UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2017March 31, 2021
Or
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from ------------to------------
Commission File Number:000-54295
Sterling Real Estate Trust
d/b/a Sterling Multifamily Trust
(Exact name of registrant as specified in its charter)
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) |
(701) (701) 353-2720
(Registrant’s telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act
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 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
| | ||
Large accelerated filer | ☐ | Accelerated filer |
|
Non-accelerated filer |
| Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
(Do not check if a smaller reporting company) | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| | |
Class | | Outstanding at |
Common Shares of Beneficial Interest, | |
|
STERLING REAL ESTATE TRUST
PART I – FINANCIAL INFORMATION
Item 1. Financial StatementsItem
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of September 30, 2017March 31, 2021 (UNAUDITED) and December 31, 20162020
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Real estate investments | | | | | | |
Land and land improvements | | $ | 119,114 | | $ | 119,088 |
Building and improvements | | | 719,637 | | | 712,560 |
Construction in progress | | | 9,339 | | | 13,640 |
Real estate investments | | | 848,090 | | | 845,288 |
Less accumulated depreciation | | | (165,200) | | | (160,575) |
Real estate investments, net | | | 682,890 | | | 684,713 |
Cash and cash equivalents | | | 13,888 | | | 11,716 |
Restricted deposits and funded reserves | | | 16,459 | | | 15,919 |
Investment in unconsolidated affiliates | | | 11,664 | | | 9,659 |
Notes receivable | | | 2,009 | | | 2,026 |
Assets held for sale | | | 830 | | | 831 |
Lease intangible assets, less accumulated amortization of $14,507 in 2021 and $15,019 in 2020 | | | 7,075 | | | 7,367 |
Other assets, net | | | 10,449 | | | 10,798 |
| | | | | | |
Total Assets | | $ | 745,264 | | $ | 743,029 |
| | | | | | |
LIABILITIES | | | | | | |
Mortgage notes payable, net | | $ | 425,164 | | $ | 421,278 |
Dividends payable | | | 7,477 | | | 7,447 |
Tenant security deposits payable | | | 5,084 | | | 4,908 |
Lease intangible liabilities, less accumulated amortization of $1,934 in 2021 and $1,963 in 2020 | | | 947 | | | 994 |
Liabilities related to assets held for sale | | | 17 | | | 5 |
Accrued expenses and other liabilities | | | 12,716 | | | 16,869 |
Total Liabilities | | | 451,405 | | | 451,501 |
| | | | | | |
COMMITMENTS and CONTINGENCIES - Note 16 | | | | | | |
| | | | | | |
SHAREHOLDERS' EQUITY | | | | | | |
Beneficial interest | | | 110,992 | | | 109,366 |
Noncontrolling interest | | | | | | |
Operating partnership | | | 179,911 | | | 181,621 |
Partially owned properties | | | 2,377 | | | 2,346 |
Accumulated other comprehensive (loss) income | | | 579 | | | (1,805) |
Total Shareholders' Equity | | | 293,859 | | | 291,528 |
| | | | | | |
| | $ | 745,264 | | $ | 743,029 |
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
ASSETS |
|
|
|
|
|
|
Real estate investments |
| $ | 648,856 |
| $ | 622,975 |
Cash and cash equivalents |
|
| 20,991 |
|
| 12,034 |
Restricted deposits and funded reserves |
|
| 7,894 |
|
| 7,213 |
Investment in unconsolidated affiliates |
|
| 2,785 |
|
| 3,653 |
Due from related party |
|
| 2 |
|
| 34 |
Receivables |
|
| 4,748 |
|
| 4,258 |
Prepaid expenses |
|
| 862 |
|
| 433 |
Notes receivable |
|
| — |
|
| 600 |
Financing and lease costs, less accumulated amortization of $1,875 in 2017 and $1,720 in 2016 |
|
| 776 |
|
| 950 |
Assets held for sale |
|
| — |
|
| 2,482 |
Lease intangible assets, less accumulated amortization of $12,491 in 2017 and $10,770 in 2016 |
|
| 13,863 |
|
| 15,852 |
Other assets |
|
| 5 |
|
| 29 |
|
|
|
|
|
|
|
Total Assets |
| $ | 700,782 |
| $ | 670,513 |
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
Mortgage notes payable, net |
| $ | 402,465 |
| $ | 390,479 |
Special assessments payable |
|
| 1,214 |
|
| 480 |
Dividends payable |
|
| 6,404 |
|
| 5,925 |
Due to related party |
|
| 617 |
|
| 957 |
Tenant security deposits payable |
|
| 4,049 |
|
| 3,851 |
Subordinated debt |
|
