2030
June 12, 2020	$	1,600	3.07%	June 15, 2030
June 12, 2020	$	3,100	3.07%	June 15, 2030
June 15, 2020	$	1,736	2.94%	June 15, 2030
June 15, 2020	$	4,592	2.94%	June 15, 2030

The following table summarizes the Trust’s interest rate swaps that were designated as cash flow hedges of interest rate risk:


	Number of Instruments			Notional
Interest Rate Derivatives	June 30, 2020	December 31, 2019		June 30, 2020		December 31, 2019
Interest rate swaps	7	3	$	26,205	$	12,960

The table below presents the estimated fair value of the Trust’s derivative financial instruments as well as their classification in the ~~notional amount~~accompanying consolidated balance sheets. The valuation techniques are described in Note 8 to the consolidated financial statements.


	Derivatives
Derivatives designated as	June 30, 2020			December 31, 2019
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	—	Other assets, net	$	58
Interest rate swaps	Accrued expenses and other liabilities	$	2,071	Accrued expenses and other liabilities	$	21

Table of ~~$1,294~~Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and ~~$2,450 to provide a fixed rate of 7.25%~~2019 (UNAUDITED)

(Dollar amounts in thousands, except share and ~~2.57%, respectively. The swaps mature in April 2020 and December 2017, respectively. The swaps were issued at approximate market terms and thus no fair value adjustment was recorded at inception.~~per share data)

The carrying amount of the swaps have been adjusted to their fair ~~values~~value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting a liability for the fair value of the future net payments forecasted under the ~~swaps.~~swap. The interest rate ~~swaps are~~swap is accounted for as an effective ~~hedges~~hedge in accordance with ASC 815-20 whereby ~~they are~~it is recorded at fair value and changes in fair value are recorded to ~~accumulated~~ comprehensive income. The following table presents the effect of the Trust’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the quarters ended June 30, 2020 and 2019:




			Location of Gain
		Amount of (Gain)/Loss	Reclassified from		Amount of (Gain)/Loss
Derivatives in		Recognized in Other	Accumulated other		Reclassified from
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		AOCI into income
Relationships		on Derivatives	(AOCI) into Income		Six Months Ended
		2020			2020
Interest rate swaps	$	2,108	Interest expense	$	55
		2019			2019
Interest rate swaps	$	(7)	Interest expense	$	15

Credit-risk-related Contingent Features

The Trust has agreements with each of its derivative counterparties that contain a provision whereby if the Trust defaults on the related indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Trust could also be declared in default on its corresponding derivative obligation.

The Trust’s agreements with each of its derivative counterparties also contain a provision whereby if the Trust consolidates with, merges with or into, or transfers all or substantially all of its assets to another entity and the creditworthiness of the resulting, surviving or transferee entity, is materially weaker than the Trust’s, the counterparty has the right to terminate the derivative obligations. As of ~~September~~June 30, ~~2017 and December 31, 2016, we recorded~~2020, the termination value of derivatives in a liability position, which includes accrued interest and ~~other accumulated comprehensive loss~~adjustment for non-performance risk, which the Trust has deemed not significant, was $2,071. As of ~~$88~~June 30, 2020, the Trust has pledged the properties related to the loans which are hedged as collateral. As of June 30, 2020, if the Trust had breached any of these provisions it could have been required to settle its obligations under the agreements at their termination value of $2,071.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and ~~$145, respectively.~~2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

NOTE 108 - FAIR VALUE MEASUREMENT

The following table presents the carrying value and estimated fair value of the ~~Company’s~~Trust’s financial instruments:


									June 30, 2020				December 31, 2019
									Carrying				Carrying
									Value		Fair Value		Value		Fair Value

	September 30, 2017				December 31, 2016
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
	(in thousands)
									(in thousands)
Financial assets:
Note receivable									$	2,063	$	2,191	$	1,300	$	1,389
Derivative assets									$	—	$	—	$	58	$	58

Financial liabilities:
Mortgage notes payable, net	$	402,465	$	402,866	$	390,479	$	402,015	$	403,168	$	440,115	$	393,164	$	415,183
Fair value of interest rate swaps	$	88	$	88	$	145	$	145
Derivative liabilities									$	2,071	$	2,071	$	21	$	21

The carrying values shown in the table are included in the consolidated balance sheets under the indicated captions.

ASC 820-10 established a three-level valuation hierarchy for fair value measurement. Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

These two types of inputs create the following fair value hierarchy:

●

Level 1 – Quoted prices for identical instruments in active markets;

●

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable;

●

Level 3 – Instruments whose significant inputs are unobservable.

The guidance requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following table presents the ~~Company’s~~Trust’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.


	Level 1		Level 2		Level 3		Total

	(in thousands)
June 30, 2020
Derivative liabilities	$	—	$	2,071	$	—	$	2,071
December 31, 2019
Derivative assets	$	—	$	58	$		$	58
Derivative liabilities	$	—	$	21	$	—	$	21

Level 1

Level 2

Level 3

Total

(in thousands)
September 30, 2017

Fair value of interest rate swaps

$
—

$
88

$
—

$
88
December 31, 2016

Fair value of interest rate swaps

$
—

$
145

$
—

$
145

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~~Fair value of interest rate swaps:~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

Derivatives: The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The ~~Company~~Trust also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

Although the ~~Company~~Trust has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~,2019, the ~~Company~~Trust has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the ~~Company~~Trust has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the ~~Company~~Trust has considered any applicable credit enhancements. The ~~Company’s~~Trust’s derivative instruments are further described in Note 9.7.

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~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

Fair Value Disclosures

The following table presents the ~~Company’s~~Trust’s financial assets and liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.

Level 1

Level 2

Level 3

Total

(in thousands)
September 30, 2017

Mortgage notes payable, net

$
—

$
—

$
402,866

$
402,866
December 31, 2016

Mortgage notes payable, net

$
—

$
—

$
402,015

$
402,015


	Level 1		Level 2		Level 3		Total

	(in thousands)
June 30, 2020
Mortgage notes payable, net	$	—	$	—	$	440,115	$	440,115
Note receivable	$	—	$	—	$	2,191	$	2,191
December 31, 2019
Mortgage notes payable, net	$	—	$	—	$	415,183	$	415,183
Note receivable	$	—	$	—	$	1,389	$	1,389

Mortgage notes payable: The ~~Company~~Trust estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the ~~Company~~Trust for similar debt instruments of comparable maturities by the ~~Company’s~~Trust’s lenders. Judgment is used in determining the appropriate rate for each of the ~~Company’s~~Trust’s individual mortgages and notes payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from ~~4.50%~~3.00% to ~~4.60%~~3.10% and from ~~4.00%~~3.75% to ~~4.35%~~3.80% at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~,2019, respectively. The fair value of the ~~Company’s~~Trust’s matured mortgage notes payable were determined to be equal to the carrying value of the properties because there is no market for similar debt instruments and the properties’ carrying value was determined to be the best estimate of fair value as of ~~September~~June 30, ~~2017.~~2020 and December 31, 2019. The ~~Company’s~~Trust’s mortgage notes payable are further described in Note 8.6.

Notes receivable: The Trust estimates the fair value of its notes receivable by discounting the future cash flows of each note at rates currently offered to the Trust for debt instruments. Judgment is used in determining the appropriate rate for each of the Trust’s individual note receivable based upon the specific terms of the agreement, including the term to maturity, and the quality and nature of the individual note. The rates used range from 3.00% to 3.10% and from 3.75% to 3.80% at June 30, 2020 and December 31, 2019, respectively.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

NOTE 119 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, outstanding limited partnership units totaled ~~17,520,000~~18,239,000 and ~~16,688,000~~17,811,000 respectively. ~~As of September~~For the three months ended June 30, ~~2017~~2020 and ~~2016,~~2019, the operating partnership declared distributions of ~~$4,336~~$4,828 and ~~$3,912~~$4,657 respectively, to limited partners which were paid on ~~October 16, 2017~~July 15, 2020 and ~~October 17, 2016,~~2019, respectively. Distributions per unit were ~~$0.7425~~$0.5294 and ~~$0.7200~~$0.5225 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017, Sterling exchanged 8,000 common shares for 8,000~~2020 and 2019 there were 0 limited partnership units ~~held by limited partners,~~exchanged for common shares pursuant to redemption requests. ~~The aggregate value of these transactions was $133.~~

At the sole and absolute discretion of the limited partnership, and so long as our redemption plans ~~exists~~exist, and applicable holding periods are met,Limited Partners may request the operating partnership redeem their limited partnership units. The operating partnership may choose to offer the Limited Partner: (i) cash for the redemption or, at the request of the Limited Partner, (2) offer shares in lieu of cash for the redemption on a basis of ~~one~~1 limited partnership unit for one Sterling common share (the “Exchange Request”). The Exchange Request shall be exercised pursuant to a Notice of Exchange. If the issuance of Sterling common shares pursuant to an Exchange Request will cause the shareholder to exceed the ownership limitations, among other reasons, payment will be made to the Limited Partner in cash. No Limited Partner may exercise an Exchange Request more than twice during any calendar year, and Exchange Requests may not be made for less than 1,000 limited partnership units. If a Limited Partner owns fewer than 1,000 limited partnership units, all of the limited partnership units held by the Limited Partner must be exchanged pursuant to the Exchange Request.

NOTE 1210 – REDEMPTION PLANS

Our Board of Trustees has approved redemption plans that enable our shareholders to sell their common shares and the partners of our operating partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans.

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~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is ~~$30,000~~$40,000 worth of securities. Currently, the fixed redemption price is ~~$15.50~~$18.25 per share or unit under the plans, which price became effective ~~March 29, 2017.~~January 1, 2020. Prior to January 1, 2020, the redemption price was $18.00 per share or unit under the plan.

We may redeem securities under the plans provided that the aggregate total has not been exceeded and we have sufficient funds to do so. The plans will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plans, either or both of them, if it determines to do so in its sole discretion.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020 and 2019, the ~~Company~~Trust redeemed ~~41,000~~95,000 and 20,000 common shares valued at ~~$634.~~$1,735 and $351. In addition, during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020 and 2019, the ~~Company~~Trust redeemed ~~58,000~~41,000 and 50,000 units valued at ~~$896.~~$750 and $902.

NOTE 1311 – BENEFICIAL INTEREST

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the entire beneficial interest of Sterling. As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, there were ~~8,353,000~~9,610,000 and ~~8,001,000~~9,436,000 common shares outstanding, respectively. We had no0 preferred shares outstanding as of either date.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

Dividends paid to holders of common shares were ~~$0.7425~~$0.5294 per share and ~~$0.7200~~$0.5225 per share for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively. As of June 30, 2020 and 2019, the operating partnership declared dividends of $2,544 and $2,405 respectively, to holders of commons shares which were paid on July 15, 2020 and 2019, respectively.

NOTE 1412 – DIVIDEND REINVESTMENT PLAN

Our Board of Trustees approved a dividend reinvestment plan to provide existing holders of our common shares with a convenient method to purchase additional common shares without payment of brokerage commissions, fees or service charges. On July 20, 2012, we registered with the Securities Exchange Commission 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on July 20, 2012. On July 11, 2017, we registered with the Securities Exchange Commission an additional 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on July 11, 2017. On June 25, 2020 our Board of Trustees approved of an additional 2,000,000 common shares to be issued under the dividend reinvestment plan. We plan to file a Form S-3D registration statement to register the additional shares with the Securities and Exchange Commission in the near future.

Under this plan, eligible shareholders may elect to have all or a portion (but not less than 25%) of the cash dividends they receive automatically reinvested in our common shares. If an eligible shareholder elects to reinvest cash dividends under the plan, the shareholder may also make additional optional cash purchases of our common shares, not to exceed $10 per fiscal quarter without our prior approval. The purchase price per common share under the plan equals 95% of the estimated value per common share for dividend reinvestments and equals 100% of the estimated value per common share for additional optional cash purchases, as determined by our Board of Trustees. In addition, eligible shareholders may not in any calendar year purchase or receive via transfer more than $40 additional optional cash purchases of Common Shares.

The estimated value per common share was ~~$16.50~~$19.25 and ~~$16.00~~$19.00 at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. See discussion of determination of estimated value in Note ~~18.~~16.

Therefore, the purchase price per common share for dividend reinvestments was ~~$15.68~~$18.29 and ~~$15.20~~$18.05 and for additional optional cash purchases was ~~$16.50~~$19.25 and ~~$16.00~~$19.00 at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ~~ten day~~ten-day notice to participants.

In the ~~nine~~six months ended ~~September~~June 30, ~~2017, 247,000~~2020, 175,000 shares were issued pursuant to dividend reinvestments and ~~134,000~~94,000 shares were issued pursuant to additional optional cash purchases under the ~~plan.~~plan, valued at $3,192 and $1,814 respectively. In the six months ended June 30, 2019, 168,000 shares were issued pursuant to dividend reinvestments and 91,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at $3,033 and $1,724 respectively.

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~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

NOTE 1513 – RELATED PARTY TRANSACTIONS

Property Management Fees

During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, we paid property management fees and administrative fees to GOLDMARK Property Management, ~~in an amount equal to 5% of rents of the properties managed by GOLDMARK.~~Inc. GOLDMARK Property Management is owned in part by Kenneth Regan, James Wieland and ~~James Wieland.~~Joel Thomsen. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, we paid management fees, on-site staff costs and other miscellaneous fees required to run the property of ~~$8,510~~$6,411 and ~~$7,411,~~$6,313, respectively, to GOLDMARK Property ~~Management.~~Management, Inc. Management fees paid during the six months ended June 30, 2020 and 2019, approximated 5% of net collected rents. In addition, during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, we paid repair and maintenance related payroll and payroll related expenses to GOLDMARK Property Management totaling ~~$3,808~~$3,082 and ~~$3,554,~~$3,118, respectively.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

Board of Trustee Fees

We incurred Trustee fees of ~~$44~~$35 and ~~$46~~$29 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively. As of ~~September~~June 30, ~~2017,~~2020, and December 31, ~~2016~~2019 we owed our Trustees ~~$12~~$64 and ~~$26~~$29 for unpaid board of trustee fees, respectively. There is no cash retainer paid to Trustees. Instead, we pay Trustees specific amounts for meetings attended.

The plan provides:



Board Chairman – Board Meeting			105 shares/meeting
Trustee – Board Meeting			75 shares/meeting
Committee Chair – Committee Meeting			30 shares/meeting
Trustee – Committee Meeting			30 shares/meeting

Common shares earned in accordance with the plan are calculated on an annual basis. Shares earned pursuant to the Trustee Compensation Plan are issued on or about July 15 for Trustees’ prior year of service. Non-independent Trustees are not compensated for their service on the Board or Committees.

