STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

Segment Revenues and Net Operating Income

The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.

Three months ended  September 30, 2017

Three months ended  September 30, 2016


Residential

Commercial

Total

Residential

Commercial

Total

(in thousands)

(in thousands)
Income from rental operations

$
21,863

$
6,792

$
28,655

$
20,081

$
6,807

$
26,888
Expenses from rental operations

12,764

2,023

14,787

11,547

1,920

13,467
Net operating income

$
9,099

$
4,769

$
13,868

$
8,534

$
4,887

$
13,421
Interest

4,690

4,636
Depreciation and amortization

5,427

5,471
Administration of REIT

885

1,136
Loss on lease terminations

—

25
Other (income)/expense

(390)

(370)
Net income

$
3,256

$
2,523


	Three months ended March 31, 2021						Three months ended March 31, 2020
	Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)
Income from rental operations	$	25,959	$	5,801	$	31,760	$	23,995	$	5,911	$	29,906
Expenses from rental operations		13,847		1,504		15,351		13,912		1,787		15,699
Net operating income	$	12,112	$	4,297	$	16,409	$	10,083	$	4,124	$	14,207
Depreciation and amortization						5,328						5,252
Interest						4,287						4,350
Administration of REIT						1,201						1,162
Other income						(243)						(1,784)
Net income					$	5,836					$	5,227

Segment Assets and Accumulated Depreciation


As of March 31, 2021	Residential		Commercial		Total

	(in thousands)
Real estate investments	$	647,519	$	200,571	$	848,090
Accumulated depreciation		(122,143)		(43,057)		(165,200)
	$	525,376	$	157,514		682,890
Cash and cash equivalents						13,888
Restricted deposits and funded reserves						16,459
Investment in unconsolidated affiliates						11,664
Note receivable						2,009
Assets held for sale						830
Intangible assets, less accumulated amortization						7,075
Other assets, net						10,449
Total Assets					$	745,264


As of December 31, 2020	Residential		Commercial		Total

	(in thousands)
Real estate investments	$	647,083	$	198,205	$	845,288
Accumulated depreciation		(118,363)		(42,212)		(160,575)
	$	528,720	$	155,993		684,713
Cash and cash equivalents						11,716
Restricted deposits and funded reserves						15,919
Investment in unconsolidated affiliates						9,659
Note receivable						2,026
Assets held for sale						831
Intangible assets, less accumulated amortization						7,367
Other assets, net						10,798
Total Assets					$	743,029

1814

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (UNAUDITED)

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

NOTE 4 – restricted deposits and funded reserves


	As of March 31,		As of December 31,
	2021		2020

	(in thousands)
Tenant security deposits	$	4,885	$	4,730
Real estate tax and insurance escrows		1,158		2,058
Replacement reserves		2,094		2,137
Other funded reserves		8,322		6,994
	$	16,459	$	15,919

Tenant Security Deposits

We have set aside funds to repay tenant security deposits upon tenant move-out.

Real Estate Tax and Insurance Escrows

Pursuant to the terms of certain mortgages, we have established and maintain real estate tax escrows and insurance escrows to pay real estate taxes and insurance. We are required to contribute to the account monthly an amount equal to 1/12 of the estimated real estate taxes and insurance premiums.

Replacement Reserves

Pursuant to the terms of certain mortgages, we have established and maintain several replacement reserve accounts. We make monthly deposits into the replacement reserve accounts to be used for repairs and replacements on the property. Certain replacement reserve accounts require authorization from the mortgage company for withdrawals.

Other Funded Reserves

Other funded reserves consist of proceeds received on the disposal of a commercial building located in Bismarck, North Dakota. The proceeds are required to be held as restricted funds under Section 1031 of the Internal Revenue Code (like-kind exchange).

Additionally, insurance proceeds of $1,324 that were received during the three months ended March 31, 2021, are held in an escrow account per the agreement set in place with the lender of the property. Funds will be released as construction costs related to the insurance claim are incurred.

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

~~Segment Assets and Accumulated Depreciation~~

As of September 30, 2017

Residential

Commercial

Total

(in thousands)
Real estate investments

$
552,792

$
202,337

$
755,129
Accumulated depreciation

(73,008)

(33,265)

(106,273)

$
479,784

$
169,072

648,856
Cash and cash equivalents

20,991
Restricted deposits and funded reserves

7,894
Investment in unconsolidated affiliates

2,785
Receivables and other assets

5,617
Financing and lease costs, less accumulated amortization

776
Intangible assets, less accumulated amortization

13,863
Total Assets

$
700,782

As of December 31, 2016

Residential

Commercial

Total

(in thousands)
Real estate investments

$
514,341

$
200,959

$
715,300
Accumulated depreciation

(63,148)

(29,177)

(92,325)

$
451,193

$
171,782

622,975
Cash and cash equivalents

12,034
Restricted deposits and funded reserves

7,213
Investment in unconsolidated affiliates

3,653
Receivables and other assets

5,354
Financing and lease costs, less accumulated amortization

950
Assets held for sale

2,482
Intangible assets, less accumulated amortization

15,852
Total Assets

$
670,513

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (UNAUDITED)

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

NOTE 5 – INVESTMENT IN UNCONSOLIDATED AFFILIATES

~~note 4 –~~

The Company’s investments in unconsolidated real estate ventures, are summarized as follows (in thousands):


Unconsolidated Affiliates	Date Acquired	Trust Ownership Interest		Total Investment in Unconsolidated Affiliates
Banner Building	2007	66.67%	$	59
Grand Forks Market Place Retail Center	2003	50%		2,429
SE Savage, LLC	2019	60%		3,168
SE Maple Grove, LLC	2019	60%		2,942
SE Rogers, LLC	2020	60%		3,066
			$	11,664

The Operating Partnership is a 50% owner of Grand Forks Marketplace Retail Center as a tenant in common through 100% ownership in a limited liability company. Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at March 31, 2021 and December 31, 2020 of $9,975 and $10,036, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership is a 66.67% owner of Banner Building as a tenant in common. The office building has approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at March 31, 2021 and December 31, 2020 of $6,181 and $6,232, respectively. The Trust is jointly and severally liable for the full mortgage balance.

Based upon the facts and circumstances at formation of the tenant in common investments, the Trust determined that they are not VIEs. As a result, the Trust used the voting interest model under the accounting standard for consolidation in order to determine whether to consolidate the tenants in common and joint ventures. Based upon each member's substantive participating rights over the activities of each entity as stipulated in the operating agreements, the tenants in common are not consolidated by the Trust and are accounted for under the equity method of accounting. The Trust’s investments in the tenants in common are included in Investment in unconsolidated affiliates, at equity, on the Trust’s consolidated balance sheets and the Trust’s earnings from its investments in the unconsolidated affiliates are presented in Equity in earnings (losses) of real estate investments on the Trust’s consolidated statements of operations.

As of September 30, 2017

Residential

Commercial

Total

(in thousands)
Land and land improvements

$
72,673

$
37,823

$
110,496
Building and improvements

453,790

163,048

616,838
Furniture, fixtures and equipment

25,357

1,466

26,823
Construction in progress

972

—

972

552,792

202,337

755,129
Less accumulated depreciation

(73,008)

(33,265)

(106,273)

$
479,784

$
169,072

$
648,856

As of December 31, 2016

Residential

Commercial

Total

(in thousands)
Land and land improvements

$
67,384

$
37,769

$
105,153
Building and improvements

419,120

161,724

580,844
Furniture, fixtures and equipment

24,852

1,466

26,318
Construction in progress

2,985

—

2,985

514,341

200,959

715,300
Less accumulated depreciation

(63,148)

(29,177)

(92,325)

$
451,193

$
171,782

$
622,975

The LLC interests discussed below are deemed to be variable interests in VIEs and, based on an evaluation of the variable interests against the criteria for consolidation, the Trust determined that it is not the primary beneficiary of the investments, as the Trust does not have power to direct the activities of the entities that most significantly affect their performance. As such, the interest in the VIEs is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are stated at cost and adjusted for the Trust’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the operating agreements. The Trust's maximum exposure to losses associated with its unconsolidated investments is primarily limited to its carrying value in the investments.

~~Construction~~

The Operating Partnership owns a 60% interest in ~~progress~~a limited liability company that is currently developing a 190-unit multifamily property. As of March 31, 2021, the Operating Partnership has contributed $2,077 in cash to SE Savage. SE Savage is located in Savage, Minnesota, with total assets of $32,133 and $27,015 as of ~~September 30, 2017 consists primarily of development~~March 31, 2021 and ~~planning costs associated with phase III of a multifamily apartment community under construction in Bismarck, North Dakota. Phase III of~~December 31, 2020, respectively. Current expectations are that the ~~development is still~~project will be completed in the ~~planning stages~~fourth quarter of 2021 and ~~construction has not yet commenced.~~

~~NOTE 5 – NOTES RECEIVABLE~~

Notes receivable primarily consisted of a $600 note to an unaffiliated party to provide working capital and for improvements on a residential property bearing interest at a rate of 6.5%. This note was personally guaranteed by the owner. Accrued interest was due monthly beginning until the note was paid in full. The principal plus accrued interest was originally due on August 31, 2016. On the original due date, the note was extended for an additional twelve months to August 31, 2017 with the same terms. The note was paid off on August 31, 2017.

current

2016

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (UNAUDITED)

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

project budget approximates $37,800 of which $29,117 has been incurred as of March 31, 2021. The property is encumbered by a first mortgage with a balance at March 31, 2021 and December 31, 2020 of $24,786 and $19,436, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 60% interest in a limited liability company that is currently developing a 160-unit multifamily property. As of March 31, 2021, the Operating Partnership has contributed $2,975 in cash to SE Maple Grove. SE Maple Grove is located in Maple Grove, Minnesota, with total assets of $18,331 and $13,106 as of March 31, 2021 and December 31, 2020. Current expectations are that the project will be completed in the second quarter of 2022 and the current project budget approximates $33,000 of which $16,242 has been incurred as of March 31, 2021. The property is encumbered by a first mortgage with a balance at March 31, 2021 and December 31, 2020 of $11,335 and $5,710, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 60% interest in a limited liability company that intends to develop a 165-unit multifamily property. As of March 31, 2021, the Operating Partnership has contributed $3,089 in cash to SE Rogers. SE Rogers holds land located in Rogers, Minnesota, with total assets of $5,761 and $4,161 as of March 31, 2021 and December 31, 2020, respectively. Current expectations are that the project will be completed in the second quarter of 2022 and the current project budget approximates $34,300 of which $5,478 has been incurred as of March 31, 2021. The property is encumbered by a first mortgage that has 0 balance at March 31, 2021 and December 31, 2020. The Company is jointly and severally liable for the full mortgage balance.