| 175 |
|
| 175 |
Lease intangible liabilities, less accumulated amortization of $1,324 in 2017 and $1,122 in 2016 |
|
| 1,846 |
|
| 2,075 |
Accounts payable - trade |
|
| 474 |
|
| 438 |
Retainage payable |
|
| 420 |
|
| 288 |
Liabilities related to assets held for sale |
|
| — |
|
| 125 |
Fair value of interest rate swaps |
|
| 88 |
|
| 145 |
Deferred insurance proceeds |
|
| 1,475 |
|
| 102 |
Accrued expenses and other liabilities |
|
| 8,672 |
|
| 6,818 |
Total Liabilities |
|
| 427,899 |
|
| 411,858 |
|
|
|
|
|
|
|
COMMITMENTS and CONTINGENCIES - Note 16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
Beneficial interest |
|
| 89,023 |
|
| 84,727 |
Noncontrolling interest |
|
|
|
|
|
|
Operating partnership |
|
| 180,725 |
|
| 170,138 |
Partially owned properties |
|
| 3,223 |
|
| 3,935 |
Accumulated other comprehensive loss |
|
| (88) |
|
| (145) |
Total Shareholders' Equity |
|
| 272,883 |
|
| 258,655 |
|
|
|
|
|
|
|
|
| $ | 700,782 |
| $ | 670,513 |
See Notes to Consolidated Financial Statements
3
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED September 30, 2017March 31, 2021 and 20162020 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
| (in thousands, except per share data) |
| (in thousands, except per share data) | ||||||||
Income from rental operations |
|
|
| ||||||||
Real estate rental income | $ | 27,088 |
| $ | 25,365 |
| $ | 80,606 |
| $ | 76,075 |
Tenant reimbursements |
| 1,567 |
|
| 1,523 |
|
| 4,592 |
|
| 4,547 |
|
| 28,655 |
|
| 26,888 |
|
| 85,198 |
|
| 80,622 |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
Expenses from rental operations |
|
|
|
|
|
|
|
|
|
|
|
Interest |
| 4,690 |
|
| 4,636 |
|
| 13,938 |
|
| 13,740 |
Depreciation and amortization |
| 5,427 |
|
| 5,471 |
|
| 16,170 |
|
| 16,711 |
Real estate taxes |
| 3,186 |
|
| 2,360 |
|
| 8,389 |
|
| 7,020 |
Property management fees |
| 3,137 |
|
| 2,771 |
|
| 9,163 |
|
| 8,095 |
Utilities |
| 1,918 |
|
| 1,709 |
|
| 6,463 |
|
| 5,715 |
Repairs and maintenance |
| 6,170 |
|
| 6,288 |
|
| 16,103 |
|
| 15,703 |
Insurance |
| 376 |
|
| 339 |
|
| 1,112 |
|
| 1,022 |
Loss on lease terminations |
| — |
|
| 25 |
|
| 146 |
|
| 299 |
|
| 24,904 |
|
| 23,599 |
|
| 71,484 |
|
| 68,305 |
Administration of REIT |
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses |
| 61 |
|
| 71 |
|
| 290 |
|
| 301 |
Advisory fees |
| 714 |
|
| 669 |
|
| 2,114 |
|
| 1,971 |
Acquisition and disposition expenses |
| — |
|
| 299 |
|
| 1,375 |
|
| 1,526 |
Trustee fees |
| 12 |
|
| 14 |
|
| 44 |
|
| 46 |
Legal and accounting |
| 98 |
|
| 83 |
|
| 385 |
|
| 343 |
|
| 885 |
|
| 1,136 |
|
| 4,208 |
|
| 4,187 |
Total expenses |
| 25,789 |
|
| 24,735 |
|
| 75,692 |
|
| 72,492 |
Income from operations |
| 2,866 |
|
| 2,153 |
|
| 9,506 |
|
| 8,130 |
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
Equity in income of unconsolidated affiliates |
| 373 |
|
| 298 |
|
| 743 |
|
| 820 |
Other income |
| 20 |
|
| 24 |
|
| 73 |
|
| 62 |
Gain (Loss) on sale of real estate and non-real estate investments |
| (3) |
|
| — |
|
| 2,049 |
|
| (320) |
Gain on change in control of real estate investments |
| — |
|
| — |
|
| 2,186 |
|
| — |
Gain (Loss) on involuntary conversion |
| — |
|
| 48 |
|
| 189 |
|
| (89) |
|
| 390 |
|
| 370 |
|
| 5,240 |
|
| 473 |
Net income | $ | 3,256 |
| $ | 2,523 |
| $ | 14,746 |
| $ | 8,603 |
Net income (loss) attributable to noncontrolling interest: |
|
|
|
|
|
|
|
|
|
|
|
Operating Partnership |
| 2,264 |
|
| 1,814 |
|
| 10,147 |
|
| 6,109 |
Partially owned properties |
| (90) |
|
| (176) |
|
| (222) |
|
| (502) |
Net income attributable to Sterling Real Estate Trust | $ | 1,082 |
| $ | 885 |
| $ | 4,821 |
| $ | 2,996 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic and diluted | $ | 0.13 |
| $ | 0.11 |
| $ | 0.59 |
| $ | 0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 3,256 |
| $ | 2,523 |
| $ | 14,746 |
| $ | 8,603 |
Other comprehensive gain (loss) - change in fair value of interest rate swaps |
| 17 |
|
| 33 |
|
| 57 |
|
| 28 |
Comprehensive income |
| 3,273 |
|
| 2,556 |
|
| 14,803 |
|
| 8,631 |
Comprehensive income attributable to noncontrolling interest |
| 2,185 |
|
| 1,661 |
|
| 9,964 |
|
| 5,626 |