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have no0 paid employees. The following is a brief description of the current fees and compensation that may be received by the Advisor under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on ~~April 6, 2017,~~March 26, 2020, effective ~~January 1, 2017.~~until March 31, 2021.

Management Fee: 0.35% of our total assets (before depreciation and amortization), annually. Total assets are our gross assets (before depreciation and amortization) as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.

During the six months ended June 30, 2020 and 2019, we incurred advisory management fees of $1,538 and $1,496 with Sterling Management, LLC, our Advisor. As of June 30, 2020 and December 31, 2019, we owed our Advisor $260 and $503, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations. During the six months ended June 30, 2020 and 2019, we reimbursed the Advisor for operating costs totaling $5 and $22, respectively. As of June 30, 2020, we owed our Advisor $5 for reimbursed operating costs.

Acquisition Fee: For its services in investigating and negotiating acquisitions of investments for us, the Advisor receives an acquisition fee of 2.5% of the purchase price of each property acquired, capped at $375 per acquisition. The total of all acquisition fees and acquisition expenses cannot exceed 6% of the purchase price of the investment, unless approved by a

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.

During the six months ended June 30, 2020, we incurred acquisition fees of $302 with our Advisor. During the six months ended June 30, 2019 there were 0 acquisition fees incurred with our Advisor. There were 0 acquisition fees owed to our Advisor as of June 30, 2020 or December 31, 2019.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

Disposition Fee: For its services in the effort to sell any investment for us, the Advisor receives a disposition fee of 2.5% of the sales price of each property disposition, capped at $375 per disposition.

During the six months ended June 30, 2020, we incurred $141 in disposition fees with our Advisor. During the six months ended June 30, 2019, there were 0 disposition fees incurred with our Advisor. See Note 15. There were 0 disposition fees owed to our Advisor as of June 30, 2020 or December 31, 2019.

Financing Fee: 0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility. The finance fee shall be capped at $38 per loan, refinance, line of credit or other credit facility.

During the six months ended June 30, 2020, we incurred financing fees of $61 with our Advisor. During the six months ended June 30, 2019, there were 0 financing fees incurred with our Advisor. As of June 30, 2020, we owed our Advisor $35 for unpaid financing fees. There were 0 financing fees owed to our Advisor as of December 31, 2019.

Project Management Fee: 6% of all completed capital improvement projects on the real estate investments owned by the Trust are paid to the Advisor.

During the six months ended June 30, 2020, there were $76 in project management fees incurred with our Advisor for capital improvement projects. As of June 30, 2020, we owed our Advisor $11 for unpaid project management fees.

Development Fee: Based on regressive sliding scale (starting at 5% and declining to 3%) of total project costs, excluding cost of land, for development services requested by us.


Total Cost	Fee		Range of Fee	Formula
0 – 10M	5.0	%	0 –.5M	0M – 5.0% x (TC – 0M)
10M - 20M	4.5	%	.5 M – .95M	.50M – 4.5% x (TC – 10M)
20M – 30M	4.0	%	.95 M – 1.35M	.95M – 4.0% x (TC – 20M)
30M – 40M	3.5	%	1.35 M – 1.70M	1.35M – 3.5% x (TC – 30M)
40M – 50M	3.0	%	1.70 M – 2.00M	1.70M – 3.0% x (TC – 40M)

TC = Total Project Cost

~~Management Fees~~

During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and 2016, we incurred advisory management fees of $2,114 and $1,971 with Sterling Management, LLC, our Advisor. As of September 30, 2017 and December 31, 2016, we owed our Advisor $240 and $226, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations. During the nine months ended September 30, 2017 and 2016, we reimbursed the Advisor for operating costs totaling $11 and $3, respectively.

~~Acquisition Fees~~

~~During the nine months ended September 30, 2017 and 2016, we incurred acquisition fees of $655 and $680, respectively, with our Advisor. There~~2019, there were ~~no acquisition fees owed to our Advisor as of September 30, 2017. As of December 31, 2016, we owed our Advisor $226 for unpaid acquisition fees.~~

~~Financing Fees~~

During the nine months ended September 30, 2017 and 2016, we incurred financing fees of $97 and $68 with our Advisor for loan financing and refinancing activities. There were no financing fees owed to our Advisor as of September 30, 2017. As of December 31, 2016, we owed our Advisor $23 for unpaid financing fees.

~~Disposition Fees~~

During the nine months ended September 30, 2017 and 2016, we incurred $110 and $35 in disposition fees with our Advisor, respectively. See Note 17. There were no disposition fees owed to our Advisor as of September 30, 2017 or December 31, 2016.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

~~Development Fees~~

~~During the nine months ended September 30, 2017 and 2016, we incurred $235 and $107 in~~0 development fees incurred with our Advisor. During the six months ended June 30, 2020, our Advisor ~~respectively.~~decided to forgo the $104 portion of held back development fees related to the Stonefield development project which was recognized as a reduction in building and improvements. As of ~~September~~June 30, ~~2017 and~~2020, there were 0 unpaid development fees owed to our Advisor. As of December 31, ~~2016,~~2019, we owed our Advisor a total of ~~$114 and $82~~$104 for unpaid development fees, of which ~~$104 and $81 were~~the entire amount was for unpaid development fees as part of a 10% hold back ~~respectively.~~with respect to the Stonefield development project.

Operating Partnership Units Issued in Connection with Acquisitions

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we issued directly or indirectly ~~899,000 operating partnership units. During this period, 402,000 of the~~176,000 operating partnership units ~~issued were issued~~ to entities affiliated with Messrs. Regan and Wieland, two of our trustees, and Messr. Swenson, one of our former officers, in connection with the acquisition of various properties. The aggregate value of these units was $6,425.

During the nine months ended September 30, 2016, we issued directly or indirectly 1,086,000 operating partnership units. During this period, 458,000 operating partnership units issued were issued to entitiesan entity affiliated with Messrs. Regan and Wieland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was ~~$7,167.~~$3,373.

~~Commissions~~

During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, there were 0 operating partnership units issued directly or indirectly, to affiliated entities.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and ~~2016,~~2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

Commissions

During the six months ended June 30, 2020, we incurred real estate commissions of ~~$549 and $692, respectively, owed~~$324, to GOLDMARK Commercial Real Estate Services, Inc. ~~(f/k/a GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc.)~~, which is controlled by Messrs. Regan and Wieland. During the six months ended June 30, 2019, there were 0 commissions incurred. There were no0 outstanding commissions owed as of ~~September~~June 30, ~~2017 and~~2020 or December 31, ~~2016.~~2019.

Rental Income

During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, we received rental income of ~~$166~~$46 and ~~$161,~~$25, respectively, under an operating lease agreement with ~~GOLDMARK Property Management.~~our Advisor.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, we received rental income of ~~$41~~$28 and ~~$39,~~$28, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate Services, Inc.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, we received rental income of ~~$34~~$130 and ~~$34,~~$115, respectively, under operating lease agreements with ~~our Advisor.~~GOLDMARK Property Management.

~~Construction Costs~~Other Operational Liabilities

During the three months ended June 30, 2020, the Trust incurred general operational liabilities related to business operations as well as costs incurred related to capital expenditures due to related parties. As of ~~September~~the three months ended June 30, 2017, since the project’s inception, we incurred total costs of $8,997 related to the construction of Phase II of the Bismarck, North Dakota development project which consists of a clubhouse and six 6-plex two-story townhomes to GOLDMARK Development, which is owned by Messers. Regan and Wieland. As of September 30, 2017,2020, we owed ~~GOLDMARK Development $391 for retainage and $251 for unpaid construction fees.~~our Advisor $323.

As of December 31, 2016, since the project’s inception through its completion in 2015, we incurred total costs of $5,767 related to the construction of Phase II of the Bismarck, North Dakota development project which consists of a clubhouse and six 6-plex two-story townhomes to GOLDMARK Development, which is controlled by Messrs. Regan and Wieland. As of December 31, 2016, we owed GOLDMARK Development $288 for retainage and $398 for unpaid construction fees.

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~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

NOTE 1614 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

Federal law (and the laws of some states in which we own or may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by us, we could incur liability for the removal of the substances and the cleanup of the property.

There can be no assurance that we would have effective remedies against prior owners of the property. In addition, we may be liable to tenants and may find it difficult or impossible to sell the property either prior to or following such a cleanup.

Risk of Uninsured Property Losses

We maintain property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornados, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) we may suffer a loss of profits which might be anticipated from one or more properties.

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~~Litigation~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and 2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

Litigation

The ~~Company~~Trust is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the financial statements of the ~~Company.~~Trust.

Significant Risks and Uncertainties

The Trust continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact its tenants and business partners. While the Trust did not incur significant disruptions during the six months ended June 30, 2020 from the COVID-19 pandemic, it is unable to predict the impact that the COVID-19 pandemic will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.

During the quarter ended June 30, 2020, the Trust received certain rent relief requests as a result of COVID-19. These requests were received principally from office tenants and most often in the form of rent deferral requests. Few rental defaults have occurred to date and the Trust is pursuing legal remedies as to these amounts which are not material in the aggregate. The Trust will continue to evaluate any further tenant rent relief requests on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modification agreements, nor will the Trust forgo its contractual rights under its lease agreements.

NOTE 1715 – DISPOSITIONS

During ~~September 2016,~~ the ~~Company entered into a purchase agreement to sell~~six months ended June 30, 2020, the operating partnership sold 2 properties. We sold a retail property located in ~~Fargo, North Dakota. This property qualified~~Apple Valley, Minnesota, for held for sale accounting treatment upon meeting all applicable GAAP criteria on or prior to September 30, 2016, at which time depreciation and amortization ceased. As such, the assets and liabilities associated with this property were separately classified as held for sale in the consolidated balance sheet as of December 31, 2016. During the second quarter ended June 30, 2017, the operating partnership sold the Fargo, North Dakota retail property for approximately $4,400$3,670 and recognized a gain of ~~$2,072.~~

$1,455 in March 2020. We sold an office property located in St. Cloud, Minnesota, for $2,050 and recognized a gain of $1 in May 2020. During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, the operating partnership ~~sold a medical property in Eau Claire, Wisconsin for approximately $1,400 and recognized a loss~~did not dispose of ~~$316.~~any properties.

NOTE 16 – ACQUISITIONS

The Trust closed on the following acquisitions during the six months ended June 30, 2020.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

1/12/20

Wolf Creek

Fargo, ND

Apartment complex

54 units

4,968

1/31/20

Columbia Park Village

Grand Forks, ND

Apartment complex

12 units

612

3/1/20

Belmont East & West

Bismarck, ND

Apartment complex

26 units

1,494

3/1/20

Eastbrook

Bismarck, ND

Apartment complex

24 units

1,296

3/1/20

Hawn

Fargo, ND

Apartment complex

48 units

2,400

3/1/20

Rosser

Bismarck, ND

Apartment complex

24 units

1,296

12,066

(a)

Acquisition price does not include capitalized closing costs and adjustments totaling $636, special assessments assumed and capitalized of $168 or additional costs incurred due to a difference in unit price of $26.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per share data)

~~The following table presents the assets and liabilities associated with the investment properties held for sale:~~

September 30,

December 31,

2017

2016

(in thousands)
ASSETS

Real estate investments

$
—

$
2,365
Restricted deposits and funded reserves

—

22
Receivables

—

25
Notes receivable

—

42
Financing and lease costs, less accumulated amortization of $87 in 2016

—

28

Total Assets

$
—

$
2,482

LIABILITIES

Special assessments payable

$
—

$
103
Tenant security deposits payable

—

22

Total Liabilities

$
—

$
125

~~NOTE 18 – ACQUISITIONS~~

~~The Company closed on the following acquisitions during the nine months ended September 30, 2017:~~

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

Prorata Acquisition Price

1/10/17

Sargent Apartments

Fargo, ND

Apartment complex

36 units

$
1,710

$
1,710
1/11/17

Arrowhead Apartments

Grand Forks, ND

Apartment complex

82 units

5,494

5,494
1/17/17

West Oak Apartments

Fargo, ND

Apartment complex

18 units

777

777
1/17/17

Carr Apartments

Fargo, ND

Apartment complex

18 units

828

828
5/1/17

Plumtree Apartments

Fargo, ND

Apartment complex

18 units

907

907
5/1/17

Sunchase Apartments

Fargo, ND

Apartment complex

36 units

1,765

1,765
6/1/17

Essex Apartments

Fargo, ND

Apartment complex

18 units

858

858
6/1/17

Jadestone Apartments

Fargo, ND

Apartment complex

18 units

809

809
6/1/17

Park Circle Apartments

Fargo, ND

Apartment complex

18 units

903

903
7/3/17

East Bridge Apartments (a)

Fargo, ND

Apartment complex

58 units

6,060

6,060

$
20,111

$
20,111

~~(a)~~

~~This property was acquired utilizing Internal Revenue Code 1031 tax-deferred exchange funds.~~

Total consideration given for acquisitions through ~~September~~June 30, ~~2017~~2020 was completed through issuing approximately ~~603,000~~469,000 limited partnership units of the operating partnership valued at ~~$16.00~~$19.25 per unit for an aggregate consideration of approximately ~~$9,651, 1031 tax-deferred exchange funds of $4,278, new loans of $2,392,~~$9,031, assumed liabilities of ~~$72~~$265, a mortgage of $3,225 and cash of ~~$3,718.~~$375. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

In addition, as of May 1, 2017, the operating partnership acquired the remaining 59.74% ownership interest in a 144 unit property which was previously held as tenant in common (See Note 2). We estimated the property had a fair value of

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~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

approximately $10,080. The operating partnership assumed a loan of $1,295 and issued $4,727 of limited partnership units for a total purchase price of approximately $6,022. The Company accounted for this as a business combination and recognized a gain on change in control of real estate investment of $2,186 in the second quarter of 2017 as a result of remeasuring the carrying value to fair value. The total loan on this property was $2,167, thus in addition to the portion of the loan assumed from the other tenant in common, the Company also recorded an additional $872 in new financing related to this acquisition.

The ~~Company closed on the following~~Trust had 0 acquisitions during the ~~nine~~six months ended ~~September~~June 30, ~~2016:~~2019.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

Prorata Acquisition Price

1/29/16

Titan Machinery

North Platte, NE

Implement dealership

16,480 sq. ft.

$
1,769

$
1,769
2/1/16

Bristol Park Apartments

Grand Forks, ND

Apartment complex

80 units

5,050

5,050
2/1/16

Redpath

White Bear Lake, MN

Office building

25,817 sq. ft.