The amounts reflected in the following table are based on the historical financial information of the unconsolidated affiliates.

The following is a summary of the financial position of the unconsolidated affiliates as of March 31, 2021 and December 31, 2020.


	March 31, 2021		December 31, 2020

	(in thousands)
ASSETS
Real estate investments	$	86,983	$	74,991
Accumulated depreciation		(9,939)		(9,692)
		77,044		65,299
Cash and cash equivalents		282		249
Restricted deposits and funded reserves		192		384
Other assets, net		296		180
Total Assets	$	77,814	$	66,112

LIABILITIES
Mortgage notes payable, net	$	51,016	$	41,405
Tenant security deposits payable		17		2
Accrued expenses and other liabilities		6,543		6,533
Total Liabilities	$	57,576	$	47,940
SHAREHOLDERS' EQUITY
Total Shareholders' Equity	$	20,238	$	18,172

	$	77,814	$	66,112

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

The following is a summary of results of operations of the unconsolidated affiliates for the three months ended March 31, 2021 and 2020.


	Three months ended March 31,
	2021		2020

	(in thousands)
Income from rental operations	$	880	$	963
Expenses from rental operations		234		259
Net operating income	$	646	$	704
Depreciation and Amortization		247		171
Interest		417		244
Net (loss) income	$	(18)	$	289

NOTE 6 - Lease intangibles

The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:

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)


							Lease		Accumulated		Lease
As of March 31, 2021							Intangibles		Amortization		Intangibles, net

	Lease		Accumulated		Lease
As of December 31, 2016	Intangibles		Amortization		Intangibles, net
Lease Intangible Assets	(in thousands)						(in thousands)
In-place leases	$	23,507	$	(9,860)	$	13,647	$	18,965	$	(13,177)	$	5,788
Above-market leases		3,115		(910)		2,205		2,617		(1,330)		1,287
	$	26,622	$	(10,770)	$	15,852
							$	21,582	$	(14,507)	$	7,075
Lease Intangible Liabilities
Below-market leases	$	(3,197)	$	1,122	$	(2,075)	$	(2,881)	$	1,934	$	(947)


	Lease		Accumulated		Lease
As of December 31, 2020	Intangibles		Amortization		Intangibles, net

Lease Intangible Assets	(in thousands)
In-place leases	$	19,768	$	(13,727)	$	6,041
Above-market leases		2,618		(1,292)		1,326
	$	22,386	$	(15,019)	$	7,367
Lease Intangible Liabilities
Below-market leases	$	(2,957)	$	1,963	$	(994)

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:

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)
2021 (April 1, 2021 - December 31, 2021)	$	829	$	137
2022		987		164
2023		849		151
2024		849		151
2025		849		151
Thereafter		2,712		193
	$	7,075	$	947

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of ~~September 30, 2017~~March 31, 2021 was ~~6.0~~7.2 years.

When acquiring property, the portion of the purchase price allocated to in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The Trust incurred amortization expense pertaining to acquired in-place lease value intangibles of $253 and $341 for the three months ended March 31, 2021 and 2020, respectively.

When acquiring property, the portion of the purchase price allocated to 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 $39 and $52 for the three months ended March 31, 2021 and 2020, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $47 and $56 for the three months ended March 31, 2021 and 2020, respectively, was recorded as an increase to real estate rental income.

NOTE 7 – LINES OF CREDIT

We have a ~~$27,000~~$18,300 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in June ~~2018; and~~2021; a ~~$6,315~~$4,915 variable rate ~~(prime rate less 0.5%~~(floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires in November 2019. The lines of credit are secured by properties in Duluth, Minnesota; Minneapolis/St. Paul, Minnesota; Austin, Texas; Mandan, North Dakota; Fargo, North Dakota; Edina, Minnesota, St. Cloud, Minnesota; Moorhead, Minnesota;June 2022; and ~~Grand Forks, North Dakota. We also have~~ a ~~$2,000~~$5,000 variable rate ~~(prime rate less 0.5%~~(floating LIBOR plus 2.00%) ~~unsecured~~ line of credit agreement with Bremer Bank, which expires ~~October 2018; and a $3,000~~June 2022. The lines of credit are secured by specific properties. At March 31, 2021, the $4,915 variable rate ~~(prime rate) unsecured~~ line of credit ~~agreement~~ with ~~Bell~~Bremer Bank ~~which expires December 2017. At September 30, 2017, there was no~~

~~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)~~

~~balance outstanding on the lines~~secured 2 letters of credit totaling $746, leaving ~~$37,015~~$27,469 available and unused under the agreements. ~~Certain of the variable~~These operating lines ~~of credit have limits on availability based on collateral specific critieria.~~are designed to enhance treasury management activities and more effectively manage cash balances.

On June 30, 2017, one of the retail properties that secured the Wells Fargo line of credit was sold. Wells Fargo has released the property as collateral, however, the bank is currently in process of determining the new available borrowing amount.

Certain line of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. As of December 31, 2016, one residential property was out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis. A waiver was received from the lender. As of September 30, 2017, we were inWe are not required to determine compliance with all ~~covenants.~~covenants as of March 31, 2021; however, we have not received any notice of non-compliance with our covenants through the date of this filing.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

NOTE 8 - MORTGAGE NOTES PAYABLE

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


	Principal Balance At
	March 31,		December 31,
	2021		2020

	(in thousands)
Fixed rate mortgage notes payable (a)	$	419,700	$	415,665
Variable rate mortgage notes payable		7,368		7,446
Mortgage notes payable		427,068		423,111
Less unamortized debt issuance costs		1,904		1,833
	$	425,164	$	421,278

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~~$43,408 and ~~$3,056~~$43,613 of variable rate mortgage debt that was swapped to a fixed rate at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively.

As of ~~September 30, 2017,~~March 31, 2021, we had ~~127~~107 fixed rate and 2 variable rate mortgage loans with effective interest rates ranging from ~~2.57%~~2.11% to ~~7.25%~~6.85% per annum and a weighted average effective interest rate of ~~4.25%~~4.01% per ~~annum.~~annum on fixed rate loans and 2.25% per annum on variable rate loans.

As of December 31, ~~2016,~~2020, we had ~~116~~114 fixed rate and 2 variable rate mortgage loans with effective interest rates ranging from ~~2.57%~~2.14% to ~~7.25%~~6.85% per annum, and a weighted average effective interest rate of ~~4.43%~~4.03% per ~~annum.~~annum on fixed rate loans and 2.28% per annum on variable rate loans.

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. ~~As of December 31, 2016, five loans on residential properties were out of compliance due~~We are not required to various unit renovation and parking lot repair and maintenance costs. The loans were secured by properties located in Fargo and Bismarck, North Dakota with a total outstanding balance of $8,336 at December 31, 2016. Annual waivers have been received from the lenders. As of September 30, 2017, we were indetermine compliance with all ~~covenants.~~ covenants as of March 31, 2021; however, we have not received any notice of non-compliance with our covenants through the date of this filing.

~~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

(in thousands)
2017 (October 1, 2017 to December 31, 2017)

$
5,000
2018

20,095
2019

25,322
2020

28,001
2021

45,897
Thereafter

281,040
Total payments

$
405,355


Years ending December 31,	Amount
	(in thousands)
2021 (April 1, 2021 - December 31, 2021)	$	15,835
2022		27,109
2023		50,417
2024		19,421
2025		51,057
Thereafter		263,229
Total payments	$	427,068

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

NOTE 9 – 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 March 31, 2021, the Trust used 9 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 nine months, the Trust estimates that an additional $269 will be reclassified as a interest expense.

The following table summarizes the Trust’s interest rate swaps as of March 31, 2021, which effectively convert on month floating rate LIBOR to a fixed rate:


			Fixed
Effective Date		Notional	Interest Rate	Maturity Date
November 1, 2019	$	6,928	3.15%	November 1, 2029
November 1, 2019	$	4,814	3.28%	November 1, 2029
January 10, 2020	$	3,130	3.39%	January 10, 2030
June 11, 2020	$	1,568	3.07%	June 15, 2030
June 11, 2020	$	3,039	3.07%	June 15, 2030
June 15, 2020	$	1,700	2.94%	June 15, 2030
June 15, 2020	$	4,498	2.94%	June 15, 2030
July 1, 2020	$	4,931	2.79%	June 10, 2030
December 2, 2020	$	12,800	2.91%	December 2, 2027

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	March 31, 2021	December 31, 2020		March 31, 2021		December 31, 2020
Interest rate swaps	9	9	$	43,408	$	43,613

The table below presents the estimated fair value of the Trust’s derivative financial instruments as well as their classification in the ~~notional amount of $1,294 and $2,450~~accompanying consolidated balance sheets. The valuation techniques are described in Note 9 to provide a fixed rate of 7.25% 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.the consolidated financial statements.


	Derivatives
Derivatives designated as	March 31, 2021			December 31, 2020
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	921	Other assets, net	$	—
Interest rate swaps	Accrued expenses and other liabilities	$	342	Accrued expenses and other liabilities	$	1,805

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 aan asset and liability for the fair value of the future net payments

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

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 Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the quarters ended March 31, 2021 and 2020:



			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		Three Months Ended
		2021			2021
Interest rate swaps	$	(2,384)	Interest expense	$	115
		2020			2020
Interest rate swaps	$	1,486	Interest expense	$	10

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 30, 2017 and December~~March 31, ~~2016, we recorded~~2021, the termination value of derivatives in a liability ~~and other accumulated comprehensive loss~~position was $342. As of ~~$88 and $145, respectively.~~March 31, 2021, the Trust has pledged the properties related to the loans which are hedged as collateral.