Comprehensive income attributable to Sterling Real Estate Trust | $ | 1,088 |
| $ | 895 |
| $ | 4,839 |
| $ | 3,005 |
| | | | | |
| Three Months Ended | ||||
| March 31, | ||||
| 2021 |
| 2020 | ||
| (in thousands, except per share data) | ||||
Income from rental operations | | ||||
Real estate rental income | $ | 31,760 | | $ | 29,906 |
Expenses | | | | | |
Expenses from rental operations | | | | | |
Operating expenses, excluding real estate taxes | | 12,107 | | | 12,535 |
Real estate taxes | | 3,244 | | | 3,164 |
Depreciation and amortization | | 5,328 | | | 5,252 |
Interest | | 4,287 | | | 4,350 |
| | 24,966 | | | 25,301 |
Administration of REIT | | 1,201 | | | 1,162 |
Total expenses | | 26,167 | | | 26,463 |
Income from operations | | 5,593 | | | 3,443 |
| | | | | |
Other income | | | | | |
Equity in income of unconsolidated affiliates | | (27) | | | 158 |
Other income | | 270 | | | 119 |
Gain on sale of real estate and non-real estate investments | | — | | | 1,455 |
Gain on involuntary conversion | | — | | | 52 |
| | 243 | | | 1,784 |
Net income | $ | 5,836 | | $ | 5,227 |
Net income (loss) attributable to noncontrolling interest: | | | | | |
Operating Partnership | | 3,753 | | | 3,419 |
Partially owned properties | | 31 | | | (5) |
Net income attributable to Sterling Real Estate Trust | $ | 2,052 | | $ | 1,813 |
| | | | | |
Net income attributable to Sterling Real Estate Trust per common share, basic and diluted | $ | 0.21 | | $ | 0.19 |
| | | | | |
Comprehensive income: | | | | | |
Net income | $ | 5,836 | | $ | 5,227 |
Other comprehensive gain (loss) - change in fair value of interest rate swaps | | 2,384 | | | (1,486) |
Comprehensive income | | 8,220 | | | 3,741 |
Comprehensive income attributable to noncontrolling interest | | 5,325 | | | 2,442 |
Comprehensive income attributable to Sterling Real Estate Trust | $ | 2,895 | | $ | 1,299 |
| | | | | |
Weighted average Common Shares outstanding, basic and diluted | | 9,983 | | | 9,562 |
See Notes to Consolidated Financial Statements
4
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE NINETHREE MONTHS ENDED September 30, 2017 March 31, 2021 and 2020 (UNAUDITED)
|
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|
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|
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|
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| Accumulated |
|
|
| Noncontrolling |
|
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| ||||||||
|
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|
|
| Distributions |
| Total |
| Interest |
| Accumulated |
|
|
| |||||||
|
| Common |
| Paid-in |
| in Excess of |
| Beneficial |
| Operating |
| Partially Owned |
| Comprehensive |
|
|
| ||||||
|
| Shares |
| Capital |
| Earnings |
| Interest |
| Partnership |
| Properties |
| Income (Loss) |
| Total | |||||||
|
|
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| (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 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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, 2020 | | 9,855 | | $ 139,105 | | (29,739) | | $ 109,366 | | $ 181,621 | | $ 2,346 | | ($ 1,805) | | $ 291,528 | |||||||
Shares/units redeemed | | (41) | | (777) | | - | | (777) | | (628) | | - | | - | | (1,405) | |||||||
Dividends and distributions declared | | - | | - | | (2,642) | | (2,642) | | (4,835) | | - | | - | | (7,477) | |||||||
Dividends reinvested - stock dividend | | 89 | | 1,686 | | - | | 1,686 | | - | | - | | - | | 1,686 | |||||||
Issuance of shares under optional purchase plan | | 65 | | 1,307 | | - | | 1,307 | | - | | - | | - | | 1,307 | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | 2,384 | | 2,384 | |||||||
Net income | | - | | - | | 2,052 | | 2,052 | | 3,753 | | 31 | | - | | 5,836 | |||||||
BALANCE AT MARCH 31, 2021 | | 9,968 | | $ 141,321 | | ($ 30,329) | | $ 110,992 | | $ 179,911 | | $ 2,377 | | $ 579 | | $ 293,859 |
See Notes to Consolidated Financial Statements
5
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED September 30, 2017March 31, 2021 and 20162020 (UNAUDITED)
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
Net income |
| $ | 14,746 |
| $ | 8,603 |
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