4,000

4,000
3/1/16

Eagle Sky I Apartments

Bismarck, ND

Apartment complex

20 units

1,525

1,525
3/1/16

Eagle Sky II Apartments

Bismarck, ND

Apartment complex

20 units

1,525

1,525
5/4/16

Garden Grove Apartments

Bismarck, ND

Apartment complex

95 units

7,072

7,072
5/4/16

Washington Apartments

Grand Forks, ND

Apartment complex

17 units

667

667
8/1/16

Roughrider

Grand Forks, ND

Apartment complex

12 units

582

582
8/29/16

West 80 Development Land

Rochester, MN

Land

18.8 acres

900

900
9/13/16

Amberwood Apartments

Grand Forks, ND

Apartment complex

95 units

3,942

3,942

$
27,032

$
27,032

Total consideration given for acquisitions through September 30, 2016 was completed through issuing approximately 1,086 limited partnership units of the operating partnership valued at $15.50 per unit for an aggregate consideration of approximately $16,940, new loans of $2,662, assumed liabilities of $78 and cash of $7,352. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

The following table summarizes the acquisition date fair values, before prorations, the ~~Company~~Trust recorded in conjunction with the acquisitions discussed above:

Nine Months Ended

September 30,

2017

2016

Land, building, tenant improvements and FF&E

$
20,111

$
25,822

Acquired lease intangible assets

-

1,386

Acquired lease intangible liabilities

-

(176)

Mortgages notes payable assumed

-

-

Other liabilities

(72)

(78)

Net assets acquired

20,039

26,954

Equity/limited partnership unit consideration

(9,651)

(16,940)

Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange

(4,278)

-

New loans

(2,392)

(2,662)

Net cash consideration

$
3,718

$
7,352


	Six Months Ended
	June 30,
		2020		2019

Land, building, tenant improvements and FF&E	$	12,896	$	-
Other liabilities		(265)		-
Net assets acquired		12,631		-
Equity/limited partnership unit consideration		(9,031)		-
New loans		(3,225)		-

Net cash consideration	$	375	$	-

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

The acquisitions completed after July 1, 2017 were considered asset acquisitions and, as such, transaction costs were capitalized upon closing. For acquisitions prior to July 1, 2017, which were accounted for as business combinations, the transaction costs totaled $1,131 and $1,526 for the nine months ended September 30, 2017 and 2016, respectively, are included in “Acquisition and disposition expenses” in the accompanying condensed consolidated statements of operations and other comprehensive (loss) income.

Estimated Value of Units/Shares

The Board of Trustees determined an estimate of fair value for the trust shares in the first ~~nine~~six months of ~~2017~~2020 and ~~2016.~~2019. In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair value for the limited partnership units in the first ~~nine~~six months of ~~2017~~2020 and ~~2016.~~2019. In determining this value, the ~~fair value of the shares and limited partnership units, the board~~Board relied upon their experience with, and knowledge about, ~~our~~the Trust’s real estate portfolio and debt obligations. The ~~board~~Board typically determines the share price ~~in March of each year.~~on an annual basis. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the ~~board~~Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition.

The Board determined the fair value of the shares and limited partnership units to be $19.25 per share/unit effective January 1, 2020. The Board determined the fair value of the shares and limited partnership units to be $19.00 per share/unit effective January 1, 2019.

Determination of price is a matter within the ~~board’s~~Board’s sole discretion. The Trust does not determine price based on any rote formula or specific factors and is not based on, or intended to comply with, fair value standards under U.S. GAAP. The value may not be indicative of the price received for selling the assets in their current condition.factors. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA’s specific pricing requirements set out in Rule 2340 or otherwise. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the ~~board~~Board looks to available data and information, which is often adjusted and weighted to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust’s Advisor.

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~~Based on the results of the methodologies, the Board determined the fair value of the shares~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020 and ~~limited partnership units to be $16.00~~2019 (UNAUDITED)

(Dollar amounts in thousands, except share and per ~~share/unit effective March 23, 2016. The Board determined the fair value of the shares and limited partnership units to be $16.50 per share/unit effective March 29, 2017.~~share data)

As with any valuation methodology, the methodologies utilized by the Board in reaching an estimate of the value of the shares and limited partnership units are based upon a number of estimates, assumptions, judgments or opinions that may, or may not, prove to be correct. The use of different estimates, assumptions, judgments, or opinions would likely have resulted in significantly different estimates of the value of the shares and limited partnership units. In addition, the Board’s estimate of share and limited partnership unit value is not based on the ~~fair~~book values of our real estate, as determined by GAAP, as our book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.

Furthermore, in reaching an estimate of the value of the shares and limited partnership units, the Board ~~did not include~~applied a liquidity discount to one valuation scenario in order to reflect the fact that the shares and limited partnership units are not currently traded on a national securities ~~exchange;~~exchange and did not consider: a discount for debt that may include a prepayment obligation or a provision precluding assumption of the debt by a third ~~party;~~party or the costs that are likely to be incurred in connection with an appropriate exit strategy, whether that strategy might be a listing of the limited partnership units or ~~Sterling~~ common shares on a national securities exchange or a merger or sale of our portfolio.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017 and 2016~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~

NOTE 1917 - SUBSEQUENT EVENTS

On ~~October 16, 2017,~~July 15, 2020, we paid a dividend or distribution of ~~$0.2475~~$0.2647 per share on our common shares of beneficial interest or limited partnership units, respectively, to common shareholders and limited partnership unit holders of record on ~~September~~June 30, ~~2017.~~2020.

On July 1, 2020, we refinanced a mortgage totaling approximately $5,000.

Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that the transactions will be completed.

We have evaluated subsequent events through the date of this filing. We are not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.

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All dollar amounts in this Form 10-Q in Part I ~~Items~~Item 2. through Item 4 and Part II ~~Items~~Item 2. are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.

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

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Certain statements contained in this section and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include but are not limited to: (i) trends affecting our financial condition or results of operations; (ii) our business and growth strategies; (iii) the real estate industry; (iv) our financing plans; and (v) other risks detailed in the Company’s periodic reports filed with the Securities and Exchange Commission. The words “believe”, “expect”, “anticipate”, “may”, “plan”, “should”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance.

Overview

Sterling Real Estate Trust d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation. Our real estate portfolio consisted of 177 properties containing 10,040 apartment units and approximately 1,646,000 square feet of leasable commercial space as of June 30, 2020. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $671,477, which includes construction in progress. Sterling’s current acquisition strategy and focus is on multifamily apartment properties

We operate as an Umbrella Partnership Real Estate Investment Trust (UPREIT), which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, we hold all or substantially all of our assets through our operating partnership. We control the operating partnership as the sole general partner and own approximately ~~32.28%~~34.51% of the operating partnership as of ~~September~~June 30, ~~2017.~~2020. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, our proportionate shares of the assets and income of our operating partnership are deemed to be assets and income of the trust.

We use this UPREIT structure to facilitate acquisitions of real estate properties. A sale of property directly to a REIT is generally a taxable transaction to the property seller. However, in an UPREIT structure, if a property seller exchanges the property with one of its operating partnerships in exchange for limited partnership units, the seller may defer taxation of gain in such exchange until the seller resells its limited partnership units or exchanges its limited partnership units for the REIT’s common stock. By offering the ability to defer taxation, we may gain a competitive advantage in acquiring desired properties over other buyers who cannot offer this benefit. In addition, investing in our operating partnership, rather than directly in Sterling, may be more attractive to certain institutional or other investors due to their business or tax structure. If an investor is interested in making a substantial investment in our operating partnership, our structure provides us the flexibility to accommodate different terms for each investment, while applicable tax laws generally restrict a REIT from charging different fee rates among its shareholders. Finally, if our shares become publicly traded, the former property seller may be able to achieve liquidity for the investment in order to pay taxes.

Operating Partnership

Our operating partnership, Sterling Properties, LLLP, was formed as a North Dakota limited liability limited partnership onin April ~~25,~~ 2003 to acquire, own and operate properties on our behalf. The operating partnership holds a diversified portfolio of multifamily and commercial properties located principally in the upper and central Midwest United States.

~~Our real estate portfolio consisted~~Table of 164 properties containing 9,335 apartment units and approximately 1,691,000 square feet of leasable commercial space as of September 30, 2017. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $648,856, which includes construction in progress. Effective January 1, 2016, Sterling’s acquisition strategy and focus is solely on multifamily apartment properties. We currently have no plans to dispose of our existing commercial properties.Contents

As of ~~September~~June 30, ~~2017,~~2020, approximately ~~71.0%~~74.2% of our properties were apartment communities located primarily in North Dakota with others located in Minnesota, Missouri and Nebraska. Most multifamily properties are leased to a variety of tenants under ~~short‑term~~short-term leases.

~~Table of Contents~~

As of ~~September~~June 30, ~~2017,~~2020, approximately ~~29.0%~~25.8% of our properties were comprised of office, retail, industrial, restaurant and medical commercial property located primarily in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska ~~Texas~~ and Wisconsin. We have both single and multi-tenant properties in the commercial portfolio, most of which are under long-term leases.

��

Our Board of Trustees and Executive Officers

We operate under the direction of our Board of Trustees, the members of which are accountable to us and our shareholders. Our trustees are elected annually by our shareholders. In addition, the Board has a duty to supervise our relationship with the Advisor and evaluates the performance of and fees paid to the Advisor on an annual basis. The Advisory Agreement was approved by the Board of Trustees (including all the independent trustees) on ~~April 6, 2017,~~March 26, 2020, effective ~~January 1, 2017.~~until March 31, 2021. Our Board of Trustees has provided investment guidance for the Advisor to follow, and must approve each investment recommended by the Advisor. Currently, we have ~~nine~~eight members on our board, ~~seven~~six of whom are independent.

Our Advisor

Our external Advisor is Sterling Management, LLC, a North Dakota limited liability company formed onin November ~~14,~~ 2002. Our Advisor, with ~~offices~~headquarters in Fargo, North Dakota, is responsible for managing our day-to-day affairs, capital projects and ~~for~~ identifying, acquiring and disposing investments on our behalf. From 2007 to 2020, our Advisor’s staff increased in number and expertise, growing from four to 28 full-time employees.

~~Conflicts of Interest~~

We are subject to various conflicts of interest arising out of our relationship with our trustees, executive officers, key personnel and our Advisor and its affiliates. Some of the conflicts of interest in our transactions with our Advisor and others are described below.

Our trustees and officers and the officers and key personnel of our Advisor (herein individually and collectively our “Leadership”) may spend a portion of their time on activities unrelated to us, which may significantly reduce the amount of time to be spent by one or more of our Leadership on Sterling activities. Each of our Leadership, including Messrs. Regan and Weiland, is currently expected to spend a significant portion of their time on our behalf, but may not always spend a majority of their time on our behalf.

One or more of our Leadership, including Messrs. Regan and Weiland, may also serve as trustees, directors, governors, members, officers or key personnel of other: (a) affiliated entities, including our Advisor; (b) real estate programs, real estate entities, or REITs; (c) advisors to other real estate programs, real estate entities or REITs; or (d) property managers to real estate programs, real estate entities or REITs (herein collectively “Other Real Estate Related Activities”). In addition, from time to time, members of our Leadership may purchase real estate or interests in real estate for themselves, which may conflict with Sterling’s activities or objectives. Leadership’s management of Other Real Estate Related Activities may significantly reduce the amount of time our Leadership is able to spend on Sterling related activities. Given Leadership is or may become involved in Other Real Estate Related Activities, there may be times where Sterling’s fundraising, acquisition, disposition and liquidation activities overlap with similar activities of Leadership’s Other Real Estate Related Activities. This overlap may cause conflicts of interest to arise with respect to, among other things, finding investors, locating and acquiring real estate investments, leasing activities and disposing of investments. The conflicts of interest faced could generally cause our operating results to suffer.

Certain members of Leadership will have fiduciary duties relating to their Other Real Estate Related Activities. These fiduciary duties may conflict with Leadership’s duties to Sterling and its shareholders. Leadership’s Other Real Estate Related Activities could result in actions or inactions detrimental to Sterling, which could harm the implementation of Sterling’s business strategies and Sterling’s investments. If Sterling does not successfully implement its business strategy, we may be unable to generate cash needed to pay dividends to shareholders and to maintain or increase the value of our assets.

~~Table of Contents~~

Conflicts with Sterling’s business and interests are most likely to arise from Leadership’s involvement in activities related to: (a) allocation of new investments and management time and services between Sterling and Leadership’s Other Real Estate Related Activities, (b) allocation of time and services between Sterling and Leadership’s Other Real Estate Related Activities; (c) Sterling’s purchase of properties from, or sale of properties to, affiliated entities, (d) the timing and terms of the investment in or sale of an asset, (e) development of our properties by affiliates, (f) investments with or activities of affiliates of our Advisor and (g) compensation to our Advisor.

To the extent Leadership engages in future Other Real Estate Related Activities, Sterling may compete for investors with such activities. Any overlap of capital raising efforts of Other Real Estate Related Activities with Sterling’s capital raising efforts or other activities could adversely affect our ability to raise capital in the future and the amount of proceeds we have to spend on real estate investments.

Sterling may, in the future, purchase real estate investments at the same time as Leadership is purchasing real estate investments via Other Real Estate Related Activities. As a result, Leadership may owe duties to both Sterling and the Other Real Estate Related Activities, their members and limited partners and these investors, which duties may from time to time conflict with the duties they owe to Sterling and its shareholders.

Leadership may engage for their own account in business activities of the types conducted or to be conducted by Sterling or our subsidiaries. To the extent Leadership takes actions that are more favorable to other entities than to us, these actions could have a negative impact on Sterling’s financial performance and, consequently, on dividends to our shareholders and the value of our stock.

~~Interests in Other Real Estate Programs~~

Leadership and entities owned by Leadership may, in the future, acquire real estate investments for their own accounts, and have done so in the past. Furthermore, Leadership and entities owned or managed by Leadership may form additional real estate investment entities in the future, including additional REITs, which can be expected to have the same or similar investment objectives and policies as we do and which may be involved in the same geographic areas. Leadership is not obligated to present to us any particular investment opportunity that comes to their attention, unless such opportunity is of a character that might be suitable for investment by us. Leadership likely will experience conflicts of interest as they simultaneously perform services for us and Other Real Estate Related Activities.

Any affiliated entity, whether or not currently existing, could compete with us in the purchase, sale or operation of real estate investments. We will seek to achieve any operating efficiency or similar savings that may result from affiliated management of competitive investments. However, to the extent that affiliates own or acquire an investment that is adjacent or its underlying property is adjacent, or in close proximity, to a property we own, our property may compete with the affiliate’s property for tenants or purchasers. Every transaction that we enter into with Leadership is subject to an inherent conflict of interest. Leadership may encounter conflicts of interest in enforcing our rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and our Advisor or any of its affiliates.