NOTE 10 - FAIR VALUE MEASUREMENT

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

September 30, 2017

December 31, 2016

Carrying

Carrying


Value

Fair Value

Value

Fair Value

(in thousands)
Financial liabilities:

Mortgage notes payable, net

$
402,465

$
402,866

$
390,479

$
402,015
Fair value of interest rate swaps

$
88

$
88

$
145

$
145


	March 31, 2021				December 31, 2020
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value

	(in thousands)
Financial assets:
Note receivable	$	2,009	$	2,091	$	2,026	$	2,117
Derivative assets	$	921	$	921	$	—	$	—

Financial liabilities:
Mortgage notes payable	$	427,069	$	451,910	$	423,111	$	443,100
Derivative liabilities	$	342	$	342	$	1,805	$	1,805

~~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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.

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~~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 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)
September 30, 2017

Fair value of interest rate swaps

$
—

$
88

$
—

$
88
December 31, 2016

Fair value of interest rate swaps

$
—

$
145

$
—

$
145


	Level 1		Level 2		Level 3		Total

	(in thousands)
March 31, 2021
Derivative assets	$	—	$	921	$	—	$	921
Derivative liabilities	$	—	$	342	$	—	$	342

December 31, 2020
Derivative liabilities	$	—	$	1,805	$	—	$	1,805

~~Fair value of interest rate swaps:~~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 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 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 30, 2017 and December 31, 2016~~, the Company 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, theThe Company 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 has considered any applicable credit enhancements. ~~The Company’s derivative instruments are further described in Note 9.~~

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (UNAUDITED)

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

Fair Value Disclosures

The following table presents the Company’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)
March 31, 2021
Mortgage notes payable, net	$	—	$	—	$	451,910	$	451,910
Note receivable	$	—	$	—	$	2,091	$	2,091
December 31, 2020
Mortgage notes payable, net	$	—	$	—	$	443,100	$	443,100
Note receivable	$	—	$	—	$	2,117	$	2,117

Mortgage notes payable: The Company 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 for similar debt instruments of comparable maturities by the Company’s lenders. Judgment is used in determining the appropriate rate for each of the Company’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%~~3.05% to ~~4.60%~~3.15% and from ~~4.00%~~3.25% to ~~4.35%~~3.35% at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~,2020, respectively.

Notes receivable. The Trust estimates the fair value of ~~the Company’s matured mortgage~~its notes ~~payable were determined to be equal~~receivable by discounting future cash flows of each instrument at rates currently offered to the ~~carrying value of the properties because there is no market~~Trust for similar ~~debt~~note instruments of comparable maturities by the Trust’s lenders. The rates used range from 3.05% to 3.15% and ~~the properties’ carrying value was determined~~from 3.25% to ~~be the best estimate of fair value as of September 30, 2017. The Company’s mortgage notes payable are further described in Note 8.~~3.35% at March 31, 2021 and December 31, 2020, respectively.

NOTE 11 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, outstanding limited partnership units totaled ~~17,520,000~~18,246,000 and ~~16,688,000~~18,279,000, respectively. Total aggregate distributions per unit were $0.2650 and $0.2647 during the three months ended March 31, 2021 and 2020, respectively. As of ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, the ~~operating partnership~~Operating Partnership declared first quarter distributions of ~~$4,336~~$4,835 and ~~$3,912~~$4,831, respectively, to limited partners ~~which were~~ paid on ~~October 16, 2017~~April 15, 2021 and ~~October 17, 2016,~~2020, respectively. ~~Distributions per unit were $0.7425 and $0.7200 during the nine months ended September 30, 2017 and 2016, respectively.~~

During the ~~nine~~three months ended ~~September 30, 2017, Sterling exchanged 8,000 common shares for 8,000~~March 31, 2021 and 2020, 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 Trust as general partner of the limited partnership, and so long our redemption plans exists and applicable holding periods are met,Limited Partners may request the ~~operating partnership~~Operating Partnership redeem their limited partnership units. The ~~operating~~Trust as general partner on behalf of the limited partnership may choose to offer the Limited Partner: (i) cash for the redemption or, at the request of the Limited Partner, ~~(2)~~or (ii) offer shares in lieu of cash for the redemption on a basis of one limited partnership unit for ~~one~~1 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

NOTE 12 – 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~~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~~$19.00 per share or unit under the plans, which price became effective ~~March 29, 2017.~~January 1, 2021. Prior to January 1, 2021 the redemption price was $18.25 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~~three months ended ~~September 30, 2017,~~March 31, 2021 and 2020, the Company redeemed 41,000 and 38,000 common shares valued at ~~$634.~~$777 and $696, respectively. In addition, during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2021 and 2020, the ~~Company~~Trust redeemed ~~58,000~~33,000 and 30,000 units valued at ~~$896.~~$628 and $541, respectively. The total amount remaining available under the plan as of March 31, 2021 is $5,920 worth of securities.

NOTE 13 – 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 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, there were ~~8,353,000~~9,968,000 and ~~8,001,000~~9,855,000 common shares outstanding, respectively. We had no0 preferred shares outstanding as of either date.

Dividends paid to holders of common shares were ~~$0.7425~~$0.2650 per share and ~~$0.7200~~$0.2647 per share for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, respectively. As of March 31, 2021 and 2020, the Operating Partnership declared first quarter dividends of $2,642 and $2,527, respectively, to holders of common shares paid on April 15, 2021 and 2020, respectively.

NOTE 14 – 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.

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. The estimated value per common share was ~~$16.50~~$20.00 and ~~$16.00~~$19.25 at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively. See discussion of determination of estimated value in ~~Note 18.~~Management Discussion and Analysis.

Therefore, the purchase price per common share for dividend reinvestments was ~~$15.68~~$19.00 and ~~$15.20~~$18.29 and for additional optional cash purchases was ~~$16.50~~$20.00 and ~~$16.00~~$19.25 at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, 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 notice to participants.

In the ~~nine~~three months ended ~~September 30, 2017, 247,000~~March 31, 2021, 89,000 shares were issued pursuant to dividend reinvestments and ~~134,000~~65,000 shares were issued pursuant to additional optional cash purchases under the ~~plan.~~ plan, valued at $1,686 and $1,307 respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (UNAUDITED)

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

In the three months ended March 31, 2020, 87,000 shares were issued pursuant to dividend reinvestments and 62,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at $1,584 and $1,203, respectively.

NOTE 15 – LEASES

As of March 31, 2021, we derived 82% of our revenues from residential leases that are generally for terms of one year or less. The residential leases may include lease income related items such as parking, storage and non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of March 31, 2021, we derived 18% of our revenues from commercial leases primarily under long-term lease agreements. Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our commercial leases on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

The Trust’s leases contain lease and non-lease components for utility reimbursement from our residents. We have elected to combine lease and non-lease components for all asset classes. The combined components are included in real estate rental income in our consolidated financial statements and are accounted for under ASC 842.

Lease income related to the Company’s operating leases is comprised of the following:


	Three months ended March 31, 2021
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	24,834	$	4,382	$	29,216
Lease income related to variable lease payments		—		1,094		1,094
Other (a)		(135)		294		159
Lease Income (b)	$	24,699	$	5,770	$	30,469


	Three months ended March 31, 2020
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	23,203	$	4,714	$	27,917
Lease income related to variable lease payments		—		1,261		1,261
Other (a)		(257)		(90)		(347)
Lease Income (b)	$	22,946	$	5,885	$	28,831

(a)

For the three months ended March 31, 2021 and 2020, “Other” is comprised of revenue adjustments related to changes in collectibility and amortization of above and below market lease intangibles and lease inducements.

(b)

Excludes other rental income for the three months ended March 31, 2021 and 2020 of $1,291 and $1,075, respectively, which is accounted for under the revenue recognition standard.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

As of March 31, 2021, non-cancelable commercial operating leases provide for future minimum rental income as follows. Apartment leases are not included as the terms are generally for one year or less.


Years ending December 31,	Amount
	(in thousands)
2021 (April 1, 2021 - December 31, 2021)	$	11,658
2022		14,789
2023		13,454
2024		12,737
2025		12,491
Thereafter		56,308
	$	121,437

NOTE 1516 – RELATED PARTY TRANSACTIONS

Effective January 1, 2021, Alloy Enterprises, Inc. was formed to act as the holding company for Sterling Management, LLC and GOLDMARK Property Management. In connection with this restructuring transaction, the owners of Alloy Enterprises, Inc. indirectly own Sterling Management, LLC and GOLDMARK Property Management. Alloy Enterprises, Inc. is owned in part by the Trust’s Chief Executive Officer and Trustee Mr. Kenneth P. Regan, by Trustee Mr. James S. Wieland, by President Joel Thomsen, by Chief Investment Officer, Ryan M. Downs, and by the Chief Financial Officer and Treasurer Erica J. Chaffee. In addition, Mr. Regan serves as the Executive Chairman of the Advisor, and Messrs. Wieland, Thomsen, and Downs and Ms. Chaffee serve on the Board of Governors of both the Advisor and GOLDMARK Property Management.

Sterling Management, LLC, a North Dakota limited liability company formed in November 2002. The Advisor is responsible for managing day-to-day affairs, overseeing capital projects and identifying, acquiring and disposing investments on behalf of the trust.

GOLDMARK Property Management, ~~Fees~~a North Dakota limited liability company formed in 1981. GOLDMARK Property Management performs property management services for the Trust.

We have a historical and ongoing relationship with Bell Bank. Bell Bank has provided the Trust certain financial services throughout the relationship. A family member of Erica J. Chaffee, our Chief Financial Officer, is an employee of Bell Bank and could have an indirect material interest in any such engagement and related transactions.

Property Management Fee

During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, we paid property management and administrative fees to GOLDMARK Property Management, ~~in an amount equal to 5% of rents of the properties managed by GOLDMARK. GOLDMARK Property Management is owned in part by Kenneth Regan and James Wieland.~~Inc. For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, we paid management fees, on-site staff costs and other miscellaneous fees required to run the property of ~~$8,510~~$3,064 and ~~$7,411,~~$3,311, respectively, to GOLDMARK Property ~~Management.~~Management, Inc. Management fees paid during the three months ended March 31, 2021 and 2020 approximated 5% of net collected rents. In addition, during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, we paid repair and maintenance ~~related payroll~~expenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling ~~$3,808~~$1,696 and ~~$3,554,~~$1,627, respectively.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

Board of Trustee Fees

We incurred Trustee fees of ~~$44~~$15 and ~~$46~~$20 during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, respectively. As of ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016~~2020 we owed our Trustees ~~$12~~$42 and ~~$26~~$27 for unpaid board of trustee fees, respectively. There is no cash retainer paid to Trustees. Instead, we pay Trustees a specific ~~amounts~~number of common shares 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~~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 and was 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 24, 2021, and is effective ~~January 1, 2017.~~until March 31, 2022.