(Gain) loss on sale of real estate investments |
|
| (2,072) |
|
| 316 |
Loss on sale of non-real estate investments |
|
| 23 |
|
| 4 |
(Gain) loss on involuntary conversion |
|
| (189) |
|
| 89 |
(Gain) on change in control of real estate investment |
|
| (2,186) |
|
| — |
Loss on lease terminations |
|
| 146 |
|
| 299 |
Equity in income of unconsolidated affiliates |
|
| (743) |
|
| (820) |
Distributions of earnings of unconsolidated affiliates |
|
| 80 |
|
| 816 |
Depreciation |
|
| 14,270 |
|
| 13,882 |
Amortization |
|
| 1,855 |
|
| 2,751 |
Amortization of debt issuance costs |
|
| 561 |
|
| 517 |
Effects on operating cash flows due to changes in |
|
|
|
|
|
|
Restricted deposits - tenant security deposits |
|
| (150) |
|
| (85) |
Restricted deposits - real estate tax and insurance escrows |
|
| 577 |
|
| 20 |
Due from related party |
|
| 32 |
|
| 60 |
Receivables |
|
| (81) |
|
| (286) |
Prepaid expenses |
|
| (430) |
|
| 66 |
Other assets |
|
| 24 |
|
| 135 |
Due to related party |
|
| (532) |
|
| (8) |
Tenant security deposits payable |
|
| 176 |
|
| 67 |
Accounts payable - trade |
|
| (96) |
|
| (561) |
Accrued expenses and other liabilities |
|
| 1,707 |
|
| 934 |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
| 27,718 |
|
| 26,799 |
INVESTING ACTIVITIES |
|
|
|
|
|
|
Purchase of real estate investment properties |
|
| (3,718) |
|
| (7,352) |
Capital expenditures and tenant improvements |
|
| (9,122) |
|
| (7,518) |
Proceeds from sale of real estate investments |
|
| 4,442 |
|
| 1,404 |
Restricted deposits - exchange escrow |
|
| (4,328) |
|
| — |
Proceeds from involuntary conversion |
|
| 1,937 |
|
| 915 |
Investment in unconsolidated affiliates |
|
| (294) |
|
| (67) |
Distributions in excess of earnings received from unconsolidated affiliates |
|
| 743 |
|
| 325 |
Restricted deposits - replacement reserve escrows |
|
| (952) |
|
| (819) |
Notes receivable issued |
|
| — |
|
| (24) |
Notes receivable payments received |
|
| 642 |
|
| 7 |
NET CASH USED IN INVESTING ACTIVITIES |
|
| (10,650) |
|
| (13,129) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
Payments for financing, debt issuance and lease costs |
|
| (442) |
|
| (431) |
Principal payments on special assessments payable |
|
| (420) |
|
| (657) |
Proceeds from issuance of mortgage notes payable and subordinated debt |
|
| 23,916 |
|
| 20,271 |
Principal payments on mortgage notes payable |
|
| (16,632) |
|
| (9,857) |
Advances on lines of credit |
|
| — |
|
| 6,669 |
Payments on lines of credit |
|
| — |
|
| (6,669) |
Proceeds from issuance of shares under optional purchase plan |
|
| 2,192 |
|
| 1,599 |
Shares/units redeemed |
|
| (1,530) |
|
| (1,765) |
Dividends/distributions paid |
|
| (15,195) |
|
| (13,126) |
NET CASH USED IN FINANCING ACTIVITIES |
|
| (8,111) |
|
| (3,966) |
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
| 8,957 |
|
| 9,704 |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
| 12,034 |
|
| 6,461 |
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 20,991 |
| $ | 16,165 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
OPERATING ACTIVITIES | | | | | | |
Net income | | $ | 5,836 | | $ | 5,227 |
Adjustments to reconcile net income to net cash from operating activities | | | | | | |
Gain on sale of real estate investments | | | — | | | (1,455) |
Gain on involuntary conversion | | | — | | | (52) |
Equity in loss (income) of unconsolidated affiliates | | | 27 | | | (158) |
Distributions of earnings of unconsolidated affiliates | | | 57 | | | 158 |
Allowance for uncollectible accounts receivable | | | (47) | | | 113 |
Depreciation | | | 5,006 | | | 4,868 |
Amortization | | | 315 | | | 380 |
Amortization of debt issuance costs | | | 130 | | | 140 |
Effects on operating cash flows due to changes in | | | | | | |
Other assets | | | 229 | | | 1,449 |
Tenant security deposits payable | | | 176 | | | 131 |
Accrued expenses and other liabilities | | | (2,820) | | | (3,617) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 8,909 | | | 7,184 |
INVESTING ACTIVITIES | | | | | | |
Purchase of real estate investment properties | | | — | | | (375) |
Capital expenditures and tenant improvements | | | (3,686) | | | (5,058) |