~~Other Activities of Our Advisor and Its Affiliates~~

We rely on our Advisor for the day-to-day operation of our business. As a result of the current and/or future interests of Leadership in any other program and the fact that they also are engaged, or may continue to engage, in Other Real Estate Related Activities, Leadership has conflicts of interest in allocating their time between us and any other programs and other activities in which they are involved. Our Advisor presently believes that it and its affiliates have sufficient personnel to discharge fully their responsibilities to all of the sponsored programs and other ventures in which they are or may become involved.

In addition, each of our executive officers also serves or may serve in the future as an officer of one or more affiliated entities, including our Advisor, and/or other affiliated entities. As a result, these individuals owe or will owe fiduciary duties to these other entities, which may conflict with the fiduciary duties that they owe to us and our shareholders.

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We may purchase real estate investments from affiliates of our Advisor. The prices we pay to affiliates of our Advisor for these investments will not be the subject of arm’s-length negotiations, which could mean that the acquisitions may be on terms less favorable to us than those negotiated with unaffiliated parties.

~~Competition in Acquiring, Leasing and Operating of Properties~~

Conflicts of interest will exist to the extent Sterling acquires, or seeks to acquire, properties in the same geographic areas where properties owned by Leadership or Leadership’s Other Real Estate Related Activities are located. In such a case, a conflict could arise in the acquisition or leasing of properties if we and one of Leadership’s Other Real Estate Related Activities were to compete for the same properties or tenants in negotiating leases, or a conflict could arise in connection with the resale of properties if we were to attempt to sell similar properties at the same time.

Conflicts of interest also may exist at such time as we or our affiliates managing property on our behalf seek to employ developers, contractors or building managers, as well as under other circumstances. Leadership will seek to reduce conflicts relating to the employment of developers, contractors or building managers. Leadership will also seek to reduce conflicts that may arise with respect to properties available for sale or rent. However, these conflicts cannot be fully avoided in that there may be established differing compensation arrangements at different properties or differing terms for resales or leasing of the various properties.

~~Joint Ventures with Affiliates~~

We may enter into joint ventures with Leadership’s Other Real Estate Related Activities (as well as other parties) for the acquisition of real estate investments. Leadership may have conflicts of interest in determining whether its Other Real Estate Related Activity should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals which are or which may become inconsistent with Sterling’s business interests or goals. In addition, should any such joint venture be consummated, Leadership may face a conflict in structuring the terms of the relationship between Sterling’s interests and the interest of the co-venturer and in managing the joint venture. Since Leadership may control both us and any affiliated co-venturer, agreements and transactions between the co-venturers with respect to any such joint venture may not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers.

~~Conflict Resolution~~

Every transaction that we enter into with Leadership will be subject to an inherent conflict of interest. Our Board of Trustees may encounter conflicts of interest in enforcing our rights or options against a member of Leadership in the event of a disagreement.

Critical Accounting Estimates

Preparation of our financial statements requires estimates and judgments to be made that ~~affect~~effect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. We evaluate these estimates based on assumptions we believe to be reasonable under the circumstances.

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 included elsewhere in this report.

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Specific Achievements

●

Increased revenues from rental operations by ~~$4,576~~$551 or ~~5.7%~~1.8% for the ~~nine~~three months ended ~~September~~June, 30, ~~2017,~~2020, compared to the same three month period in 2019.

●

Increased revenues from rental operations by $625 or 1.0% for the six months ended June 30, 2020, compared to same ~~nine~~six month period in ~~2016.~~

2019.

●

Acquired ~~a total of ten~~six new residential ~~apartment~~ properties ~~totaling 320 units for a total of $20,111~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2017. In addition, we placed in service four six unit townhome buildings.~~

2020.

~~Table of Contents~~

●

Acquired the remaining 59.74% interest in an 144 unit residential property which was previously held as tenant in common and recognized a gain of $2,186 in connection with this transation (see Note 2 to the consolidated financial statements).

Disposed of ~~a retail property located in Fargo, North Dakota and recognized a gain of $2,072 (see Note 17 to~~two commercial properties during the ~~consolidated financial statements).~~

six months ended June 30, 2020.

●

Declared ~~and paid~~ dividends aggregating ~~$0.7425~~$0.5294 per common share for the ~~first nine~~six months ~~of 2017.~~

ended June 30, 2020.

Results of Operations for the Three Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019


													Three months ended June 30, 2020						Three months ended June 30, 2019
													Residential		Commercial		Total		Residential		Commercial		Total

	Three months ended September 30, 2017						Three months ended September 30, 2016
	Residential		Commercial		Total		Residential		Commercial		Total
	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
													(unaudited)						(unaudited)
													(in thousands)						(in thousands)
Real Estate Revenues	$	21,863	$	6,792	$	28,655	$	20,081	$	6,807	$	26,888	$	24,381	$	6,440	$	30,821	$	23,822	$	6,448	$	30,270
Real Estate Expenses
Real Estate Taxes		2,404		782		3,186		1,726		634		2,360		2,472		667		3,139		2,308		711		3,019
Property Management Fees		2,933		204		3,137		2,519		252		2,771
Property Management														3,088		215		3,303		3,171		286		3,457
Utilities		1,534		384		1,918		1,321		388		1,709		1,903		218		2,121		1,978		261		2,239
Repairs and Maintenance		5,539		631		6,170		5,663		625		6,288		4,332		405		4,737		4,989		578		5,567
Insurance		354		22		376		318		21		339		765		35		800		549		20		569
Total Real Estate Expenses		12,764		2,023		14,787		11,547		1,920		13,467		12,560		1,540		14,100		12,995		1,856		14,851
Net Operating Income	$	9,099	$	4,769		13,868	$	8,534	$	4,887		13,421	$	11,821	$	4,900		16,721	$	10,827	$	4,592		15,419
Interest						4,690						4,636						4,224						4,582
Depreciation and amortization						5,427						5,471						5,246						5,353
Administration of REIT						885						1,136						1,085						971
Loss on lease terminations						—						25
Other (income)/expense						(390)						(370)						(231)						(308)
Net Income					$	3,256					$	2,523					$	6,397					$	4,821


Net Income Attributed to:
Noncontrolling Interest					$	2,174					$	1,638					$	4,195					$	3,174
Sterling Real Estate Trust					$	1,082					$	885					$	2,202					$	1,647
Dividends per share (1)					$	0.2475					$	0.2400					$	0.2647					$	0.2613
Earnings per share					$	0.13					$	0.11					$	0.23					$	0.18
Weighted average number of common shares						8,356						7,891						9,611						9,209

(1)

~~(1)~~

Does not take into consideration the amounts distributed by the operating partnership to limited partners.

Revenues

Property revenues of ~~$28,655~~$30,821 for the three months ended ~~September~~June 30, ~~2017~~2020 increased ~~$1,767~~$551 or ~~6.6%~~1.8% in comparison to the same period in ~~2016.~~2019. Residential property revenues increased ~~$1,782~~$559 and commercial property revenues decreased ~~$ (15).~~$8.

The following table illustrates ~~changes in~~ occupancy percentages for the three month periods indicated:


	June 30,		June 30,
	2020		2019
Residential occupancy	93.4	%	94.1	%
Commercial occupancy	89.5	%	88.9	%

September 30,

September 30,

2017

2016

Residential occupancy

94.1
%
94.2
%
Commercial occupancy

95.7
%
95.9
%

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Residential revenues for the three months ended ~~September~~June 30, ~~2017~~2020 increased ~~$1,782~~$559 or 2.3% in comparison to the same period for ~~2016.~~2019. Residential properties acquired since January 1, ~~2016~~2020 contributed approximately ~~$1,563~~$395 to the increase in total residential revenues in the three months ended ~~September~~June 30, ~~2017. Rental~~2020. The remaining increase is due to increased rent charges at our stabilized properties as well as the increased income ~~from~~related to Ratio Utility Billing System (RUBS) Income in our Minneapolis Market. The overall residential ~~properties~~

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~~owned for more than one year~~income increase was offset by increased ~~approximately $219~~vacancy, primarily in ~~comparison to the same period in 2016.~~our Minneapolis Market. Residential revenues comprised ~~76.3%~~79.1% of total revenues for the three months ended ~~September~~June 30, ~~2017~~2020 compared to ~~74.7%~~78.7% of total revenues for the three months ended ~~September~~June 30, ~~2016.~~2019. The residential occupancy rates for the three months ended ~~September~~June 30, ~~2017 were comparable~~2020, decreased 0.70% primarily due to ~~September 30, 2016.~~increased renewal activity in our residential portfolio, rather than new lease activity.

For the three months ended ~~September~~June 30, ~~2017~~2020 total commercial revenues decreased ~~$15~~$8 or 0.1% in comparison to the same period for ~~2016.~~2019. Revenues ~~from~~decreased $79 due to vacant office space in commercial properties ~~acquired since January 1, 2016, contributed approximately $2~~located in the Fargo, ND region. Business loss proceeds received of $521 related to a loss on involuntary conversion at an office building in Fargo, ND, offset the ~~decrease~~decreased rents related to vacancy. In addition, disposition of two commercial properties, account for $98 in ~~total commercial~~decreased revenues induring the three months ended ~~September~~June 30, ~~2017. Rental~~2020. The remaining decrease relates to the amortization of straight line rents at a commercial office building in our Minneapolis market as well as overall decreased estimated common area maintenance income ~~from commercial properties owned~~ for ~~more than one year decreased approximately $13 in comparison~~the three months ended June 30, 2020 as compared to the same period in ~~2016. The decrease in revenues was primarily attributed to decreases in straight-line rent adjustments and the sale of the Fargo retail property.~~2019. Commercial revenues comprised ~~23.7%~~20.9% of the total revenues for the three months ended ~~September~~June 30, ~~2017~~2020 compared to ~~25.3%~~21.3% of total revenues for the three months ended ~~September~~June 30, ~~2016. The commercial occupancy rates for the three months ended September 30, 2017 are comparable to the three months ended September 30, 2016.~~2019.

Expenses

Residential expenses from operations of ~~$12,764~~$12,560 during the three months ended ~~September~~June 30, ~~2017 increased $1,217~~2020 decreased $435 or ~~10.5%~~3.3% in comparison to the same period in ~~2016. This increase~~2019. The decrease was attributed to ~~the increase in number~~decreased repairs and maintenance expense of ~~residential properties owned~~$657 or 13.2%, offset by increased real estate taxes of $164 or 7.1%, and property insurance expense of $216 or 39.3%. Actual property management fees remained unchanged and continue to approximate 5% of net collected rents; however, other property management related expenses also decreased during the three months ended ~~September~~June 30, ~~2017 versus~~2020. The primary driver of decreased operational expenses, specifically related to reduced repairs and maintenance expense, is due to COVID-19 causing residential lease renewal rates to increase approximately 23% as compared to the same three month period in ~~2016. In addition, overall increases~~2019, as residents chose to remain in ~~operating expenses including property management fees increased $414 or 16.4%, real estate taxes increased $678 or 39.3%~~their current apartment units, precluding general maintenance and ~~utilities increased $213 or 16.1%. Increases in real estate taxes were~~unit upgrades to be performed. The Trust believes a ~~result~~portion of the ~~annual real estate tax assessments received during~~decrease in repairs and maintenance is deferred and will be realized as the ~~quarter, which were adjusted~~COVID-19 pandemic passes and the units will become available to ~~reflect increased assessments levied by respective North Dakota counties.~~be upgraded.

Commercial expenses from operations of ~~$2,023~~$1,540 during the three months ended ~~September~~June 30, ~~2017 increased $103~~2020 decreased $316 or ~~5.4%~~17.0% in comparison to the same period in ~~2016.~~2019. The ~~increase was primarily~~decrease in overall expenses is attributed to ~~increases~~COVID-19, causing shelter-in-places in ~~real estate taxes for one Bloomington, Minnesota~~many locations where our office space is located, resulting in decreased repairs and maintenance costs of $173 or 29.9%, as well as decreased property management expenses of $71 or 24.8% and ~~North Dakota properties.~~ decreased utility costs of $43 or 16.5%. Similar to residential expenses, the Trust believes that as the COVID-19 pandemic passes, operational expenses, primarily repairs and maintenance costs, that have been deferred, will be realized in future periods.

Interest expense of ~~$4,690~~$4,224 during the three months ended ~~September~~June 30, ~~2017 increased $54~~2020 decreased $358 or 7.8% in comparison to the same period in ~~2016 due to increased levels~~2019. Pay offs of higher interest rate loans during the first quarter of 2020 and fourth quarter of 2019 as well as new debt and refinancing in the second quarter of 2020, decreased the overall weighted average interest rate on our outstanding ~~(an aggregate increase of $8,357). Interest expense was approximately 16.4% and 17.2% of rental income for~~consolidated mortgage debt. The lower consolidated mortgage rate decreased total interest paid on mortgages by $182 during the three months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~ 2020 as compared to the same period in 2019, bringing mortgage interest expenses as a percent of income to 13.7% versus 15.14% during the three months ended June 30, 2019. Additionally, interest expense on construction in progress, also contributed to the decrease in interest expense. Interest expense for construction in progress is classified as a contra-expense account, offsetting interest expense by $186 during the three months ended June 30, 2020.

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Depreciation and amortization expense ~~decreased 0.8% from $5,471 for~~of $5,246 during the three months ended ~~September~~June 30, ~~2016~~2020 decreased $107 or 2.0% in comparison to ~~$5,427 for~~ the ~~three months ended September 30, 2017.~~same period in 2019. The ~~$44 net~~ decrease ~~was~~is primarily ~~a result~~due to the write off of ~~a $236 decrease in amortization related~~certain lease intangibles due to lease ~~intangibles that are fully amortized.~~terminations at an office building located in Minneapolis, MN. Amortization expense will continue to decrease as lease intangibles become fully ~~amortized.~~

~~REIT administration expenses decreased from $1,136~~amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of rental income for the three months ended ~~September~~June 30, ~~2016 to $885 for~~2020 and 2019 was 17.0% and 17.6%, respectively.

REIT administration expenses of $1,085 during the three months ended ~~September~~June 30, ~~2017 due~~2020 increased $113 or 11.7% in comparison to ~~a decrease in acquisition expenses related to lower acquisition activity in 2017 compared with~~ the same period in ~~2016.~~ 2019. The increase is attributable to an increase in the amount of the REIT advisory fee as well as increased audit and tax fees attributed to additional services performed and general timing variances of when work was performed during the year 2020, as compared to 2019.