Management ~~Fee~~: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.

Acquisition ~~Fee~~: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.

Disposition ~~Fee~~: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.

Financing ~~Fee~~: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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

Development ~~Fee~~: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~~If Advisor shares responsibility for providing Development Services with one or more third parties, Advisor’s set Development Fee shall be reduced by the fees charged by any such third parties; provided, such adjustment is subject to a 2.5% minimum Advisor’s Development Fee. Additionally, in cases where the Advisor is sharing responsibility for providing Development Services, the Development Fee shall be capped at 2.5% of $20,000,000 ($500,000).

~~During~~The below table summarizes the ~~nine months ended September 30, 2017~~fees incurred and ~~2016, we incurred advisory management fees of $2,114 and $1,971 with Sterling Management, LLC,~~payable to 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.


	March 31, 2021		March 31, 2020		March 31, 2021		December 31, 2020
	Incurred		Incurred		Due and		Due and
	Fee		Fee		Payable		Payable

	(in thousands)
Fee:
Advisory	$	807	$	765	$	271	$	278
Acquisition	$	-	$	302	$	-	$	-
Disposition	$	-	$	92	$	-	$	175
Financing	$	43	$	25	$	38	$	-
Development	$	-	$	-	$	79	$	79
Project Management	$	71	$	17	$	-	$	51

~~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 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 development fees incurred with our Advisor, respectively. As of September 30, 2017 and December 31, 2016, we owed our Advisor a total of $114 and $82 for unpaid development fees, of which $104 and $81 were for unpaid development fees as part of a 10% hold back, respectively.

Operating Partnership Units Issued in Connection with Acquisitions

During the ~~nine~~three months ended ~~September 30, 2017, we issued directly or indirectly 899,000 operating partnership units. During this period, 402,000 of the~~March 31, 2021, there were 0 operating partnership units ~~issued~~issued.

During the three months ended March 31, 2020, 176,000 operating partnership units 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~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, we incurred real estate commissions of ~~$549~~$250 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. There were no0 outstanding commissions owed as of ~~September 30, 2017 and~~March 31, 2021 or December 31, ~~2016.~~2020.

~~Rental Income~~

~~During the nine months ended September 30, 2017 and 2016, we received rental income of $166 and $161, respectively, under an operating lease agreement with GOLDMARK Property Management.~~

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

~~During the nine months ended September 30, 2017 and 2016, we received rental income of $34 and $34, respectively, under operating lease agreements with our Advisor.~~

~~Construction Costs~~

As of September 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, we owed GOLDMARK Development $391 for retainage and $251 for unpaid construction fees.

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.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (UNAUDITED)

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

Rental Income

During the three months ended March 31, 2021 and 2020, we received rental income of $67 and $67, respectively, under an operating lease agreement with GOLDMARK Property Management, Inc.

During the three months ended March 31, 2021 and 2020, we received rental income of $14 and $14, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate, Inc.

During the three months ended March 31, 2021 and 2020, we received rental income of $22 and $21, respectively, under operating lease agreements with our Advisor.

During the three months ended March 31, 2021 and 2020, we received rental income of $122 and $120, respectively, under an operating lease agreement with Bell Bank.

Other operational liabilities and receivables

During the three months ended March 31, 2021 and 2020, the Trust incurred $174 and $0, respectively, for general costs related to business operations as well as capital expenditures related to construction in progress that were paid to related parties. As of March 31, 2021 and December 31, 2020, operational outstanding liabilities were $121 and $684, respectively.

Debt Financing

As of March 31, 2021 and December 31, 2020, the Trust had $67,935 and $51,915, respectively, of outstanding principal on loans entered into with Bell Bank. During the three months ended March 31, 2021 and 2020, the Trust incurred interest expense on debt held with Bell Bank of $587 and $514, respectively. Accrued interest as of March 31, 2021 and December 31, 2020, related to this debt was $123 and $121, respectively.

Insurance Services

On November 1, 2020, the Trust obtained a traditional insurance policy with Bell Insurance. The policy provides coverage for the Trust’s Commercial segment. As of March 31, 2021, total premiums paid for this policy was $113. There was 0 such policy in place with Bell Bank as of March 31, 2020.

NOTE 1617 - 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.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

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,~~tornadoes, 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.

Litigation

~~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. Several uncertainties continue to exist at this time, including but not limited to the uncertainty of additional state and/or federal stimulus and the effect of the recent surge in COVID-19 cases in many states. The Trust did not incur significant disruptions for the year ended December 31, 2020 from the COVID-19 pandemic. During the quarter ended March 31, 2021, the Trust continued to monitor state and federal legislative actions and efforts regarding the eviction moratorium which affects almost all single-family and multifamily rental housing units. The Trust has seen several tenants complete the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on these tenants and, at this time is unable to predict the impact that the COVID-19 pandemic and the eviction moratorium will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.

NOTE 1718 – DISPOSITIONS

During ~~September 2016,~~ the ~~Company entered into a purchase agreement to sell a retail~~three months ended March 31, 2021, the operating partnership did not dispose of any properties. During the three months ended March 31, 2020, the Trust disposed of 1 property located in ~~Fargo, North Dakota. This~~Apple Valley, Minnesota, for $3,670 and recognized a gain of $1,455 in March 2020.

The Trust had 1 property that qualified 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~~as such, the assets and liabilities associated with this property were separately classified as held for sale in the consolidated balance sheet as of March 31, 2021 and 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 and recognized a gain of $2,072.~~2020.

~~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.~~

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 (UNAUDITED)

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

The following table ~~presents~~shows the net book value of assets ~~and liabilities associated with the investment properties~~ held for ~~sale:~~sale.


					March 31,		December 31,
					2021		2020

	September 30,		December 31,
	2017		2016
	(in thousands)
					(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

Land and land improvements					$	150	$	150
Building and improvements						1,428		1,428
Real estate investments						1,578		1,578
Less accumulated depreciation						(749)		(749)
Real estate investments, net						829		829
Other assets, net						1		2

Total Assets	$	—	$	2,482	$	830	$	831


LIABILITIES
Special assessments payable	$	—	$	103
Tenant security deposits payable		—		22	$	5	$	5

Accrued expenses and other liabilities					$	12	$	—

Total Liabilities	$	—	$	125	$	17	$	5

NOTE 1819 – ACQUISITIONS

The Trust had 0 acquisitions during the three months ended March 31, 2021.

The Company closed on the following acquisitions during the ~~nine~~three months ended ~~September 30, 2017:~~March 31, 2020.

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

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)

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

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 difference in unit price of $26.

Total consideration given for acquisitions through ~~September 30, 2017~~March 31, 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 $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~~March 31, 2021 and ~~2016~~2020 (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 acquisitions during the nine months ended September 30, 2016:~~

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,~~pro-rations, the Company 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


	Three Months Ended
	March 31,
	2021		2020

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 months of 2017 and 2016. 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 months of 2017 and 2016. In determining the fair value of the shares and limited partnership units, the board relied upon their experience with, and knowledge about, our real estate portfolio and debt obligations. The board typically determines the share price in March of each year. 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 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.

Determination of price is a matter within the 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. 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 looks to available data and information, which is often adjusted 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.

Based on the results of the methodologies, the Board determined the fair value of the shares and limited partnership units to be $16.00 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.

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 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 a liquidity discount in order to reflect the fact that the shares and limited partnership units are not currently traded on a national securities exchange; a discount for debt that may include a prepayment obligation or a provision precluding assumption of the debt by a third 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 1920 - SUBSEQUENT EVENTS

On ~~October 16, 2017,~~April 15, 2021, we paid a dividend or distribution of ~~$0.2475~~$0.265 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 30, 2017.~~March 31, 2021.

~~Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that~~On April 28, 2021, the ~~transactions will be completed.~~Trust disposed of a commercial real estate property located in Waite Park, Minnesota for $900.

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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Table of Contents

All dollar amounts in this Form 10-Q in Part I Items 2. through 44. and Part II Items 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

~~We operate~~Our real estate portfolio consisted of 179 properties containing 10,328 apartment units and approximately 1,642,000 square feet of leasable commercial space as ~~an Umbrella Partnership Real Estate Investment Trust (UPREIT),~~of March 31, 2021. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $682,890, which includes construction in progress. Currently Sterling’s acquisition strategy and focus 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~~solely on multifamily apartment properties. Substantially all of our ~~assets~~business is conducted through our ~~operating partnership. We control~~Operating Partnership, of which we are the sole general partner. The Trust controls the operating partnership as the ~~sole~~ general partner and ~~own~~owns approximately ~~32.28%~~35.35% of the operating partnership as of ~~September 30, 2017.~~March 31, 2021. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, ~~our~~the proportionate shares of the assets and income of ~~our~~the operating partnership are deemed to be the assets and income of the ~~trust.~~

~~We use this UPREIT structure~~Trust. Subject to ~~facilitate acquisitions~~certain restrictions and limitations, our business is externally managed by our advisor pursuant to an advisory agreement, Sterling Management, LLC manages our operations and our portfolio 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 overSterling Management, LLC also provides portfolio-management, marketing, investor-relations and 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 on April 25, 2003 to acquire, own and operate properties~~administrative services on our behalf. ~~The operating partnership holds a diversified portfolio~~We have no paid employees.

Table of ~~multifamily~~Contents

Critical Accounting Estimates

Below is accounting policies and ~~commercial properties located principally~~estimates that management believes are critical to the preparation of the unaudited consolidated financial statements included in this Report. Certain accounting policies used in the ~~upper~~preparation of these consolidated financial statements are particularly important for an understanding of the financial position and ~~central Midwest United States.~~

~~Our real estate portfolio consisted~~results 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.

As of September 30, 2017, approximately 71.0% 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 leases.