Proceeds from sale of real estate investments and non-real estate investments | | | — | | | 3,494 |
Proceeds from involuntary conversion | | | 1,642 | | | 259 |
Investment in unconsolidated affiliates | | | (2,090) | | | (38) |
Distributions in excess of earnings received from unconsolidated affiliates | | | 1 | | | 105 |
Notes receivable payments received | | | 17 | | | — |
NET CASH USED IN INVESTING ACTIVITIES | | | (4,116) | | | (1,613) |
FINANCING ACTIVITIES | | | | | | |
Payments for financing, debt issuance | | | (154) | | | (98) |
Payments on investment certificates and subordinated debt | | | (25) | | | — |
Principal payments on special assessments payable | | | — | | | (253) |
Proceeds from issuance of mortgage notes payable and subordinated debt | | | 18,485 | | | 7,788 |
Principal payments on mortgage notes payable | | | (14,528) | | | (9,129) |
Proceeds from issuance of shares under optional purchase plan | | | 1,307 | | | 1,203 |
Shares/units redeemed | | | (1,405) | | | (1,237) |
Dividends/distributions paid | | | (5,761) | | | (5,534) |
NET CASH USED IN FINANCING ACTIVITIES | | | (2,081) | | | (7,260) |
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS | | | 2,712 | | | (1,689) |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF YEAR | | | 27,635 | | | 17,382 |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF QUARTER | | $ | 30,347 | | $ | 15,693 |
| | | | | | |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF QUARTER | | | | | | |
Cash and cash equivalents | | $ | 13,888 | | $ | 4,295 |
Restricted deposits | | | 16,459 | | | 11,398 |
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF QUARTER | | $ | 30,347 | | $ | 15,693 |
See Notes to Consolidated Financial Statements
6
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED September 30, 2017March 31, 2021 and 20162020 (UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
SCHEDULE OF CASH FLOW INFORMATION |
|
|
|
|
| |
Cash paid during the period for interest, net of capitalized interest |
| $ | 13,954 |
| $ | 13,776 |
|
|
|
|
|
|
|
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
Dividends reinvested |
| $ | 3,836 |
| $ | 3,543 |
Dividends declared and not paid |
|
| 2,067 |
|
| 1,893 |
UPREIT distributions declared and not paid |
|
| 4,336 |
|
| 3,912 |
UPREIT units converted to REIT common shares |
|
| 133 |
|
| 435 |
Stock issued pursuant to trustee compensation plan |
|
| 59 |
|
| 60 |
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT |
|
| 14,378 |
|
| 16,940 |
Increase in land improvements due to increase in special assessments payable |
|
| 1,141 |
|
| 772 |
Unrealized gain on interest rate swaps |
|
| 57 |
|
| 28 |
Acquisition of assets with new financing |
|
| 3,264 |
|
| 2,662 |
Acquisition of assets through assumption of debt and liabilities |
|
| 1,367 |
|
| 78 |
Capitalized interest and real estate taxes related to construction in progress |
|
| 126 |
|
| 66 |
Acquisition of assets with accounts payable |
|
| 572 |
|
| 413 |
Acquisition of assets with 1031 exchange funds |
|
| 4,278 |
|
| — |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
SCHEDULE OF CASH FLOW INFORMATION | | | | | | |
Cash paid during the period for interest, net of capitalized interest | | $ | 4,144 | | $ | 4,203 |
| | | | | | |
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | | | | | | |
Dividends reinvested | | $ | 1,686 | | $ | 1,584 |
Dividends declared and not paid | | | 2,642 | | | 2,527 |
UPREIT distributions declared and not paid | | | 4,835 | | | 4,831 |
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT | | | — | | | 9,031 |
Increase in land improvements due to increase in special assessments payable | | | 26 | | | 65 |
Unrealized gain (loss) on interest rate swaps | | | 2,384 | | | (1,486) |
Acquisition of assets with new financing | | | — | | | 3,225 |
Acquisition of assets through assumption of debt and liabilities | | | — | | | 265 |
Capitalized interest and real estate taxes related to construction in progress | | | 95 | | | 137 |
See Notes to Consolidated Financial Statements
7
Sterling Real Estate Trust, d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in NovemberDecember 2002. Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation.Code.