Other income of $231 during the three months ended June 30, 2020 decreased $77 or 25% in comparison to the same period in 2019.

Net Operating Income

We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders of the Trust or cash flow from operating activities as a measure of financial performance.

~~Residential NOI increased $565 or 6.6% for the three months ended September 30, 2017 in comparison~~ See Note 3 to the ~~same three month period in 2016 primarily as a result of an increase in revenues. Commercial~~Consolidated Financial Statements included above for more information on NOI ~~decreased $118 or 2.4% for the three months ended September 30, 2017 in comparison to the same three month period in 2016. The decrease~~

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~~was primarily due to the increase in real estate taxes for one Bloomington, Minnesota office property and North Dakota properties.~~performance by segment.

Net Income

Net income for the three months ended ~~September~~June 30, ~~2017~~2020 was ~~$3,256~~$6,397 compared to ~~$2,523~~$4,821 for the three months ended ~~September~~June 30, ~~2016. The increase was primarily attributed to an increase~~2019. As noted above, the primary driver of ~~$447 in~~increased net ~~operating~~ income ~~and a decrease of $299 in acquisition fees. There were no acquisition fees expensed in~~for the three months ended ~~September~~June 30, ~~2017 due~~2020 is attributed to six property acquisitions occurring in 2020, as well as the ~~Company’s early adoption~~impact the COVID-19 pandemic has had on the operational expenses of ~~ASU 2017-01 as~~the portfolio.

Table of ~~July 1, 2017.~~Contents

Results of Operations for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020


	Six months ended June 30, 2020						Six months ended June 30, 2019
	Residential		Commercial		Total		Residential		Commercial		Total

	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Real Estate Revenues	$	48,376	$	12,351	$	60,727	$	47,258	$	12,844	$	60,102
Real Estate Expenses
Real Estate Taxes		4,947		1,356		6,303		4,658		1,390		6,048
Property Management		6,394		463		6,857		6,286		496		6,782
Utilities		4,322		522		4,844		4,538		587		5,125
Repairs and Maintenance		9,221		912		10,133		9,761		1,162		10,923
Insurance		1,588		74		1,662		1,141		40		1,181
Total Real Estate Expenses		26,472		3,327		29,799		26,384		3,675		30,059
Net Operating Income	$	21,904	$	9,024		30,928	$	20,874	$	9,169		30,043
Interest						8,574						9,298
Depreciation and amortization						10,498						10,891
Administration of REIT						2,247						2,082
Other (income)/expense						(2,015)						(839)
Net Income					$	11,624					$	8,611

Net Income Attributed to:
Noncontrolling Interest					$	7,609					$	5,676
Sterling Real Estate Trust					$	4,015					$	2,935
Dividends per share⁽¹⁾					$	0.5294					$	0.5225
Earnings per share					$	0.4200					$	0.3200
Weighted average number of common shares						9,587						9,151

Nine months ended September 30, 2017

Nine months ended September 30, 2016


Residential

Commercial

Total

Residential

Commercial

Total

(unaudited)

(unaudited)

(in thousands)

(in thousands)
Real Estate Revenues

$
64,579

$
20,619

$
85,198

$
59,990

$
20,632

$
80,622
Real Estate Expenses

Real Estate Taxes

6,168

2,221

8,389

5,144

1,876

7,020
Property Management Fees

8,527

636

9,163

7,428

667

8,095
Utilities

5,399

1,064

6,463

4,695

1,020

5,715
Repairs and Maintenance

14,493

1,610

16,103

14,118

1,585

15,703
Insurance

1,043

69

1,112

968

54

1,022
Total Real Estate Expenses

35,630

5,600

41,230

32,353

5,202

37,555
Net Operating Income

$
28,949

$
15,019

43,968

$
27,637

$
15,430

43,067
Interest

13,938

13,740
Depreciation and amortization

16,170

16,711
Administration of REIT

4,208

4,187
Loss on lease terminations

146

299
Other (income)/expense

(5,240)

(473)
Net Income

$
14,746

$
8,603

Net Income Attributed to:

Noncontrolling Interest

$
9,925

$
5,607
Sterling Real Estate Trust

$
4,821

$
2,996
Dividends per share (1)

$
0.7425

$
0.7200
Earnings per share

$
0.5900

$
0.3800
Weighted average number of common shares

8,234

7,791

(1)

~~(1)~~

Does not take into consideration the amounts distributed by the operating partnership to limited partners.

Revenues

Property revenues of ~~$85,198~~$60,727 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 increased ~~$4,576~~$625 or ~~5.7%~~1.0% in comparison to the same period in ~~2016.~~2019. Residential property revenues increased ~~$4,589~~$1,118 and commercial property revenues decreased ~~$(13).~~$493, from the prior year’s comparable six month period.

The following table illustrates ~~changes in~~ occupancy percentages for the ~~nine~~six month periods indicated:


	September 30,		September 30,
	2017		2016

					June 30,		June 30,
					2020		2019
Residential occupancy	94.9	%	95.2	%	93.1	%	93.8	%
Commercial occupancy	96.7	%	95.6	%	89.5	%	88.9	%

~~Table of Contents~~

Residential revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 increased ~~$4,589~~$1,118 or 2.4% in comparison to the same period for ~~2016.~~2019. Residential properties acquired since January 1, ~~2016~~2020 contributed approximately ~~$4,044~~$638 to the increase in total residential revenues in the ~~nine~~six months ended ~~September~~June 30, ~~2017. Rental~~2020. The remaining increase is due to increased rent charges at our stabilized properties as well as the increased income ~~from~~related to Ratio Utility Billing System (RUBS) Income in our Minneapolis Market. The overall residential ~~properties owned for more than one year~~income increase was offset by increased ~~approximately $545~~vacancy, primarily in ~~comparison to the nine months ended September 30, 2016.~~our Minneapolis Market. Residential revenues comprised ~~75.8%~~79.7% of total revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 compared to ~~74.4%~~78.6% of total revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2016. The residential~~2019. Residential occupancy ~~rates for~~year-over-year has remained comparable at approximately 93%.

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For the ~~nine~~six months ended ~~September~~June 30, ~~2017 were comparable to September 30, 2016.~~

~~For the nine months ended September 30, 2017,~~2020, total commercial revenues decreased ~~$(13)~~$493 or 3.8% in comparison to the same period for ~~2016. Commercial properties acquired since January 1, 2016, contributed approximately $~~41 to the increase in total commercial revenues in the nine months ended September 30, 2017. Rental income from commercial properties owned for more than one year decreased approximately $54 in comparison to the nine months ended September 30, 2016.2019. The decrease was primarily ~~attributed~~attributable to the ~~sale~~disposition of ~~a retail property in June 2017 which contributed to nine months of revenues in 2016 but only~~two commercial properties during the six months ended June 30, 2020. These properties accounted for $117 of ~~revenue~~the decrease. The remaining decrease relates to the amortization of straight line rents at a commercial office building in ~~2017.~~our Minneapolis market as well as overall decreased estimated common area maintenance income for the six months ended June 30, 2020 as compared to the same period in 2019. Commercial revenues comprised ~~24.2%~~20.3% of the total revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 compared to ~~25.6%~~21.4% of total revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2016. The commercial~~2019. Commercial occupancy ~~rates for the nine months ended September 30, 2017 increased 1.1% primarily due to lease up~~year-over-year has remained comparable at ~~two properties including a Fargo retail property and Minot office property.~~ approximately 89%.

Expenses

Residential expenses from operations of ~~$35,630~~$26,472 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 increased ~~$3,277~~$88 or ~~10.1%~~0.3% in comparison to the same period in ~~2016. This~~2019. The increase was primarily attributed to insurance expense which increased due to increased premium expense on habitational properties. Increased real estate taxes, driven by increased estimates of projected 2020 real estate taxes, of $290 or 6.2%, also contribute to the overall increase. This was offset by a decrease in repairs and maintenance expense of $540 or 5.5% as well as decreased utilities expense of $216 or 4.8%. Actual property management fees remained unchanged and continue to approximate 5% of net collected rents. The primary driver of decreased operational expenses, specifically related to repairs and maintenance expense, is due to the COVID-19 pandemic causing residential lease renewal rates to increase ~~in the number of residential properties owned during the nine months ended September 30, 2017 versus~~approximately 17% as compared to the same period in ~~2016. In addition, increases~~2019, as residents chose to remain in ~~property management fees~~their current apartment units, preventing general maintenance and unit upgrades to be performed. The Trust believes a portion of ~~$1,099 or 14.8% due to increased competition for labor, increases~~the decrease in ~~utilities of $704 or 15.0% and increases in repair~~repairs and maintenance ~~expenses of $375 or 2.7% reflect~~is deferred and will be realized as the ~~investments made~~COVID-19 pandemic passes and the units become available to ~~position properties for continued rate increases, tenant retention, and market competitiveness.~~be upgraded.

Commercial expenses from operations of ~~$5,600~~$3,327 during the ~~nine~~six months ended ~~September~~June 30, ~~2017 increased $398~~2020 decreased $348 or ~~7.7%~~9.4% in comparison to the same period in ~~2016.~~2019. The ~~increase was primarily~~decrease in overall expenses is attributed to ~~increases~~the COVID-19 pandemic, causing shelter-in-places in ~~real estate taxes for one Bloomington, Minnesota office property~~many locations where our commercial properties are located, attributing to decreased repairs and ~~North Dakota properties.~~maintenance expenses of $250 or 21.5%. Utility expense of $65 or 11.1% in comparison to the same period 2019, also attributed to the overall decrease. Similar to residential expenses, the Trust believes that as the COVID-19 pandemic passes, operational expenses, primarily repairs and maintenance costs that have been deferred, will be realized in future periods.

Interest expense of ~~$13,938~~$8,574 during the ~~nine~~six months ended ~~September~~June 30, ~~2017 increased $198~~2020 decreased $724 in comparison to the same period in ~~2016 due~~2019. Pay offs of higher interest rate loans during the first quarter of 2020 and fourth quarter of 2019 as well as new debt and refinancing in the second quarter of 2020, decreased the overall weighted average interest rate on our consolidated mortgage debt. The lower consolidated mortgage rate decreased total interest paid on mortgages of $392 as compared to ~~increased levels~~the same period in 2019, bringing mortgage interest expenses as a percent of ~~debt outstanding.~~income to 14.12% versus 15.47% in 2019. Additionally, interest expense on construction in progress, also contributed to the decrease in interest expense. Interest expense ~~was approximately 16.4% and 17.0% of rental income~~ for ~~the nine months ended September 30, 2017 and 2016, respectively.~~construction in progress is classified as a contra-expense account, offsetting interest expense by $313.

Depreciation and amortization expense ~~decreased 3.2% from $16,711~~of $10,498 for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2020 decreased $393 or 3.6% in comparison to ~~approximately $16,170 for~~ the ~~nine months ended September 30, 2017.~~ same period in 2019.The ~~$541~~ decrease ~~was~~is primarily ~~a result~~due to the write off of ~~a $929 decrease in amortization related to~~certain lease intangibles ~~that are fully amortized.~~at an office building located in Minneapolis, MN. Amortization expense will continue to decrease as lease intangibles become fully ~~amortized.~~amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of rental income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 was relatively consistent at ~~19.0%~~17.3% and ~~20.7%~~18.1%, respectively.

Other income (expense) during the nine months ended September 30, 2017 was $5,240. This amount included a net gain of $2,049 incurred in connection with the sale of a retail property in June 2017 and the sale of vehicles in January 2017. In addition, other income includes a $2,186 gain on change in control over a real estate investment. Other income (expense) during the nine months ended September 30, 2016 included a loss of $320 incurred in connection with the sale of a medical property in April 2016 and the sale of a vehicle in January 2016. The property sale was pursuant to the exercise of an option contained in the tenant’s lease.

REIT administration expenses ~~increased from $4,187~~of $2,247 for the ~~nine~~six months ended ~~September~~June 30, ~~2016 to $4,208 for~~ ~~the nine months ended September 30, 2017~~ ~~due to an increase in portfolio assets in 2017~~2020 increased $165 or 7.9% in comparison to the same period in ~~2016.~~ 2019. The increase is attributable to an increase in the amount of the REIT advisory fee as well as increased audit and tax fees attributed to additional services performed and general timing variances during the year 2020, as compared to 2019.

Other income of $2,015 for the six months ended June 30, 2020 increased $1,176 or 140.2% in comparison to the same period in 2019. Realized gains of $1,456 on the sale of two commercial properties during the six months ended June 30, 2020 is the primary factor in the increase as compared to the same period in 2019. The 2020 gain activity, is offset by gains on involuntary conversion recognized during the six months ended June 30, 2019 of $329.

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Net Operating Income

~~Residential NOI increased $1,312 or 4.7% for the nine months ended September 30, 2017 in comparison~~ See Note 3 to the ~~same nine month period in 2016 due primarily to a $4,589 increase in revenues. Commercial~~Consolidated Financial Statements included above for more information on NOI decreased $411 or 2.7% for the nine months ended September 30, 2017 in comparison to the same nine month period in 2016 due primarily attributed to decreased revenues due to the sale of a retail property in June 2017 and a medical property in April 2016 and increased real estate taxes for one Bloomington, Minnesota office property and North Dakota properties.performance by segment.

Net Income

Net income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020was ~~$14,746~~$11,624 compared to ~~$8,603~~$8,611 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~ 2019.

COVID-19 Impact

The ~~increase~~Trust continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact its tenants and business partners. While the Trust did not incur significant disruptions during the six months ended June 30, 2020 from the COVID-19 pandemic, it is unable to predict the impact that the COVID-19 pandemic will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.

During the quarter ended June 30, 2020, the Trust received certain rent relief requests as a result of COVID-19. These requests were received principally from office tenants and most often in ~~net income~~the form of rent deferral requests. Few rental defaults have occurred to date and the Trust is ~~primarily attributed~~pursuing legal remedies as to these amounts which are not material in the aggregate. The Trust will continue to evaluate any further tenant rent relief requests on an individual basis, considering a ~~$2,049 net gain on~~number of factors. Not all tenant requests will ultimately result in modification agreements, nor will the ~~sale of real estate and non-real estate investments and a $2,186 gain on the change in control over real estate investments.~~Trust forgo its contractual rights under its lease agreements.

Property Acquisitions and Dispositions

Property Acquisitions and Dispositions during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020

We acquired ~~ten~~six properties for a total of ~~$20,111~~$12,896 during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2020. Total consideration for the acquisitions was the issuance of approximately ~~$9,651~~$9,031 in limited partnership units of the operating partnership, ~~1031 tax-deferred exchange funds of $4,278, new loans of $2,392,~~ assumed liabilities of ~~$72 and~~$265, cash of ~~$3,718. In addition, there was~~$375 and a ~~change in control over a real estate investment, with~~mortgage of $3,225.