~~Table of Contents~~

As of September 30, 2017, approximately 29.0% 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 propertiesoperations presented in the ~~commercial portfolio, most~~historical consolidated financial statements included in this Report. A summary of ~~which are under long-term leases.~~

~~Our Board of Trustees and Executive Officers~~

~~We operate under~~significant accounting policies is also provided in the ~~direction of~~aforementioned notes to 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 paidconsolidated financial statements (see note 2 to the ~~Advisor on an annual basis. The Advisory Agreement was approved~~unaudited consolidated financial statements). These policies require the application of judgment and assumptions by ~~the Board of Trustees (including all the independent trustees) on April 6, 2017, effective January 1, 2017. Our Board of Trustees has provided investment guidance for the Advisor to follow,~~management and, ~~must approve each investment recommended by the Advisor. Currently, we have nine members on our board, seven of whom are independent.~~

~~Our Advisor~~

~~Our external Advisor is Sterling Management, LLC,~~as a North Dakota limited liability company formed on November 14, 2002. Our Advisor, with offices in Fargo, North Dakota, is responsible for managing our day-to-day affairs and for identifying, acquiring and disposing investments on our behalf.

~~Conflicts of Interest~~

Weresult, are subject to ~~various conflicts~~a degree of ~~interest arising out~~uncertainty. Due to this uncertainty, actual results could differ materially from estimates calculated and utilized by management.

Impairment of ~~our relationship with our trustees, executive officers, key personnel and our Advisor and its affiliates. Some~~Real Estate Investments

The Trust’s investment properties are reviewed for potential impairment at the end of each reporting period whenever events or changes in circumstances indicate that the ~~conflicts~~carrying value may not be recoverable. At the end of ~~interest in our transactions with our Advisor and others are described below.~~each reporting period, the Trust separately determines whether impairment indicators exist for each property.

~~Our trustees and officers and the officers and key personnel~~Examples 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~~situations considered to be ~~spent~~impairment indicators include, but are not limited to:

a substantial decline or continued low occupancy rate;

continued difficulty in leasing space;

significant financially troubled tenants;

a change in plan to sell a property prior to the end of its useful life or holding period;

a significant decrease in market price not in line with general market trends; and

any other quantitative or qualitative events or factors deemed significant by the Trust’s management or board of trustees.

If the presence of one or more impairment indicators as described above is identified at the end 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~~the reporting period 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 reducethroughout 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 ariseyear 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 resultsan investment property, the asset is tested for recoverability by comparing its carrying value to ~~suffer.~~

~~Certain members of Leadership will have fiduciary duties relating~~the estimated future undiscounted cash flows. An investment property is considered to ~~their Other Real Estate Related Activities. These fiduciary duties may conflict with Leadership’s duties to Sterling and~~be impaired when the estimated future undiscounted cash flows are less than its ~~shareholders. Leadership’s Other Real Estate Related Activities could result in actions~~current carrying value. When performing a test for recoverability or ~~inactions detrimental to Sterling, which could harm~~estimating 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 thefair value of ~~our assets.~~ an impaired investment property, the Trust makes complex or subjective assumptions which include, but are not limited to:

projected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period and property location;

projected capital expenditures and lease origination costs;

projected cash flows from the eventual disposition of an operating property using a property specific capitalization rate;

comparable selling prices; and

property specific discount rates for fair value estimates as necessary.

~~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 inimpairment has occurred, the ~~future and~~Trust will record an impairment charge calculated as 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~~excess 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 thecarrying value of ~~our stock.~~ the asset over its fair value for impairment of investment properties. Based on evaluation, there were no impairment losses during the three months ended March 31, 2021 and 2020.

~~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.

~~Table of Contents~~

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 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~~three months ended ~~September 30, 2017~~March 31, 2021 included elsewhere in this report.

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Principal Business Activity

~~Specific Achievements~~

Sterling Real Estate 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. Sterling currently owns directly and indirectly 179 properties. The Trust’s 133 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings. The Trust owns 46 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently, the Trust’s mix of properties is 76.9% residential and 23.1% commercial (based on cost) and total $682,890 in real estate investments at March 31, 2021. The Trust has one property held for sale located in Waite Park, Minnesota at March 31, 2021. The carrying value of assets held for sale at March 31, 2021 is $830. Currently our focus is limited to multifamily apartment properties. We currently have no plans with respect to our commercial properties. We will consider unsolicited offers for purchase of commercial properties on a case by case basis.


Residential Property	Location	No. of Properties	Units
	North Dakota	112	6,378
	Minnesota	16	3,147
	Missouri	1	164
	Nebraska	4	639
		133	10,328

Commercial Property	Location	No. of Properties	Sq. Ft
	North Dakota	20	772,000
	Arkansas	2	28,000
	Colorado	1	17,000
	Iowa	1	33,000
	Louisiana	1	15,000
	Michigan	1	12,000
	Minnesota	13	668,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		46	1,642,000

Results of Operations

Management Highlights

●

Increased ~~revenues~~reveues from rental operations by ~~$4,576~~$1,854 or ~~5.7%~~6.2% for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2021, compared to the same ~~nine~~three month period in ~~2016.~~

2020.

●

~~Acquired a total of ten~~Increased economic occupancy by 1.9% in the residential ~~apartment properties totaling 320 units~~market and increased physical occupuancy by 1.5% in the commercial market for ~~a total of $20,111 during~~ the ~~nine~~three months ended ~~September 30, 2017. In addition, we placed in service four six unit townhome buildings.~~

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~~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~~March 31, 2021 compared to the ~~consolidated financial statements).~~

same three month period in 2020.

●

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

Declared and paid dividends aggregating ~~$0.7425~~$0.2650 per common share for the ~~first nine~~three months ~~of 2017.~~

ending March 31, 2021.

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Results of Operations for the Three Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020


	Three months ended March 31, 2021						Three months ended March 31, 2020
	Residential		Commercial		Total		Residential		Commercial		Total

	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Real Estate Revenues	$	25,959	$	5,801	$	31,760	$	23,995	$	5,911	$	29,906
Real Estate Expenses
Real Estate Taxes		2,579		665		3,244		2,476		688		3,164
Property Management		3,092		188		3,280		3,305		249		3,554
Utilities		2,584		240		2,824		2,419		304		2,723
Repairs and Maintenance		4,829		382		5,211		4,889		507		5,396
Insurance		763		29		792		823		39		862
Total Real Estate Expenses		13,847		1,504		15,351		13,912		1,787		15,699
Net Operating Income	$	12,112	$	4,297		16,409	$	10,083	$	4,124		14,207
Interest						4,287						4,350
Depreciation and amortization						5,328						5,252
Administration of REIT						1,201						1,162
Other income						(243)						(1,784)
Net Income					$	5,836					$	5,227

Net Income Attributed to:
Noncontrolling Interest					$	3,784					$	3,414
Sterling Real Estate Trust					$	2,052					$	1,813
Dividends per share⁽¹⁾					$	0.2650					$	0.2647
Earnings per share					$	0.2100					$	0.1900
Weighted average number of common shares						9,983						9,562

Three months ended  September 30, 2017

Three months ended  September 30, 2016


Residential

Commercial

Total

Residential

Commercial

Total

(unaudited)

(unaudited)


(in thousands)

(in thousands)
Real Estate Revenues

$
21,863

$
6,792

$
28,655

$
20,081

$
6,807

$
26,888
Real Estate Expenses

Real Estate Taxes

2,404

782

3,186

1,726

634

2,360
Property Management Fees

2,933

204

3,137

2,519

252

2,771
Utilities

1,534

384

1,918

1,321

388

1,709
Repairs and Maintenance

5,539

631

6,170

5,663

625

6,288
Insurance

354

22

376

318

21

339
Total Real Estate Expenses

12,764

2,023

14,787

11,547

1,920

13,467
Net Operating Income

$
9,099

$
4,769

13,868

$
8,534

$
4,887

13,421
Interest

4,690

4,636
Depreciation and amortization

5,427

5,471
Administration of REIT

885

1,136
Loss on lease terminations

—

25
Other (income)/expense

(390)

(370)
Net Income

$
3,256

$
2,523

Net Income Attributed to:

Noncontrolling Interest

$
2,174

$
1,638
Sterling Real Estate Trust

$
1,082

$
885
Dividends per share (1)

$
0.2475

$
0.2400
Earnings per share

$
0.13

$
0.11
Weighted average number of common shares

8,356

7,891

(1)

~~(1)~~

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

Revenues

Property revenues of ~~$28,655~~$31,760 for the three months ended ~~September 30, 2017~~March 31, 2021 increased ~~$1,767~~$1,854 or ~~6.6%~~6.2% in comparison to the same period in ~~2016.~~2020. Residential property revenues increased ~~$1,782~~$1,964 and commercial property revenues decreased ~~$ (15).~~$110.

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


	September 30,		September 30,
	2017		2016

					March 31,		March 31,
					2021		2020
Residential occupancy	94.1	%	94.2	%	94.7	%	92.8	%
Commercial occupancy	95.7	%	95.9	%	91.9	%	90.0	%

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Residential revenues for the three months ended ~~September 30, 2017~~March 31, 2021 increased ~~$1,782~~$1,964 in comparison to the same period for ~~2016.~~2020. Residential properties acquired since January 1, ~~2016~~2020 contributed approximately ~~$1,563~~$1,072 to the increase in total residential revenues ~~in the three months ended September 30, 2017. Rental income from residential properties~~

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~~owned for more than one year increased approximately $219 in comparison to the same period in 2016. Residential revenues comprised 76.3% of total revenues~~ for the three months ended ~~September 30, 2017 compared~~March 31, 2021. The remaining increase is due to ~~74.7% of total revenues for~~increased rent charges at our stabilized properties as well as decreased vacancy in the ~~three months ended September 30, 2016.~~Fargo market. The residential occupancy rates for the three months ended ~~September 30, 2017 were comparable~~March 31, 2021 increased 1.9% primarily due to ~~September 30, 2016.~~decreased vacancy, caused by rent proceeds received on delinquent charges.