Sterling previously established an operating partnership (“Sterling Properties, LLLP”LLLP or the Operating Partnership”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, Sterling has management responsibility for all activities of the operating partnership. As of September 30, 2017March 31, 2021 and December 31, 2016,2020, Sterling owned approximately 32.28%35.35% and 32.41%35.03%, respectively, of the operating partnership.
NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2016,2020, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2017 and consolidated statements of operations and other comprehensive income, consolidated statement of shareholders’ equity, and consolidated statements of cash flows for the three and nine months ended September 30, 2017 and 2016, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial statements as of and for the three and nine months ended September 30, 2017.March 31, 2021. These adjustments are of a normal recurring nature.
Principles of Consolidation
The consolidated financial statements include the accounts of Sterling, Sterling Properties, LLLP, and wholly-owned limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.
As of March 31, 2021 the Trust owned approximately 35.35% of the partnership interests (“OP Units”) of the Operating Partnership. The remaining OP Units, consisting exclusively of limited partner interests, are held by persons who contributed their interests in properties to the Operating Partnership in exchange for OP Units. Under the partnership agreement, these persons have the right to tender their OP Units for redemption to the Operating Partnership at any time following a specified restricted period for cash equal to the fair value of an equivalent number of common shares of the Trust. In lieu of delivering cash, however, the Trust, as the Operating Partnership’s general partner, may, at its option, choose to acquire any OP Units so tendered by issuing common shares in exchange for the tendered OP Units. If the Trust so chooses, its common shares will be exchanged for OP Units on a one-for-one basis. This one-for-one exchange ratio is subject to adjustment to prevent dilution. With each such exchange or redemption, the Trust’s percentage ownership in the Operating Partnership will increase. In addition, whenever the Trust issues common or other classes of its shares, it contributes the net proceeds it receives from the issuance to the Operating Partnership and the Operating Partnership issues to the Trust an equal number of OP Units or other partnership interests having preferences and rights that mirror the preferences and rights of the shares issued. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”
8
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)
Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (“VIE”) for which we have both: a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE. The Trust will consolidate the operations of a joint venture if the Trust determines that it is either the primary beneficiary of a variable interest entity (VIE) or has substantial influence and control of the entity. In instances where the Trust determines that it is not the primary beneficiary of a VIE or the Trust does not control the joint venture but can exercise influence over the entity with respect to its operations and major decisions, the Trust will use the equity method of accounting. Under the equity method, the operations of a joint venture will not be consolidated with the Trust’s operations but instead its share of operations will be reflected as equity in earnings (loss) of unconsolidated entity on its consolidated statements of operations and comprehensive loss. Additionally, the Trust’s net investment in the joint venture will be reflected as investment in unconsolidated entity on the consolidated balance sheets.
8
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)
Principal Business Activity
Sterling currently owns directly and indirectly 164 properties.The Operating Partnership meets the criteria as a variable interest entity (“VIE”). The Trust’s 115 residential properties are locatedsole significant asset is its investment in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings. The Trust owns 49 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, Texas and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently,the Operating Partnership. As a result, substantially all of the Trust’s mixassets and liabilities represent those assets and liabilities of propertiesthe Operating Partnership. All of the Trust’s debt is 71.0% residentialan obligation of the Operating Partnership, and 29.0% commercial (based on cost) and total $648,856 in real estate investments at September 30, 2017. Effective January 1, 2016, Sterling’s acquisition strategy and focus is solely on multifamily apartment properties. We currently have no plans to disposethe Trust guarantees the unsecured debt obligations of our existing commercial properties.the Operating Partnership.