We disposed of two commercial properties during the operating partnership acquiring the other tenant in common’s 59.74% ownership interest in a 144 unit property (See Note 2 and 19 of the consolidated financial statements). We estimated the property had a fair value of approximately $10,080. The operating partnership assumed a loan of $1,295 and issued $4,727 of limited partnership units for a total purchase price of approximately $6,022. The Company accounted for this as a business combination and recognized a gain on change in control of real estate investment of $2,186 in the second quarter of 2017 as a result of remeasuring the carrying value to fair value.

~~During the nine~~six months ended ~~September~~June 30, ~~2017, the operating partnership sold~~2020. The Trust disposed of a retail property located in ~~Fargo, North Dakota~~Apple Valley, MN for ~~approximately $4,400~~$3,670 and ~~recognized a gain of $2,072.~~an office building in St. Cloud, MN for $2,050.

~~Property Acquisitions and Dispositions during the nine months ended September 30, 2016~~

We acquired nine properties for a total of $27,032 during the nine months ended September 30, 2016. Total consideration for the acquisitions was the issuance of approximately $16,940 in limited partnership units of the operating partnership, new loans of $2,662, assumed liabilities of $78 and cash of $7,352.

During the nine months ended September 30, 2016, the operating partnership sold a medical property in Eau Claire, Wisconsin for approximately $1,400 and recognized a loss of $316. The property sale was pursuant to an option exercise in the tenant’s lease.

See Notes 1715 and 1816 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~2019.

Construction in Progress and Development Projects

Construction in progress as of June 30, 2020 consists primarily of development and planning costs associated with the Glen Pond development in Eagan, Minnesota and the Goldmark Office Park 1715 building located in Fargo, North Dakota. The Glen Pond development consists of 114 units of multifamily property. Current expectations are that the project will be completed in the third quarter of calendar year 2020 and the current project budget approximates $16,175 of which $15,698 has been incurred and is included in Construction in progress. The Goldmark Office Park

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consists of three commercial office buildings. Current expectations are that the project which includes building renovations, reconstruction of portions of the office park and additional amenities will be completed in phases with the primary phase completed in the third quarter of calendar year 2020. The current project budget is approximately $6,674 of which $5,266 has been incurred and is included in Construction in progress.

The Trust is involved with two joint ventures as of June 30, 2020 that are for the sole purpose of developing multifamily property. Reside Apartments is a development in Savage, Minnesota and SE Maple Grove is a development in Maple Grove, Minnesota. The Reside development consists of 190 units of multifamily property. Current expectations are that the project will be completed in the third quarter of 2021 and the current budget approximates $34,500 of which $10,200 has been incurred by the joint venture. The SE Maple Grove development consists of 160 units of multifamily property. Current expectations are that the project will be completed in the first quarter of 2022 and the current budget approximates $24,400. The project has not started as of June 30, 2020.

Funds From Operations ~~and Modified Funds From Operations (FFO and MFFO)~~(FFO)

Funds From Operations (FFO) applicable to common shares and limited partnership units means net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.

Historical cost accounting for real estate assets implicitly assumes the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. The term Funds From Operations (FFO) was created to address this problem. It was intended to be a standard supplemental measure of REIT operating performance that excluded historical cost depreciation from — or “added back” to — GAAP net income.

Our management believes this non-GAAP measure is useful to investors because it provides supplemental information that facilitates comparisons to prior periods and for the evaluation of financial results. Management uses this non-GAAP measure to evaluate our financial results, develop budgets and manage expenditures. The method used to produce non-GAAP results is not computed according to GAAP, is likely to differ from the methods used by other companies and should not be regarded as a replacement for corresponding GAAP measures. Management encourages the review of the reconciliation of this non-GAAP financial measure to the comparable GAAP results.

Since the introduction of the definition of FFO, the term has come to be widely used by REITs. In the view of National Association of Real Estate Investment Trusts (“NAREIT”), the use of the definition of FFO (combined with the primary GAAP presentations required by the Securities and Exchange Commission) has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making it easier ~~than before~~ to compare the results of one REIT with another.

In addition to FFO, management also uses Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental performance measure. MFFO as defined by us adds back to FFO acquisition related costs which are required to be expensed in accordance with GAAP. Our definition of MFFO also adds back disposition costs related to sales of investment properties. Acquisition and disposition related expenses include those paid to our Advisor and third parties. Management believes that adding back acquisition and disposition related costs to calculate MFFO provides useful supplemental performance information that is comparable over the long-term and that this measure is consistent with management’s analysis of the operating performance of the REIT.

While FFO ~~and MFFO~~ applicable to common shares and limited partnership units are widely used by REITs as performance metrics, all REITs do not use the same definition of FFO ~~and MFFO~~ or calculate FFO ~~and MFFO~~ in the same way. The FFO ~~and MFFO~~ reconciliation presented here is not necessarily comparable to FFO ~~and MFFO~~ presented by other real estate investment trusts. FFO ~~and MFFO~~ should also not be considered as an alternative to net income as determined in accordance with GAAP as a measure of a real estate investment trust’s performance, but rather should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated financial statements included in this report. FFO ~~and MFFO~~ applicable to common shares and limited partnership units does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of sufficient cash flow to fund a real estate investment trust’s needs or its ability to service indebtedness or to pay dividends to shareholders.

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The following tables include calculations of FFO, ~~and MFFO,~~ and the reconciliations to net income, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively. We believe these calculations are the most comparable GAAP financial measure (in thousands):

Reconciliation of Net Income Attributable to Sterling to FFO ~~and MFFO~~ Applicable to Common Shares and Limited Partnership Units


	Three months ended June 30, 2020					Three months ended June 30, 2019
			Weighted Avg	Per				Weighted Avg	Per
			Shares and	Share and				Shares and	Share and
	Amount		Units(1)	Unit (2)		Amount		Units(1)	Unit (2)

	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	2,202	9,611	$	0.23	$	1,647	9,209	$	0.18

Add back:
Noncontrolling Interest - OPU		4,177	18,242				3,191	17,830
Depreciation & Amortization from continuing operations		5,246					5,353
Depreciation & Amortization from discontinued operations		—					—
Pro rata share of unconsolidated affiliate depreciation & amortization		94					95
Loss on sale of depreciable real estate investments		—					—
Loss on impairment of real estate investments		—					—
Subtract:
Gain on sales of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		(1)					—
Funds from operations applicable to common shares and limited partnership units (FFO)	$	11,718	27,853	$	0.42	$	10,286	27,039	$	0.38

Three months ended  September 30, 2017

Three months ended  September 30, 2016

Weighted Avg

Per

Weighted Avg

Per

Shares and

Share and

Shares and

Share and


Amount

Units(1)

Unit (2)

Amount

Units(1)

Unit (2)

(unaudited)

(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust

$
1,082

8,356

$
0.13

$
885

7,891

$
0.11

Add back:

Noncontrolling Interest - OPU

2,264

17,523

1,814

16,158

Depreciation & Amortization from continuing operations

5,427

5,471

Pro rata share of unconsolidated affiliate depreciation & amortization

93

118

Loss on sale of depreciable real estate investments

—

—

Subtract:

Gain on sales of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments

3

—

Funds from operations applicable to common shares and limited partnership units (FFO)

8,869

25,879

$
0.34

8,288

24,049

$
0.34
Add back:

Acquisition, and disposition expenses

—

299

Modified Funds from Operations applicable to common shares and limited partnership units (MFFO)

$
8,869

25,879

$
0.34

$
8,587

24,049

$
0.36

(1)

~~(1)~~

Please see Note 119 and Note 1311 to the consolidated financial statements included above for more information.

(2)

~~(2)~~

Net Income is calculated on a per share basis. FFO ~~and MFFO~~ are calculated on a per share and unit basis.


	Six months ended June 30, 2020						Six months ended June 30, 2019
			Weighted Avg	Per				Weighted Avg	Per
			Shares and	Share and				Shares and	Share and
	Amount		Units(1)	Unit (2)		Amount		Units(1)	Unit (2)

	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	4,015	9,587	$	0.42	$	2,935	9,151	$	0.32

Add back:
Noncontrolling Interest - OPU		7,596	18,139				5,723	17,845
Depreciation & Amortization from continuing operations		10,498					10,891
Pro rata share of unconsolidated affiliate depreciation & amortization		189					189
Subtract:
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		(1,456)					—
Funds from operations applicable to common shares and limited partnership units (FFO)	$	20,842	27,726	$	0.75	$	19,738	26,996	$	0.73

Nine months ended September 30, 2017

Nine months ended September 30, 2016

Weighted Avg

Per

Weighted Avg

Per

Shares and

Share and

Shares and

Share and


Amount

Units(1)

Unit (2)

Amount

Units(1)

Unit (2)

(unaudited)

(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust

$
4,821

8,234

$
0.59

$
2,996

7,791

$
0.38

Add back:

Noncontrolling Interest - OPU

10,147

17,330

6,109

15,880

Depreciation & Amortization from continuing operations

16,170

16,711

Pro rata share of unconsolidated affiliate depreciation & amortization

288

355

Loss on sale of depreciable real estate investments

—

316

Subtract:

Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments

(4,261)

—

Funds from operations applicable to common shares and limited partnership units (FFO)

27,165

25,564

$
1.06

26,487

23,671

$
1.12
Add back:

Acquisition, and disposition expenses

1,375

1,526

Modified Funds from Operations applicable to common shares and limited partnership units (MFFO)

$
28,540

25,564

$
1.12

$
28,013

23,671

$
1.18

(1)

~~(1)~~

Please see Note 119 and Note 1311 to the consolidated financial statements included above for more information.

(2)

~~(2)~~

Net Income is calculated on a per share basis. FFO ~~and MFFO~~ are calculated on a per share and unit basis.

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Liquidity and Capital Resources

Our principal demands for funds will be for the (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends/distributions (iv) payment of principal and interest on current and any future outstanding indebtedness, ~~and~~ (v) redemptions of our securities under our redemption ~~plans.~~plans and (vi) capital improvements and property development related expenditures. Generally, we expect to meet cash needs for the payment of operating expenses and interest on outstanding indebtedness from cash flow from operations. We expect to pay dividends/distributions and any repurchase requests to our shareholders and the unit holders of our operating partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary. We expect to meet cash needs for acquisitions and other real-estate investments from cash flow from operations, net proceeds of share offerings and debt proceeds.

Evaluation of Liquidity

We continually evaluate our liquidity and ability to fund future operations, debt obligations and any repurchase requests. As part of our analysis, we consider among other items, credit quality of tenants and lease expirations.

Credit Quality of Tenants

We are exposed to credit risk within our tenant portfolio, which can reduce our results of operations and cash flow from operations if our tenants are unable to pay their rent. Tenants experiencing financial difficulties may become delinquent on their rent or default on their leases and, if they file for bankruptcy protection, may reject our lease in bankruptcy court, resulting in reduced cash flow. This may negatively impact net asset values and require us to incur impairment charges. Even if a default has not occurred and a tenant is continuing to make the required lease payments, we may restructure or renew leases on less favorable terms, or the tenant’s credit profile may deteriorate, which could affect the value of the leased asset and could in turn require us to incur impairment charges.

Historically, the geographic location of our properties and credit-worthiness of our tenants have resulted in minimal to no property impairments or write-offs on uncollectible rental revenues. It is possible, however, that tenants may file for bankruptcy or default on their leases in the future and that economic conditions may deteriorate.

To mitigate credit risk on commercial properties, we have historically looked to invest in assets that we believe are critically important to our tenant’s operations and have attempted to diversify our portfolio by tenant, tenant industry and geography. We also monitor all of our properties performance through review of rent delinquencies as a precursor to a potential default, meetings with tenant management and review of tenants’ financial statements and compliance with financial covenants. When necessary, our asset management process includes restructuring transactions to meet the evolving needs of tenants, refinancing debt and selling properties, as well as protecting our rights when tenants default or enter into bankruptcy.

Lease Expirations and Occupancy

No significant leases are scheduled to expire or renew in the next twelve months. The Advisor, with the assistance of our commercial property managers, actively manages our real estate portfolio and begins discussing options with tenants in advance of scheduled lease expirations. In certain cases, we may obtain lease renewals from our tenants; however, tenants may elect to move out at the end of their term. In the cases where commercial tenants elect not to renew, we may seek replacement tenants or try to sell the property.

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Cash Flow Analysis

Our objectives are to generate sufficient cash flow over time to provide shareholders with increasing dividends and to seek investments with potential for strong returns and capital appreciation throughout varying economic cycles. We

~~Table of Contents~~

have funded 100% of the dividends from operating cash flows. In setting a dividend rate, we focus primarily on expected returns from investments we have already made to assess the sustainability of a particular dividend rate over time.


					Six Months Ended
					June 30,
					2020		2019

	Nine Months Ended
	September 30,
	2017		2016
	(in thousands)
					(in thousands)
Net cash flows provided by operating activities	$	27,718	$	26,799	$	21,521	$	19,136
Net cash flows used in investing activities	$	(10,650)	$	(13,129)	$	(10,678)	$	(3,896)
Net cash flows used in financing activities	$	(8,111)	$	(3,966)	$	(5,736)	$	(20,756)

Operating Activities

Our real estate properties generate cash flow in the form of rental revenues, which is reduced by interest payments, direct lease costs and property-level operating expenses. Property-level operating expenses consist primarily of property management fees including salaries and wages of property management personnel, utilities, cleaning, repairs, insurance, security and building maintenance cost, and real estate taxes. Additionally, we incur general and administrative expenses, advisory fees, acquisition and disposition expenses and financing fees.

Net cash provided by operating activities was ~~$27,718~~$21,521 and ~~$26,799~~$19,136 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization. ~~The funds generated for the nine months ended September 30, 2017 and 2016 were primarily from property operations of our real estate portfolio.~~

Investing Activities

Our investing activities generally consist of real estate-related transactions (purchases and sales of properties) and payments of capitalized property-related costs such as intangible ~~assets and reserve escrows.~~assets.