For the three months ended ~~September 30, 2017~~March 31, 2021, total commercial revenues decreased ~~$15~~$110 in comparison to the same period for ~~2016. Revenues from commercial properties acquired since January 1, 2016, contributed approximately $2~~2020. The decrease was primarily attributable to the ~~decrease~~sale of three commercial real estate investments in ~~total~~2020. These properties account for $324 of decreased commercial ~~revenues in~~rent during the three months ended ~~September 30, 2017. Rental~~March 31, 2021. The overall commercial income decrease was offset due to straight line rental income from new leases entered into at commercial properties ~~owned for more than one year decreased approximately $13~~located in ~~comparison to the same period in 2016. The decrease in revenues was primarily attributed to decreases in straight-line rent adjustments~~Fargo, ND and the sale of the Fargo retail property. Commercial revenues comprised 23.7% of the total revenues for the three months ended September 30, 2017 compared to 25.3% of total revenues for the three months ended September 30, 2016.Minneapolis, MN. The commercial occupancy rates for the three months ended ~~September 30, 2017 are comparable~~March 31, 2021 increased 1.9% primarily due to new leases entered into in the ~~three months ended September 30, 2016.~~Fargo, ND market.

Expenses

Residential expenses from operations of ~~$12,764~~$13,847 during the three months ended ~~September 30, 2017 increased $1,217~~March 31, 2021 decreased $65 or ~~10.5%~~0.5% in comparison to the same period in ~~2016. This increase~~2020. The decrease was attributed to a reduction in property management fees, on-site staff costs and other miscellaneous expenses of $221 or 6.7%. Property management fees approximate 5% of net collected rent. This decrease is offset by increased real estate taxes of $103 or 4.2%. The main reason for the increase in ~~number~~real estate taxes is related to residential property acquisitions during the year ended December 31, 2020, which accounts for $60 of ~~residential properties owned~~the increase. Further, the decrease was offset by increased utilities expense of $165 or 6.8%, driven by an increase in water and sewer expense during the three months ended September 30, 2017 versus the same period in 2016. In addition, overall increases in operating expenses including property management fees increased $414 or 16.4%, real estate taxes increased $678 or 39.3% and utilities increased $213 or 16.1%. Increases in real estate taxes were a result of the annual real estate tax assessments received during the quarter, which were adjusted to reflect increased assessments levied by respective North Dakota counties.March 31, 2021.

Commercial expenses from operations of ~~$2,023~~$1,504 during the three months ended ~~September 30, 2017 increased $103~~March 31, 2021 decreased $283 or ~~5.4%~~15.8% in comparison to the same period in ~~2016.~~2020. The ~~increase was primarily~~decrease in overall expenses is attributed to ~~increases~~a decrease in ~~real estate taxes for one Bloomington, Minnesota office property~~repairs and ~~North Dakota properties.~~

~~Interest~~maintenance expense of ~~$4,690~~$125 or 24.7% with snow removal accounting for $31 or 24.8% of the decrease. Utility expenses during the three months ended ~~September 30, 2017 increased $54~~March 31, 2021 decreased by $64 or 21.1% in comparison to the same period 2020, also contributed to the overall decrease.

Interest expense of $4,287 during the three months ended March 31, 2021 decreased $63 or 1.4% in comparison to the same period in ~~2016 due~~2020. Pay offs of higher interest rate loans during 2020, decreased the overall weighted average interest rate on our consolidated mortgage debt by 31 basis points. The lower consolidated mortgage rate decreased total interest paid on mortgages by $85 as compared to ~~increased levels~~the same period in 2020, bringing mortgage interest expense as a percentage of ~~debt outstanding (an aggregate~~income to 13.5% versus 14.5% in 2020. Additionally, interest expense on construction in progress, offset the decrease in interest expense. Interest expense for construction in progress is classified as a contra-expense account, offsetting interest expense and resulting in an increase of ~~$8,357). Interest~~$37 in interest expense.

Depreciation and amortization expense ~~was approximately 16.4% and 17.2%~~ of ~~rental income for~~$5,328 during the three months ended ~~September 30, 2017 and 2016, respectively.~~

~~Depreciation and amortization expense decreased 0.8% from $5,471 for~~March 31, 2021 increased $76 or 1.4%. The increase is primarily due to the ~~three months ended September 30, 2016 to $5,427 for the three months ended September 30, 2017. The $44 net decrease was primarily a result of a $236 decrease~~property acquisitions that occurred in ~~amortization related to lease intangibles that are fully amortized.~~2020. 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 30, 2016~~March 31, 2021 and 2020 was 16.8% and 17.6%, respectively.

REIT administration expenses of $1,201 during the three months ended March 31, 2021 increased $39 or 3.4% compared to ~~$885~~the same period in 2020. The increase is attributable to an increase in the amount of the REIT advisory fee.

Other income of $243 for the three months ended ~~September 30, 2017 due~~March 31, 2021 decreased $1,541 or 86.4% in comparison to ~~a decrease in acquisition expenses related to lower acquisition activity in 2017 compared with~~ the same period in ~~2016.~~ 2020. The decrease is attributed to disposition activity in the first quarter of 2020 that did not occur in the same period in 2021. The total gain on the sale of a real estate investment during the three months ended March 31, 2020 was $1,455.

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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~~Consolidated Financial Statements included herein, as ~~a result of an increase in revenues. Commercial~~well as the above table 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~~

~~Table of Contents~~

~~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 30, 2017~~ March 31, 2021was ~~$3,256~~$5,836 compared to ~~$2,523~~$5,227 for the three months ended ~~September 30, 2016.~~ March 31, 2020.

Known Trends, Events and Uncertainties

COVID-19 Impact

The ~~increase was primarily attributed~~Trust continues to ~~an increase~~closely monitor the impact of ~~$447~~the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact its tenants and business partners. A number of uncertainties continue to exist at this time including but not limited to the uncertainty of additional state and/or federal stimulus and the effect of the surge in ~~net operating income~~COVID-19 cases in many states. While the Trust did not incur significant disruptions during the year ended December 31, 2020 from the COVID-19 pandemic, the effects of the ongoing COVID-19 pandemic could have material adverse effects on our business and ~~a decrease~~results of ~~$299 in acquisition fees. There were no acquisition fees expensed in~~operations so long as COVID-19 continues to impact the U.S. economy. The extent to which the economic disruption associated with the COVID-19 pandemic impacts our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. In particular, during the three months ended ~~September 30, 2017~~March 31, 2021, the Trust continued to monitor state and federal legislative actions and efforts in regard to the eviction moratorium which affects almost all single-family and multifamily rental housing units. The Trust has seen a number of tenants complete the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on these tenants and, at this time is unable to predict the impact that COVID-19 and the eviction moratorium will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.

As of March 31, 2021, the ~~Company’s early adoption of ASU 2017-01~~Trust received certain rent relief requests as ~~of July 1, 2017.~~

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

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)~~

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

~~Revenues~~

Property revenues of $85,198 for the nine months ended September 30, 2017 increased $4,576 or 5.7% in comparison to the same period in 2016. Residential property revenues increased $4,589 and commercial property revenues decreased $(13).

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

September 30,

September 30,

2017

2016

Residential occupancy

94.9
%
95.2
%
Commercial occupancy

96.7
%
95.6
%

~~Table of Contents~~

Residential revenues for the nine months ended September 30, 2017 increased $4,589 in comparison to the same period for 2016. Residential properties acquired since January 1, 2016 contributed approximately $4,044 to the increase in total residential revenues in the nine months ended September 30, 2017. Rental income from residential properties owned for more than one year increased approximately $545 in comparison to the nine months ended September 30, 2016. Residential revenues comprised 75.8% of total revenues for the nine months ended September 30, 2017 compared to 74.4% of total revenues for the nine months ended September 30, 2016. The residential occupancy rates for the nine months ended September 30, 2017 were comparable to September 30, 2016.

For the nine months ended September 30, 2017, total commercial revenues decreased $(13) 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. The decrease was primarily attributed to the sale of a retail property in June 2017 which contributed to nine months of revenues in 2016 but only six months of revenue in 2017. Commercial revenues comprised 24.2% of the total revenues for the nine months ended September 30, 2017 compared to 25.6% of total revenues for the nine months ended September 30, 2016. The commercial occupancy rates for the nine months ended September 30, 2017 increased 1.1% primarily due to lease up at two properties including a Fargo retail property and Minot office property.

~~Expenses~~

Residential expenses from operations of $35,630 during the nine months ended September 30, 2017 increased $3,277 or 10.1% in comparison to the same period in 2016. This increase was attributed to the increase in the number of residential properties owned during the nine months ended September 30, 2017 versus the same period in 2016. In addition, increases in property management fees of $1,099 or 14.8% due to increased competition for labor, increases in utilities of $704 or 15.0% and increases in repair and maintenance expenses of $375 or 2.7% reflect the investments made to position properties for continued rate increases, tenant retention, and market competitiveness.

Commercial expenses from operations of $5,600 during the nine months ended September 30, 2017 increased $398 or 7.7% in comparison to the same period in 2016. The increase was primarily attributed to increases in real estate taxes for one Bloomington, Minnesota office property and North Dakota properties.

Interest expense of $13,938 during the nine months ended September 30, 2017 increased $198 in comparison to the same period in 2016 due to increased levels of debt outstanding. Interest expense was approximately 16.4% and 17.0% of rental income for the nine months ended September 30, 2017 and 2016, respectively.

Depreciation and amortization expense decreased 3.2% from $16,711 for the nine months ended September 30, 2016 to approximately $16,170 for the nine months ended September 30, 2017. The $541 decrease was primarily a result of ~~a $929 decrease~~COVID-19. These requests were received principally from office tenants and most often in ~~amortization related~~the form of rent deferral requests. Few rental defaults have occurred to ~~lease intangibles that~~date and the Trust is pursuing legal remedies as to these amounts which are ~~fully amortized. Amortization expense~~not material in the aggregate. The Trust will continue to ~~decrease as lease intangibles become fully amortized. Depreciation and amortization expense as~~evaluate any further tenant rent relief requests on an individual basis, considering a ~~percentage~~number of ~~rental income for the nine months ended September 30, 2017 and 2016 was relatively consistent at 19.0% and 20.7%, 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~~factors. Not all tenant requests will ultimately result 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 for the nine months ended September 30, 2016 to $4,208 for~~ ~~the nine months ended September 30, 2017~~ ~~due to an increase in portfolio assets in 2017 in comparison to the same period in 2016.~~

~~Table of Contents~~

~~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 ofmodification agreements, nor will the Trust ~~or cash flow from operating activities as a measure of financial performance.~~forgo its contractual rights under its lease agreements.