|
|
|
|
|
|
|
Residential Property |
| Location |
| No. of Properties |
| Units |
|
| North Dakota |
| 96 |
| 5,828 |
|
| Minnesota |
| 16 |
| 3,027 |
|
| Missouri |
| 1 |
| 164 |
|
| Nebraska |
| 2 |
| 316 |
|
|
|
| 115 |
| 9,335 |
|
|
|
|
|
|
|
Commercial Property |
| Location |
| No. of Properties |
| Sq. Ft |
|
| North Dakota |
| 20 |
| 805,000 |
|
| Arkansas |
| 2 |
| 29,000 |
|
| Colorado |
| 1 |
| 13,000 |
|
| Iowa |
| 1 |
| 33,000 |
|
| Louisiana |
| 1 |
| 15,000 |
|
| Michigan |
| 1 |
| 12,000 |
|
| Minnesota |
| 15 |
| 683,000 |
|
| Mississippi |
| 1 |
| 15,000 |
|
| Nebraska |
| 1 |
| 16,000 |
|
| Texas |
| 1 |
| 7,000 |
|
| Wisconsin |
| 5 |
| 63,000 |
|
|
|
| 49 |
| 1,691,000 |
Concentration of Credit Risk
Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Investments
Real estate investments are recorded at cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred.
9
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 CompanyTrust allocates the purchase price of each acquired investment property accounted for as a business combinationan asset acquisition based upon the estimatedrelative fair value at acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, and (v) any assumed financing that is determined to be above or below market, (vi) the value of customer relationships and (vii) goodwill, if any. Transaction costs related to acquisitions accounted for as business combinations are expensed as incurred and included within “Administration of REIT expenses” in the
accompanying consolidated statements of operations and other comprehensive income.
The Company elected to early adopt ASU 2017-01, Business Combinations, on a prospective basis as of July 1, 2017. This new guidance clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not considered a business and, thus, accounted for as an asset acquisition as opposed to a business combination. Refer to the “Recent Accounting Pronouncements” section within Note 2 to the consolidated financial statements. Under this new guidance, the Company expects most acquisitions of investment property will meet this screen and, thus, be accounted for as asset acquisitions. The Company allocates the purchase price of each acquired investment property that is accounted foracquisitions and capitalized as an asset acquisition based upon the relative fair valuea cost of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, (v) any assumed financing that is determined to be above or below market and (vi) the value of customer relationships. Asset acquisitions do not give rise to goodwill and the related transaction costs are capitalized and included with the allocated purchase price.property.
For tangible assets acquired, including land, building and other improvements, the CompanyTrust considers available comparable market and industry information in estimating acquisition date fair value. Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant
9
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)
status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs. The Company allocates a portion of the purchase price to the estimated acquired in-place lease value intangibles based on factors available in third party appraisals or cash flow estimates of the property prepared by our internal analysis. These estimates are based upon cash flow projections for the property, existing leases, lease origination costs for similar leases as well as lost rental payments during an assumed lease-up period. The Company also evaluates each acquired lease as compared to current market rates. If an acquired lease is determined to be above or below market, the Company allocates a portion of the purchase price to such above or below market leases based upon the present value of the difference between the contractual lease payments and estimated market rent payments over the remaining lease term. Renewal periods are included within the lease term in the calculation of above and below market lease values if, based upon factors known at the acquisition date, market participants would consider it reasonably assured that the lessee would exercise such options. Fair value estimates used in acquisition accounting, including the discount rate used, require the Company to consider various factors, including, but not limited to, market knowledge, demographics, age and physical condition of the property, geographic location, and size and location of tenant spaces within the acquired investment property.
The portion of the purchase price allocated to acquired in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The Company incurred amortization expense pertaining to acquired inplace lease value intangibles of $370 and $459 for the three months ended September 30, 2017 and 2016, respectively and $1,141 and $1,567 for the nine months ended September 30, 2017 and 2016, respectively.
The portion of the purchase price allocated to acquired above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to rental income. Amortization pertaining to above market lease intangibles of $56 and $57 for the three months ended September 30, 2017 and 2016, respectively, was recorded as a reduction to income from rental operations. Amortization pertaining to below market lease intangibles of $70 and $78 for
10
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 and 2016 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
the three months ended September 30, 2017 and 2016, respectively, was recorded as an increase to income from rental operations. Amortization pertaining to above market lease intangibles of $169 and $174 for the nine months ended September 30, 2017 and 2016, respectively, was recorded as a reduction to income from rental operations. Amortization pertaining to below market lease intangibles of $214 and $253 for the nine months ended September 30, 2017 and 2016, respectively, was recorded as an increase to income from rental operations.