Net cash used in investing activities was ~~$10,650~~$10,678 and ~~$13,129~~$3,896 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, cash flows used in investing activities related ~~primarily~~specifically to the acquisition of properties and capital expenditures was ~~$12,840~~$15,812 and ~~$14,870, respectively, and~~$4,005, respectively. During the ~~changes in restricted cash for replacement reserve escrows~~six months ended June 30, 2020, a note receivable of $363 bearing a 6.5% interest rate, payable over five years was ~~$ (952) and $ (819), respectively.~~issued as well as two notes receivable equaling $400 bearing a 6% interest rate payable over three years. In addition, during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020 and 2019, proceeds of ~~$4,442~~$774 and $1,065 were received from involuntary conversions, respectively. During the six months ended June 30, 2020, proceeds of $5,483 were generated from the sale of ~~one~~two commercial retail property and the sale of vehicles. The proceeds from the sale of the commercial retail property of $4,278 were deposited into a 1031 exchange escrow at June 30, 2017 and used on July 3, 2017. In addition, during the nine months ended September 30, 2017, proceeds of $1,937 were received from involuntary conversions. The majority of the proceeds were related to one property that was damaged in 2016. During the nine months ended September 30, 2016, proceeds of $1,404 were generated from the sale of one commercial medical property and the sale of one vehicle. In addition, during the nine months ended September 30, 2016, proceeds of $915 were received from involuntary conversions.properties.

Financing Activities

Our financing activities generally consist of funding property purchases by raising proceeds and securing mortgage notes payable as well as paying dividends, paying syndication costs and making principal payments on mortgage notes payable.

Net cash used in financing activities was ~~$8,111~~$5,736 and ~~$3,966~~$20,756 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~ 2020, we paid ~~$15,195~~$11,285 in dividends and distributions, redeemed ~~$1,530~~$2,485 of shares and units, received ~~proceeds~~$18,876 from new mortgage notes payable, ~~of $23,916,~~ and made mortgage principal payments of ~~$16,632.~~$12,138. For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, we paid ~~$13,126~~$10,828 in dividends and distributions, redeemed ~~$1,765~~$1,253 of shares and units, ~~received proceeds from new mortgage notes payable of $20,271,~~ and made mortgage principal payments of ~~$9,857.~~$10,160.

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Dividends

~~Dividends~~

Common Stock

We declared cash dividends to our shareholders during the period from January 1, ~~2017~~2020 to ~~September~~June 30, ~~2017~~2020 totaling ~~$6,111~~$5,071 or ~~$0.7425~~$0.5294 per share, ~~including amounts~~of which $1,819 was cash dividends and $3,251 were reinvested through ~~the dividend reinvestment plan. During the nine months ended September 30, 2017, we paid cash dividends of $2,201 and dividends of $3,910 were reinvested under~~ the dividend reinvestment plan. The cash dividends were paid with the ~~$27,718~~$21,521 from our cash flows from operations and ~~$743~~$238 provided by distributions from unconsolidated affiliates.

We declared cash dividends to our shareholders during the period from January 1, ~~2016~~2019 to ~~September~~June 30, ~~2016~~2019 totaling ~~$5,606~~$4,779 or ~~$0.7200~~$0.5225 per share, ~~including amounts~~of which $1,665 was cash dividends and $3,114 were reinvested through ~~the dividend reinvestment plan. During the nine months ended September 30, 2016, we paid cash dividends of $1,983 and dividends of $3,623 were reinvested under~~ the dividend reinvestment plan. The cash dividends were paid with the ~~$26,799~~$19,136 from our cash flows from operations and ~~$325~~$394 provided by distributions from unconsolidated affiliates.

We continue to provide cash dividends to our shareholders from cash generated by our operations. The following chart summarizes the sources of our cash used to pay dividends. Our primary source of cash is cash flow provided by operating activities from our investments as presented in our cash flow statement. We also include distributions from unconsolidated affiliates to the extent that the underlying real estate operations in these entities generate ~~these~~ cash ~~flows~~flow and the gain on sale of properties relates to net profits from the sale of certain properties. Our presentation is not intended to be an alternative to our consolidated statement of cash flows and does not present all sources and uses of our cash.

The following table presents certain information regarding our dividend coverage:


					Six Months Ended
					June 30,
					2020		2019

	Nine Months Ended
	September 30,
	2017		2016
	(in thousands)
Cash flows provided by operations (includes net income of $14,746 and $8,603, respectively)	$	27,718	$	26,799
Distributions from unconsolidated affiliates		743		325
					(in thousands)
Cash flows provided by operations (includes net income of $11,624 and $8,611, respectively)					$	21,521	$	19,136
Distributions in excess of earnings received from unconsolidated affiliates						141		50
Gain (Loss) on sales of real estate and non-real estate investments		2,047		(320)		1,456		—
Dividends declared		(6,111)		(5,606)		(5,071)		(4,779)
Excess	$	24,397	$	21,198	$	18,047	$	14,407

Limited Partnership Units

The operating partnership agreement provides that our operating partnership will distribute to the partners (subject to certain limitations) cash from operations on a quarterly basis (or more frequently, if we so elect) in accordance with the percentage interests of the partners. We determine the amounts of such distributions in our sole discretion.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we declared quarterly distributions ~~totalling $12,909~~totaling $9,659 to holders of limited partnership units in our operating partnership, which we paid on April ~~17,~~15 and July ~~17, and October 16, 2017.~~15, 2020. Distributions were paid at a rate of ~~$0.2475~~$0.2647 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, we declared quarterly distributions ~~totalling $11,546~~totaling $9,318 to holders of limited partnership units in our operating partnership, which we paid on April 15 and July 15, ~~and October 17, 2016.~~2019. Distributions were paid at a rate of ~~$0.2400~~$0.2613 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

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Sources of Dividends

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we paid aggregate dividends of ~~$6,111,~~$5,071, which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our funds from operations, or FFO, was ~~$27,165 while our modified funds from operations, or MFFO, for the nine months ended September 30, 2017 was $28,540;~~$20,842; therefore, our management believes our distribution policy is sustainable over time. For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, we paid aggregate dividends of ~~$5,606~~$4,779 which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our FFO was ~~$26,487 while our MFFO,~~$19,738 as of the ~~nine~~six months ended ~~September~~June 30, ~~2016 was $28,013.~~2019. For a further discussion of FFO, ~~and MFFO,~~ including a reconciliation of FFO ~~and MFFO~~ to net income, see “Funds from ~~Operations and Modified Funds from~~ Operations” above.

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Cash Resources

At ~~September~~June 30, ~~2017,~~2020, our unrestricted cash resources consisted of cash and cash equivalents totaling approximately ~~$20,991.~~$8,697. Our unrestricted cash reserves can be used for working capital needs and other commitments. In addition, we had unencumbered properties with a gross book value of ~~$36,373,~~$56,306, which could potentially be used as collateral to secure additional financing in future periods.

At ~~September~~June 30, ~~2017,~~2020, there was no balance outstanding on the ~~lines~~$31,415 line of credit. The line of credit is collateral for two letters of credit totaling $1,216, leaving ~~$37,015~~$30,199 available and unused under the agreements. See Note 75 to the accompanying consolidated financial statements for additional details regarding our line of credit agreements.

The sale of our securities and issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we did not sell any common shares in a private ~~placements.~~placement. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we issued ~~247,000~~175,000 and ~~134,000~~94,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively, and raised gross proceeds of ~~$6,028.~~ $5,006. During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, we did not sell any common shares in a private placement. During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, we issued ~~236,000~~168,000 and ~~101,000~~91,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, respectively, and raised gross proceeds of ~~$5,142.~~$4,757.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we issued 469,000 limited partnership units ~~valued at approximately $14,378~~ in connection with ~~the acquisition of~~six properties ~~and one property that had a change in control.~~acquired.

~~During the nine months ended September 30, 2016, we issued limited partnership units valued at approximately $16,940 in connection with the acquisitions of properties.~~

Off-Balance Sheet Arrangements

As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Inflation

Substantially all of our multifamily property leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally will minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore will expose us to the effect of a decline in market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter term leases.

As of ~~September~~June 30, ~~2017,~~2020, most of our commercial leases require tenants to pay directly or reimburse us for a share of our operating expenses. As a result, we are often able to pass on much of any increases to our property operating expenses that

~~Table of Contents~~

might occur due to inflation by correspondingly increasing our expense reimbursement revenues. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, inflation did not have a material impact on our revenues or net income.

Item 3. Quantitative and ~~Qualitative~~Qualitative Disclosures about Market Risk

The principal material financial market risk to which we are exposed is interest-rate risk. Our exposure to market risk for changes in interest rates relates primarily to refinancing long-term fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and our variable rate lines of credit.

As virtually all of our outstanding debt is long-term, fixed rate debt, our interest rate risk has not changed significantly from what was disclosed in our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2016~~2019 filed with the Securities and Exchange Commission on March ~~23, 2017.~~13, 2020.

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Item 4. Controls and ~~Procedures.~~ Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief ~~Accounting~~Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief ~~Accounting~~Financial Officer have concluded that, as of ~~September~~June 30, ~~2017,~~2020, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the ~~third~~second fiscal quarter of ~~2017~~ 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

5051

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PART II

OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Sale of Securities

Neither Sterling nor the operating partnership issued any unregistered securities during the three months ended ~~September~~June 30, ~~2017.~~2020.

Other Sales

During the three months ended ~~September~~June 30, ~~2017, there were no~~2020, we did not issue any common shares in exchange for limited partnership units of the operating partnership on a one-for-one basis pursuant to redemption requests made by accredited investors pursuant to Section ~~4(2)~~4 (a) (2) and Rule 506 of Regulation D.

Redemptions of Securities

Set forth below is information regarding common shares and limited partnership units redeemed during the three months ended ~~September~~June 30, ~~2017:~~2020:

Average

Total Number of

Total Number of

Approximate Dollar Value of

Total Number

Total Number

Price

Shares Redeemed

Units Redeemed

Shares (or Units) that May

of Common

of Limited

Paid per

as Part of

as Part of

Yet Be Redeemed Under

Shares

Partner Units

Common

Publicly Announced

Publicly Announced

Publicly Announced
Period

Redeemed


Redeemed

Share/Unit

Plans or Programs

Plans or Programs

Plans or Programs
July 1-31, 2017

3,000

13,000

$
15.50

1,072,000

676,000

$
6,352
August 1-31, 2017

5,000

—

$
15.50

1,077,000

676,000

$
6,274
September 1-30, 2017

2,000

4,000

$
15.50

1,079,000

680,000

$
6,181
Total

10,000

17,000


			Average		Total Number of	Total Number of	Approximate Dollar Value of
	Total Number	Total Number	Price		Shares Redeemed	Units Redeemed	Shares (or Units) that May
	of Common	of Limited	Paid per		as Part of	as Part of	Yet Be Redeemed Under
	Shares	Partner Units	Common		Publicly Announced	Publicly Announced	Publicly Announced
Period	Redeemed	Redeemed	Share/Unit		Plans or Programs	Plans or Programs	Plans or Programs
January 1-31, 2020	13,000	13,000	$	18.25	1,250,000	846,000	$	5,395
February 1-28, 2020	4,000	14,000	$	18.25	1,254,000	860,000	$	5,065
March 1-31, 2020	21,000	3,000	$	18.25	1,275,000	863,000	$	4,625
Total	38,000	30,000

April 1-30, 2020	53,000	5,000	$	18.25	1,328,000	868,000	$	3,582
May 1-31, 2020	4,000	7,000	$	18.25	1,332,000	875,000	$	3,376
June 1-30, 2020	—	—	$	18.25	1,332,000	875,000	$	8,376
Total	57,000	12,000

For the three months ended ~~September~~June 30, ~~2017,~~2020, we redeemed all shares or units for which we received redemption requests. In addition, for the three months ended ~~September~~June 30, ~~2017,~~2020, all common shares and units redeemed were redeemed as part of the publicly announced plans.

The Amended and Restated Share Redemption Plan permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our operating partnership, up to a maximum amount of ~~$30,000~~$40,000 worth of shares and units, upon request by the holders after they have held them for at least one year and subject to other conditions and limitations described in the plan. The amount remaining to be redeemed as of June 30, 2020, was $8,376. The redemption price for such shares and units redeemed under the plan was fixed at ~~$15.00~~$18.25 per share or unit, which ~~was increased to $15.50~~became effective ~~March 29, 2017 and is the current redemption price.~~January 1, 2020. The redemption plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plan at any time if it determines to do so is in our best interest.

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Item 6. Exhibits.

~~Item 6. Exhibits.~~

Exhibit
Number		Title of Document
3.1		Amended and Restated Bylaws effective June 2, 2020 (incorporated by reference to Exhibit No. 3.1 to the Trust’s Current Report on Form 8-K filed June 3, 2020).
10.1		Amended and Restated Share Redemption Plan effective June 25, 2020 (incorporated by reference to Exhibit No. 10.1 to the Trust’s Current Report on Form 8-K filed June 30, 2020).
10.2		Amended and Restated Unit Redemption Plan effective June 25, 2020 (incorporated by reference to Exhibit No. 10.2 to the Trust’s Current Report on Form 8-K filed June 30, 2020).
10.3		Amended and Restated Dividend Reinvestment Plan effective June 25, 2020 (incorporated by reference to Exhibit No. 10.3 to the Trust’s Current Report on Form 8-K filed June 30, 2020).
31.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief ~~Accounting~~Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief ~~Accounting~~Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the of the Sarbanes-Oxley Act of 2002.

101		The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2017,~~2020 formatted in ~~XBRL (eXtensible~~iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016;~~2019; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016;~~2019; (iii) Consolidated ~~Statement~~Statements of Shareholders’ Equity for ~~nine~~the three and six months ended ~~September~~June 30, ~~2017;~~2020; (iv) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, and; (v) Notes to Consolidated Financial Statements.

104		Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.