Residential NOI increased $1,312 or 4.7% for the nine months ended September 30, 2017 in comparison to the same nine month period in 2016 due primarily to a $4,589 increase in revenues. Commercial 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.

~~Net Income~~

~~Net income for the nine months ended September 30, 2017~~was $14,746 compared to $8,603 for the nine months ended September 30, 2016. The increase in net income is primarily attributed to a $2,049 net gain on the sale of real estate and non-real estate investments and a $2,186 gain on the change in control over real estate investments.

Property Acquisitions and Dispositions

Property Acquisitions and Dispositions during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021

There were no acquisitions or dispositions during the three months ended March 31, 2021.

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Property Acquisitions and Dispositions during the three months ended March 31, 2020

We acquired ~~ten~~six properties for a total of ~~$20,111~~$12,896 during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 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 the operating partnership acquiring the other tenant in common’s 59.74% ownership interest in a 144 unit property (See Note 2 and 19~~mortgage of ~~the consolidated financial statements).~~ $3,225.

We ~~estimated the property had a fair value~~disposed 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 months ended September 30, 2017, the operating partnership sold a~~one retail property located in ~~Fargo, North Dakota~~Apple Valley, MN for ~~approximately $4,400 and recognized a gain of $2,072.~~$3,670.

~~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 1718 and 18 19 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016.~~2020.

Construction in Progress and Development Projects

~~Table~~The Trust capitalizes direct and certain indirect project costs incurred during the development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes. At such time as the development is considered substantially complete, the capitalization of ~~Contents~~

certain indirect costs such as real estate taxes and interest and financing costs cease and all project-related costs included in construction in process are reclassified to land and building and other improvements.

Construction in progress as of March 31, 2021 consists primarily of construction at Bell Plaza located in Minneapolis, Minnesota, the Montreal Courts Apartments located in Little Canada, Minnesota, the Bayview Apartments located in Fargo, North Dakota, and Trustmark located in Fargo, North Dakota. The Bell Plaza work includes updated HVAC and thermostats throughout the building. Current expectations are that the project will be completed in the second quarter of 2021 and the current project budget approximates $1,000 of which $998 has been incurred and included in construction in progress. The Montreal Courts development consists of a new clubhouse. The current project budget approximates $1,965 of which $1,827 has been incurred and the remaining budgeted cost is accrued for at March 31, 2021. The project is included in construction in progress until final payment of all costs have been made which is expected to occur during the second quarter of 2021. The Bayview Apartments development consists of new windows and siding. Current expectations are that the project will be completed in the second quarter of 2021 and the current project budget approximates $1,501 of which $1,418 has been incurred and is included in construction in progress. The Trustmark construction primarily consists of office demolition and clearing, as well as tenant space remodel and build-outs. Current expectations are that the projects will be completed in the second quarter of 2021 and the current project budgets approximate $5,398 of which $2,968 has been incurred and is included in construction in progress.

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.

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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.

~~Table of Contents~~

The following tables include calculations of FFO and ~~MFFO, and~~ the reconciliations to net income, for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, respectively. We believe these calculations are the most comparable GAAP financial ~~measure (in thousands):~~measure:

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


	Three months ended March 31, 2021						Three months ended March 31, 2020
			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	$	2,052	9,983	$	0.21	$	1,813	9,562	$	0.19

Add back:
Noncontrolling Interest - OPU		3,753	18,260				3,419	18,036
Depreciation & Amortization from continuing operations		5,328					5,252
Pro rata share of unconsolidated affiliate depreciation & amortization		140					94
Subtract:
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		—					(1,455)
Funds from operations applicable to common shares and limited partnership units (FFO)	$	11,273	28,243	$	0.40	$	9,123	27,598	$	0.33

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 11 and Note 13 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.

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)~~

~~Please see Note 11 and Note 13 to the consolidated financial statements included above for more information.~~

~~(2)~~

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

~~Table of Contents~~

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 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.

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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~~tenants’ 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~~Generally our residential leases are ~~scheduled to expire~~for a term of one year or ~~renew in~~less. There are two commercial leases expiring within the next twelve ~~months.~~months that are considered significant. As of March 31, 2021 and 2020, revenues of $327 and $321, respectively, were received from these leases. The Advisor, with the assistance of our 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 tenants elect not to renew, we may seek replacement tenants or try to sell the property.

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.

Nine Months Ended

September 30,

2017

2016

(in thousands)
Net cash flows provided by operating activities

$
27,718

$
26,799
Net cash flows used in investing activities

$
(10,650)

$
(13,129)
Net cash flows used in financing activities

$
(8,111)

$
(3,966)

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~~$8,909 and ~~$26,799~~$7,184 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, 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.

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Net cash used in investing activities was ~~$10,650~~$4,116 and ~~$13,129~~$1,613 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, cash flows used in investing activities related ~~primarily~~ to the acquisition of properties and capital expenditures was ~~$12,840~~$3,686 and ~~$14,870, respectively,~~$5,433, respectively. Cash outlays related to investments in unconsolidated affiliates was $2,090 and ~~the changes in restricted cash for replacement reserve escrows was $ (952) and $ (819), respectively. In addition,~~$38 during the ~~nine~~three months ended ~~September 30, 2017, proceeds of $4,442 were generated~~March 31, 2021 and 2020, respectively. Gains from involuntary conversions for the three months ended March 31, 2021 was $1,642. Gains from sale of one 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,real estate investments during the ~~nine~~three 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~~March 31, 2020 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.$3,494.

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~~$2,081 and ~~$3,966~~$7,260 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016, respectively.~~2020. During the ~~nine~~three months ended ~~September 30, 2017,~~ March 31, 2021, we paid ~~$15,195~~$5,761 in dividends and distributions, redeemed ~~$1,530~~$1,405 of shares and units, received proceeds of $18,485 from new mortgage notes, ~~payable of $23,916,~~ and made mortgage principal payments of ~~$16,632.~~$14,528. For the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2020, we paid ~~$13,126~~$5,534 in dividends and distributions, redeemed ~~$1,765~~$1,237 of shares and units, received proceeds of $7,788 from new mortgage notes, ~~payable of $20,271,~~ and made mortgage principal payments of ~~$9,857.~~$9,129.

Estimated Value of Units/Shares

The Board of Trustees determined an estimate of fair value for the trust shares in the first three months of 2021 and 2020. 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 three months of 2021 and 2020. In determining this value, the Board relied upon their experience with, and knowledge about, the Trust’s real estate portfolio and debt obligations. The Board typically determines the share price 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 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 $20.00 per share/unit effective January 1, 2021. The Board determined the fair value of the shares and limited partnership units to be $19.25 per share/unit effective January 1, 2020.

Determination of price is a matter within the Board’s sole discretion. The Trust does not determine price based on any rate formula or specific 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 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.

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 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.

4743

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Furthermore, in reaching an estimate of the value of the shares and limited partnership units, the Board 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 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 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 common shares on a national securities exchange or a merger or sale of our portfolio.

~~Dividends~~

Dividends and Distributions

Common Stock

We declared cash dividends to our shareholders during the period from January 1, ~~2017~~2021 to ~~September 30, 2017~~March 31, 2021 totaling ~~$6,111~~$2,642 or ~~$0.7425~~$0.2650 per share, ~~including amounts reinvested through the dividend reinvestment plan. During the nine months ended September 30, 2017, we paid~~of which $963 were cash dividends ~~of $2,201~~ and ~~dividends of $3,910~~$1,679 were reinvested under the dividend reinvestment plan. The cash dividends were paid with the ~~$27,718~~$8,909 from our cash flows from operations and ~~$743~~$1 provided by distributions from unconsolidated affiliates.

We declared cash dividends to our shareholders during the period from January 1, ~~2016~~2020 to ~~September 30, 2016~~March 31, 2020 totaling ~~$5,606~~$2,527 or ~~$0.7200~~$0.2647 per share, ~~including amounts reinvested through the dividend reinvestment plan. During the nine months ended September 30, 2016, we paid~~of which $919 were cash dividends ~~of $1,983~~ and ~~dividends of $3,623~~$1,608 were reinvested under the dividend reinvestment plan. The cash dividends were paid with the ~~$26,799~~$7,184 from our cash flows from operations and ~~$325~~$105 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~~ 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:


					Three Months Ended
					March 31,
					2021		2020

	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 $5,836 and $5,227, respectively)					$	8,909	$	7,184
Distributions in excess of earnings received from unconsolidated affiliates						1		105
Gain (Loss) on sales of real estate and non-real estate investments		2,047		(320)		—		1,455
Dividends declared		(6,111)		(5,606)		(2,642)		(2,527)
Excess	$	24,397	$	21,198	$	6,268	$	6,217

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~~three months ended ~~September 30, 2017,~~March 31, 2021, we declared quarterly distributions ~~totalling $12,909~~totaling $4,835 to holders of limited partnership units in our operating partnership, which we paid on April ~~17, July 17, and October 16, 2017.~~15, 2021. Distributions were paid at a rate of ~~$0.2475~~$0.2650 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

For the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2020, we declared quarterly distributions ~~totalling $11,546~~totaling $4,831 to holders of limited partnership units in our operating partnership, which we paid on April 15, ~~July 15, and October 17, 2016.~~2020. Distributions were paid at a rate of ~~$0.2400~~$0.2647 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 and Distributions

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2021, we paid aggregate dividends and distributions of ~~$6,111,~~$7,447, 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,~~$11,273 for the ~~nine~~three months ended ~~September 30, 2017 was $28,540;~~March 31, 2021; therefore we believe our ~~management believes our~~dividend and distribution policy is sustainable over time. For the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2020, we paid aggregate dividends and distributions of ~~$5,606~~$7,118, which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our FFO was ~~$26,487 while our MFFO,~~$9,123 as of the ~~nine~~three months ended ~~September 30, 2016 was $28,013.~~March 31, 2020. 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.

Cash Resources

At ~~September 30, 2017,~~March 31, 2021, our cash resources consisted of cash and cash equivalents totaling approximately ~~$20,991.~~$13,888. Our 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,~~$51,314, which could potentially be used as collateral to secure additional financing in future periods.

At ~~September 30, 2017,~~March 31, 2021, there was no balance outstanding on the lines of credit. Of the $28,215 available as of March 31, 2021, one variable rate line of credit secured two letters of credit totaling $746, leaving ~~$37,015~~$27,469 available and unused under the agreements. See Note 7 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~~three months ended ~~September 30, 2017,~~March 31, 2021, we did not sell any common shares in a private placements. During the nine months ended September 30, 2017, we issued 247,000 and 134,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively, and raised gross proceeds of $6,028. ~~During the nine months ended September 30, 2016, we did not sell any~~ common shares in a private placement. During the ~~nine~~three months ended ~~September 30, 2016, we issued 236,000 and 101,000~~March 31, 2021, 89,000 common shares were issued pursuant to dividend reinvestments and 65,000 were issued pursuant to additional optional cash purchases under the ~~dividend reinvestment~~ plan, ~~through dividends reinvested and the optional share repurchases, respectively,~~ and raised gross proceeds of ~~$5,142.~~$2,993. During the three months ended March 31, 2020, we did not sell any common shares in a private placement. During the three months ended March 31, 2020, 87,000 common shares were issued pursuant to dividend reinvestments and 62,000 were issued pursuant to additional optional cash purchases under the plan, and raised gross proceeds of $2,787.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2021, we issued no limited partnership units ~~valued at approximately $14,378~~ in connection with ~~the~~ acquisition of ~~properties and one property that had a change in control.~~properties.

During the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2020, we issued 469,000 limited partnership units ~~valued at approximately $16,940~~ in connection with ~~the acquisitions of properties.~~six properties acquired.

~~Off-Balance Sheet~~Unconsolidated Affiliate Arrangements

As of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, we had ~~no off-balance sheet arrangements that have or are reasonably likely~~debt obligations related to ~~have a current or future effect on our financial condition, changes~~investments in ~~financial condition, revenues or expenses, results~~unconsolidated affiliates of ~~operations, liquidity, capital expenditures or capital resources.~~$52,276 and $41,559, respectively. The Trust is jointly and severally liable for the full mortgage balance.

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

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might occur due to inflation by correspondingly increasing our expense reimbursement revenues. During the nine months ended September 30, 2017, 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.

The carrying amount of our interest rate swaps have been adjusted to their fair value at March 31, 2021, resulting in a liability of $341 and asset of $920. As of December 31, 2020, the fair value adjustment resulted in a liability of $1,805.

As ~~virtually all~~much 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~~2020 filed with the Securities and Exchange Commission on March ~~23, 2017.~~13, 2021.

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

Disclosure Controls and Procedures

~~Our management, with the participation of our~~Sterling Real Estate Trust’s Chief Executive Officer and Chief ~~Accounting~~Financial Officer ~~has~~have evaluated the effectiveness of ~~our~~Sterling Real Estate Trust’s disclosure controls and procedures (as ~~such term is~~ defined in ~~Rule~~Rules 13a-15(e) ~~under~~and 15d-15(e) of the ~~Securities~~ Exchange ~~Act of 1934, as amended)~~Act) as of the end of the period covered by this ~~report.~~ Report.Based on ~~such~~that evaluation, ~~our~~the Company’s Chief Executive Officer and Chief ~~Accounting~~Financial Officer ~~have~~ concluded that ~~as of September 30, 2017, such~~the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were not effective as of December 31, 2020 due to ~~ensure that information required~~a material weakness in internal control over financial reporting.

Material Weakness in Internal Control over Financial Reporting

At December 31, 2020, the Trust concluded its internal controls over financial reporting surrounding management’s review of the appropriate hedging documentation failed to ~~be disclosed by us~~identify the drafting error in the ~~reports that we file~~internal documentation relating to the method used to test the effectiveness of the Trust’s hedging relationships. In addition, the contemporaneous documentation and fair value hedge effectiveness requirements of ASC 815 were not applied appropriately for the hedging relationships at inception. The ineffectiveness of these internal controls did not result in a restatement of previously issued interim or ~~submit under~~annual consolidated financial statements.

As of March 31, 2021, the ~~Exchange Act is recorded, processed, summarized~~following remediation measures have been implemented:

Improved training, education and accounting reviews designed to ensure that all relevant personnel involved in derivative transactions understand and apply hedge accounting in compliance with generally accepted accounting principles, including ASC 815 and its related interpretations.

ii.

Enlisting the use of a third-party specialist for any new hedging relationship entered into subsequent to the date of the financial statements being issued, to evaluate the effectiveness of the hedging relationship at the inception of each hedge.

iii.

All hedges entered into by the Trust prior to March 31, 2021, have been subsequently re-designated and are considered to be highly effective hedges.

We believe these remediation measures have strengthened our internal control over financial reporting and ~~reported within~~have remediated 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,~~material weakness identified as ~~appropriate to allow timely decisions regarding required disclosure.~~of December 31, 2020.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the ~~third~~first fiscal quarter of ~~2017~~ 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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 30, 2017.~~March 31, 2021.

Other Sales

During the three months ended ~~September 30, 2017, there were no~~March 31, 2021, we did not issued 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 30, 2017:~~March 31, 2021:

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, 2021	9,000	—	$	19.00	1,371,000	899,000	$	7,157
February 1-29, 2021	21,000	26,000	$	19.00	1,392,000	925,000	$	6,274
March 1-31, 2021	11,000	7,000	$	19.00	1,403,000	932,000	$	5,920
Total	41,000	33,000

For the three months ended ~~September 30, 2017,~~March 31, 2021, we redeemed all shares or units for which we received redemption requests. In addition, for the three months ended ~~September 30, 2017,~~March 31, 2021, 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 March 31, 2021, was $5,920. The redemption price for such shares and units redeemed under the plan was fixed at ~~$15.00~~$19.00 per share or unit, which ~~was increased to $15.50~~became effective ~~March 29, 2017 and is the current redemption price.~~January 1, 2021. 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

10.1		Amended and Restated Sterling Real Estate Trust Independent Trustee Common Shares Plan approved March 25, 2021 (incorporated by reference to Exhibit No. 10.1 to the Trust’s Current Report on Form 8-K filed March 31, 2021).
10.2		Tenth Amended and Restated Advisory Agreement, effective April 1, 2021 (incorporated by reference to Exhibit No. 10.2 to the Trust’s current report on Form 8-K filed March 31, 2021).
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~~2002..

101		The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2017,~~March 31, 2021, formatted in ~~XBRL (eXtensible~~iXBRL (Inline iXtensible Business Reporting Language): (i) Consolidated Balance Sheets at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016;~~2020; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016;~~2020; (iii) Consolidated ~~Statement~~Statements of Shareholders’ Equity for ~~nine~~three months ended ~~September 30, 2017;~~March 31, 2021 and 2020; (iv) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, 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~~May 14, 2021

	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)

5349

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~~May 11_. 2021
Common Shares of Beneficial Interest, $0.01 par value per share		~~8,516,368~~10,084,442

	Page
	No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):	3
Consolidated Balance Sheets – as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~ 2020	3
Consolidated Statements of Operations and Other Comprehensive Income – Three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~ 2020	4
Consolidated ~~Statement~~Statements of Shareholders’ Equity – ~~Nine~~Three months ended ~~September 30, 2017~~March 31, 2021 and 2020	5
Consolidated Statements of Cash Flows – ~~Nine~~Three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~ 2020	6
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk	50 46
Item 4. Controls and Procedures	50 46

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51 47
Item 6. Exhibits	52 48
Signatures	53 49


				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


			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, 2019	9,436	$ 131,261	($ 28,888)	$ 102,373	$ 174,221	$ 2,416	$ 37	$ 279,047
Contribution of assets in exchange for the issuance of noncontrolling interest shares	-	-	-	-	9,031	-	-	9,031
Shares/units redeemed	(38)	(696)	-	(696)	(541)	-	-	(1,237)
Dividends and distributions declared	-	-	(2,527)	(2,527)	(4,831)	-	-	(7,358)
Dividends reinvested - stock dividend	87	1,584	-	1,584	-	-	-	1,584
Issuance of shares under optional purchase plan	62	1,203	-	1,203	-	-	-	1,203
Change in fair value of interest rate swaps	-	-	-	-	-	-	(1,486)	(1,486)
Net income	-	-	1,813	1,813	3,419	(5)	-	5,227
BALANCE AT MARCH 31, 2020	9,547	$ 133,352	($ 29,602)	$ 103,750	$ 181,299	$ 2,411	($ 1,449)	$ 286,011


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


	Three months ended September 30, 2017						Three months ended September 30, 2016

	Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)
Income from rental operations	$	21,863	$	6,792	$	28,655	$	20,081	$	6,807	$	26,888
Expenses from rental operations		12,764		2,023		14,787		11,547		1,920		13,467
Net operating income	$	9,099	$	4,769	$	13,868	$	8,534	$	4,887	$	13,421
Interest						4,690						4,636
Depreciation and amortization						5,427						5,471
Administration of REIT						885						1,136
Loss on lease terminations						—						25
Other (income)/expense						(390)						(370)
Net income					$	3,256					$	2,523


	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 September 30, 2017	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	552,792	$	202,337	$	755,129
Accumulated depreciation		(73,008)		(33,265)		(106,273)
	$	479,784	$	169,072		648,856
Cash and cash equivalents						20,991
Restricted deposits and funded reserves						7,894
Investment in unconsolidated affiliates						2,785
Receivables and other assets						5,617
Financing and lease costs, less accumulated amortization						776
Intangible assets, less accumulated amortization						13,863
Total Assets					$	700,782


	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


	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


Years ending December 31,	Amount
	(in thousands)
2017 (October 1, 2017 to December 31, 2017)	$	5,000
2018		20,095
2019		25,322
2020		28,001
2021		45,897
Thereafter		281,040
Total payments	$	405,355


	September 30, 2017				December 31, 2016
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
	(in thousands)
Financial liabilities:
Mortgage notes payable, net	$	402,465	$	402,866	$	390,479	$	402,015
Fair value of interest rate swaps	$	88	$	88	$	145	$	145


	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