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SIGNATURES

~~SIGNATURES~~

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

Dated:~~November 8, 2017~~August 7, 2020

	STERLING REAL ESTATE TRUST

	By:	/s/ Kenneth P. Regan
		Kenneth P. Regan
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ ~~Angie D. Stock~~Erica J. Chaffee
		~~Angie D. Stock~~Erica J. Chaffee
		Chief ~~Accounting~~Financial Officer
		(Principal Financial and Accounting Officer)

5354

North Dakota	90-0115411
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1711 Gold Drive South, Suite 100, Fargo, North Dakota	58103
(Address of principal executive offices)	(Zip Code)



Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Shares, par value $0.01 per share	N/A	N/A


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐☒
Emerging growth company	☐
~~(Do not check if a smaller reporting company)~~


Class		Outstanding at ~~November 6, 2017~~August 4, 2020
Common Shares of Beneficial Interest, $0.01 par value per share		~~8,516,368~~9,739,533.26

	Page
	No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):	3
Consolidated Balance Sheets – as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~ 2019	3
Consolidated Statements of Operations and Other Comprehensive Income – Three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~ 2019	4
Consolidated ~~Statement~~Statements of Shareholders’ Equity – ~~Nine~~Three and six months ended ~~September~~June 30, ~~2017~~2020 and 2019	5
Consolidated Statements of Cash Flows – ~~Nine~~Six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~ 2019	6 7
Notes to Consolidated Financial Statements	8 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk	50
Item 4. Controls and Procedures	50 51

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51 52
Item 6. Exhibits	52 53
Signatures	53 54


	September 30,		December 31,
	2017		2016
	(in thousands)
ASSETS
Real estate investments	$	648,856	$	622,975
Cash and cash equivalents		20,991		12,034
Restricted deposits and funded reserves		7,894		7,213
Investment in unconsolidated affiliates		2,785		3,653
Due from related party		2		34
Receivables		4,748		4,258
Prepaid expenses		862		433
Notes receivable		—		600
Financing and lease costs, less accumulated amortization of $1,875 in 2017 and $1,720 in 2016		776		950
Assets held for sale		—		2,482
Lease intangible assets, less accumulated amortization of $12,491 in 2017 and $10,770 in 2016		13,863		15,852
Other assets		5		29

Total Assets	$	700,782	$	670,513

LIABILITIES
Mortgage notes payable, net	$	402,465	$	390,479
Special assessments payable		1,214		480
Dividends payable		6,404		5,925
Due to related party		617		957
Tenant security deposits payable		4,049		3,851
Subordinated debt		175		175
Lease intangible liabilities, less accumulated amortization of $1,324 in 2017 and $1,122 in 2016		1,846		2,075
Accounts payable - trade		474		438
Retainage payable		420		288
Liabilities related to assets held for sale		—		125
Fair value of interest rate swaps		88		145
Deferred insurance proceeds		1,475		102
Accrued expenses and other liabilities		8,672		6,818
Total Liabilities		427,899		411,858

COMMITMENTS and CONTINGENCIES - Note 16

SHAREHOLDERS' EQUITY
Beneficial interest		89,023		84,727
Noncontrolling interest
Operating partnership		180,725		170,138
Partially owned properties		3,223		3,935
Accumulated other comprehensive loss		(88)		(145)
Total Shareholders' Equity		272,883		258,655

	$	700,782	$	670,513


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
	(in thousands, except per share data)				(in thousands, except per share data)
Income from rental operations
Real estate rental income	$	27,088	$	25,365	$	80,606	$	76,075
Tenant reimbursements		1,567		1,523		4,592		4,547
		28,655		26,888		85,198		80,622
Expenses
Expenses from rental operations
Interest		4,690		4,636		13,938		13,740
Depreciation and amortization		5,427		5,471		16,170		16,711
Real estate taxes		3,186		2,360		8,389		7,020
Property management fees		3,137		2,771		9,163		8,095
Utilities		1,918		1,709		6,463		5,715
Repairs and maintenance		6,170		6,288		16,103		15,703
Insurance		376		339		1,112		1,022
Loss on lease terminations		—		25		146		299
		24,904		23,599		71,484		68,305
Administration of REIT
Administrative expenses		61		71		290		301
Advisory fees		714		669		2,114		1,971
Acquisition and disposition expenses		—		299		1,375		1,526
Trustee fees		12		14		44		46
Legal and accounting		98		83		385		343
		885		1,136		4,208		4,187
Total expenses		25,789		24,735		75,692		72,492
Income from operations		2,866		2,153		9,506		8,130
Other income (expense)
Equity in income of unconsolidated affiliates		373		298		743		820
Other income		20		24		73		62
Gain (Loss) on sale of real estate and non-real estate investments		(3)		—		2,049		(320)
Gain on change in control of real estate investments		—		—		2,186		—
Gain (Loss) on involuntary conversion		—		48		189		(89)
		390		370		5,240		473
Net income	$	3,256	$	2,523	$	14,746	$	8,603
Net income (loss) attributable to noncontrolling interest:
Operating Partnership		2,264		1,814		10,147		6,109
Partially owned properties		(90)		(176)		(222)		(502)
Net income attributable to Sterling Real Estate Trust	$	1,082	$	885	$	4,821	$	2,996

Net income per common share, basic and diluted	$	0.13	$	0.11	$	0.59	$	0.38

Comprehensive income:
Net income	$	3,256	$	2,523	$	14,746	$	8,603
Other comprehensive gain (loss) - change in fair value of interest rate swaps		17		33		57		28
Comprehensive income		3,273		2,556		14,803		8,631
Comprehensive income attributable to noncontrolling interest		2,185		1,661		9,964		5,626
Comprehensive income attributable to Sterling Real Estate Trust	$	1,088	$	895	$	4,839	$	3,005


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019

	(in thousands, except per share data)				(in thousands, except per share data)
Income from rental operations
Real estate rental income	$	30,821	$	30,270	$	60,727	$	60,102
Expenses
Expenses from rental operations
Operating expenses, excluding real estate taxes		10,961		11,832		23,496		24,011
Real estate taxes		3,139		3,019		6,303		6,048
Depreciation and amortization		5,246		5,353		10,498		10,891
Interest		4,224		4,582		8,574		9,298
		23,570		24,786		48,871		50,248
Administration of REIT		1,085		971		2,247		2,082
Total expenses		24,655		25,757		51,118		52,330
Income from operations		6,166		4,513		9,609		7,772

Other income
Equity in income of unconsolidated affiliates		80		262		238		394
Other income		150		46		269		116
Gain on sale of real estate and non-real estate investments		1		—		1,456		—
Gain on involuntary conversion		—		—		52		329
		231		308		2,015		839
Net income	$	6,397	$	4,821	$	11,624	$	8,611
Net income (loss) attributable to noncontrolling interest:
Operating Partnership		4,177		3,191		7,596		5,723
Partially owned properties		18		(17)		13		(47)
Net income attributable to Sterling Real Estate Trust	$	2,202	$	1,647	$	4,015	$	2,935

Net income per common share, basic and diluted	$	0.23	$	0.18	$	0.42	$	0.32

Comprehensive income:
Net income	$	6,397	$	4,821	$	11,624	$	8,611
Other comprehensive (loss) gain - change in fair value of interest rate swaps		(622)		3		(2,108)		7
Comprehensive income		5,775		4,824		9,516		8,618
Comprehensive income attributable to noncontrolling interest		3,788		3,176		6,229		5,681
Comprehensive income attributable to Sterling Real Estate Trust	$	1,987	$	1,648	$	3,287	$	2,937

Weighted average Common Shares outstanding		9,611		9,209		9,587		9,151


				Accumulated				Noncontrolling
				Distributions		Total		Interest				Accumulated
	Common	Paid-in		in Excess of		Beneficial		Operating		Partially Owned		Comprehensive
	Shares	Capital		Earnings		Interest		Partnership		Properties		Income (Loss)		Total

	(in thousands)
BALANCE AT DECEMBER 31, 2016	8,001	$	106,207	$	(21,480)	$	84,727	$	170,138	$	3,935	$	(145)	$	258,655
Shares issued pursuant to trustee compensation plan	4		59				59								59
Contribution of assets in exchange for the issuance of noncontrolling interest shares									14,378		—				14,378
Shares/units redeemed	(41)		(634)				(634)		(896)		—				(1,530)
Dividends declared					(6,111)		(6,111)		(12,909)		—				(19,020)
Dividends reinvested - stock dividend	247		3,836				3,836								3,836
Issuance of shares under optional purchase plan	134		2,192				2,192								2,192
UPREIT units converted to REIT common shares	8		133				133		(133)		—				—
Change in fair value of interest rate swaps													57		57
Distributions paid to consolidated real estate entity noncontrolling interests									—		(490)				(490)
Net income					4,821		4,821		10,147		(222)				14,746
BALANCE AT SEPTEMBER 30, 2017	8,353	$	111,793	$	(22,770)	$	89,023	$	180,725	$	3,223	$	(88)	$	272,883


Residential Property	Location	No. of Properties	Units
	North Dakota	96	5,828
	Minnesota	16	3,027
	Missouri	1	164
	Nebraska	2	316
		115	9,335

Commercial Property	Location	No. of Properties	Sq. Ft
	North Dakota	20	805,000
	Arkansas	2	29,000
	Colorado	1	13,000
	Iowa	1	33,000
	Louisiana	1	15,000
	Michigan	1	12,000
	Minnesota	15	683,000
	Mississippi	1	15,000
	Nebraska	1	16,000
	Texas	1	7,000
	Wisconsin	5	63,000
		49	1,691,000


Buildings and improvements		40 years
Furniture, fixtures and equipment		5-9 years


Years ending December 31,	Amount
	(in thousands)
2020 (July 1, 2020 - December 31, 2020)	$	8,828
2021		14,879
2022		11,493
2023		9,505
2024		9,035
Thereafter		42,596
	$	96,336


	Nine months ended September 30, 2017						Nine months ended September 30, 2016
	Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)
Income from rental operations	$	64,579	$	20,619	$	85,198	$	59,990	$	20,632	$	80,622
Expenses from rental operations		35,630		5,600		41,230		32,353		5,202		37,555
Net operating income	$	28,949	$	15,019	$	43,968	$	27,637	$	15,430	$	43,067
Interest						13,938						13,740
Depreciation and amortization						16,170						16,711
Administration of REIT						4,208						4,187
Loss on lease terminations						146						299
Other (income)/expense						(5,240)						(473)
Net income					$	14,746					$	8,603


As of June 30, 2020							Residential		Commercial		Total

As of September 30, 2017	Residential		Commercial		Total
	(in thousands)
							(in thousands)
Real estate investments	$	552,792	$	202,337	$	755,129	$	629,968	$	196,134	$	826,102
Accumulated depreciation		(73,008)		(33,265)		(106,273)		(111,432)		(43,193)		(154,625)
	$	479,784	$	169,072		648,856
							$	518,536	$	152,941		671,477
Cash and cash equivalents						20,991						8,697
Restricted deposits and funded reserves						7,894						13,792
Investment in unconsolidated affiliates						2,785						8,275
Receivables and other assets						5,617
Financing and lease costs, less accumulated amortization						776
Note receivable												2,063
Intangible assets, less accumulated amortization						13,863						8,032
Other assets, net												6,339
Total Assets					$	700,782					$	718,675


As of December 31, 2019							Residential		Commercial		Total

As of December 31, 2016	Residential		Commercial		Total
	(in thousands)
							(in thousands)
Real estate investments	$	514,341	$	200,959	$	715,300	$	605,813	$	196,215	$	802,028
Accumulated depreciation		(63,148)		(29,177)		(92,325)		(104,170)		(42,146)		(146,316)
	$	451,193	$	171,782		622,975
							$	501,643	$	154,069		655,712
Cash and cash equivalents						12,034						9,002
Restricted deposits and funded reserves						7,213						8,380
Investment in unconsolidated affiliates						3,653						7,915
Receivables and other assets						5,354
Financing and lease costs, less accumulated amortization						950
Assets held for sale						2,482
Note receivable												1,300
Intangible assets, less accumulated amortization						15,852						9,133
Other assets, net												8,244
Total Assets					$	670,513					$	699,686


	Lease		Accumulated			Lease
As of June 30, 2020	Intangibles		Amortization			Intangibles, net

Lease Intangible Assets	(in thousands)
In-place leases	$	20,734	$	(14,114)		$	6,620
Above-market leases		2,806		(1,394)	��		1,412
	$	23,540	$	(15,508)		$	8,032
Lease Intangible Liabilities
Below-market leases	$	(3,032)	$	1,935		$	(1,097)


	Lease		Accumulated		Lease
As of September 30, 2017	Intangibles		Amortization		Intangibles, net
Lease Intangible Assets	(in thousands)
In-place leases	$	23,239	$	(11,413)	$	11,826
Above-market leases		3,115		(1,078)		2,037
	$	26,354	$	(12,491)	$	13,863
Lease Intangible Liabilities
Below-market leases	$	(3,170)	$	1,324	$	(1,846)


	Intangible		Intangible
Years ending December 31,	Assets		Liabilities
	(in thousands)
2017 (October 1, 2017 to December 31, 2017)	$	600	$	70
2018		2,237		278
2019		1,932		269
2020		1,507		218
2021		1,210		189
Thereafter		6,377		822
	$	13,863	$	1,846


	Intangible		Intangible
Years ending December 31,	Assets		Liabilities

	(in thousands)
2020 (July 1, 2020 - December 31, 2020)	$	665	$	103
2021		1,121		184
2022		987		164
2023		849		151
2024		849		151
Thereafter		3,561		344
	$	8,032	$	1,097


	Principal Balance At
	September 30,		December 31,
	2017		2016
	(in thousands)
Fixed rate mortgage notes payable (a)	$	405,355	$	393,511
Less unamortized debt issuance costs		2,890		3,032
	$	402,465	$	390,479


	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2017
Fair value of interest rate swaps	$	—	$	88	$	—	$	88
December 31, 2016
Fair value of interest rate swaps	$	—	$	145	$	—	$	145


	Three months ended September 30, 2017					Three months ended September 30, 2016
			Weighted Avg	Per				Weighted Avg	Per
			Shares and	Share and				Shares and	Share and
	Amount		Units(1)	Unit (2)		Amount		Units(1)	Unit (2)
	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	1,082	8,356	$	0.13	$	885	7,891	$	0.11

Add back:
Noncontrolling Interest - OPU		2,264	17,523				1,814	16,158
Depreciation & Amortization from continuing operations		5,427					5,471
Pro rata share of unconsolidated affiliate depreciation & amortization		93					118
Loss on sale of depreciable real estate investments		—					—
Subtract:
Gain on sales of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		3					—
Funds from operations applicable to common shares and limited partnership units (FFO)		8,869	25,879	$	0.34		8,288	24,049	$	0.34
Add back:
Acquisition, and disposition expenses		—					299
Modified Funds from Operations applicable to common shares and limited partnership units (MFFO)	$	8,869	25,879	$	0.34	$	8,587	24,049	$	0.36


			Average		Total Number of	Total Number of	Approximate Dollar Value of
	Total Number	Total Number	Price		Shares Redeemed	Units Redeemed	Shares (or Units) that May
	of Common	of Limited	Paid per		as Part of	as Part of	Yet Be Redeemed Under
	Shares	Partner Units	Common		Publicly Announced	Publicly Announced	Publicly Announced
Period	Redeemed	Redeemed	Share/Unit		Plans or Programs	Plans or Programs	Plans or Programs
July 1-31, 2017	3,000	13,000	$	15.50	1,072,000	676,000	$	6,352
August 1-31, 2017	5,000	—	$	15.50	1,077,000	676,000	$	6,274
September 1-30, 2017	2,000	4,000	$	15.50	1,079,000	680,000	$	6,181
Total	10,000	17,000