Furniture and fixtures are stated at cost less accumulated depreciation. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expenseexpensed as incurred.
Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:
| | |
Buildings and improvements | 40 years | |
Furniture, fixtures and equipment |
| 5-9 years |
Depreciation expense for the three months ended September 30, 2017 and 2016 totaled $4,816 and $4,625, respectively. Depreciation expense for the nine months ended September 30, 2017 and 2016 totaled $14,270 and $13,882, respectively.
The Company’sTrust’s investment properties are reviewed for potential impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the CompanyTrust separately determines whether impairment indicators exist for each property.
Examples of situations considered to be impairment indicators include, but are not limited to:
|
|
|
|
|
|
|
|
|
|
|
|
If the presence of one or more impairment indicators as described above is identified at the end of the reporting period or throughout the year with respect to an investment property, the asset is tested for recoverability by comparing its carrying value to the estimated future undiscounted cash flows. An investment property is considered to be impaired when the estimated future undiscounted cash flows are less than its current carrying value. When performing a test for recoverability or estimating the fair value of an impaired investment property, the Company makes complex or subjective assumptions which include, but are not limited to:
|
|
|
|
|
|
|
|
|
|
11
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)
To the extent impairment has occurred, the Company will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties. Based on evaluation, there were no0 impairment losses during the ninethree months ended September 30, 2017March 31, 2021 and 2016.2020.
Properties Held for Sale
We account for our properties held for sale in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), which addresses financial accounting and reporting in a period in which a component or group of components of an entity either has been disposed of or is classified as held for sale.
In accordance with ASC 360, at such time as aThe Trust had 1 property is held for sale such property is carried at the lower of: (1) its carrying amount, or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as properties held for sale in the period in which all of the following criteria are met:
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The results of operations of a component of an entity that either has been disposed of or is classified as held-for-sale under the requirements of ASC 360 shall be reported in discontinued operations in accordance with ASC 205, Presentation of Financial Statements (“ASC 205”) if such disposal or classification represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
There were no properties classified as held for sale at September 30, 2017. There was one retail property classified as held for sale at December 31, 2016.2020. See Note 17.18.
Construction in Progress
The CompanyTrust 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 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.
Cash and Cash Equivalents
We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents.
12
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)
Investment in Unconsolidated Affiliates
We account for unconsolidated affiliates using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings contributions and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. NoNaN impairment losses were recorded related to the unconsolidated affiliates for the ninethree months ended September 30, 2017March 31, 2021 and 2016.2020.
10
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)
We use the equity method to account for investments that qualify as variable interest entities where we are not the primary beneficiary and entities that we do not control or where we do not own a majority of the economic interest but have the ability to exercise significant influence over the operations and financial policies of the investee. We will also use the equity method for investments that do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. For a joint venture accounted for under the equity method, our share of net earnings and losses is reflected in income when earned and distributions are credited against our investment in the joint venture as received.
In determining whether an investment in a limited liability company or tenant in common is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns. As of September 30, 2017, our tenantSee Note 5, Investment in common arrangements do not qualify as variable interest entities and do not meet the control requirementsUnconsolidated Affilliates, for consolidation, as defined in ASC 810.further information.
As of September 30, 2017 and December 31, 2016, the unconsolidated affiliates held total assets of $23,930 and $26,140 and mortgage notes payable of $17,561 and $20,017, respectively.
The operating partnership previously owned a 40.26% interest as a tenant in common in a single asset limited liability company which owns a 144 unit residential, multifamily apartment complex in Bismarck, North Dakota. The property was encumbered by a first mortgage with a balance at December 31, 2016 of $2,190. As of May 1, 2017, there was a change in control over the real estate investment, with the operating partnership acquiring the other tenant in common’s 59.74% ownership interest in the property (see Note 18). We estimated the property had a fair value of approximately $10,080. The operating partnership assumed a loan of $1,295 and issued $4,727 of limited partnership units for a total purchase price of approximately $6,022. The company accounted for this as a business combination and recognized a gain on change in control of real estate investment of $2,186 in the second quarter of 2017 as a result of remeasuring the carrying value to fair value.
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 September 30, 2017 and December 31, 2016 of $10,743 and $10,891, respectively. The Company is jointly and severally liable for the full mortgage balance.
13
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 operating partnership owns a 66.67% interest as tenant in common in an office building with 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 September 30, 2017 and December 31, 2016 of $6,818 and $6,936, respectively. The Company is jointly and severally liable for the full mortgage balance.
Receivables
Receivables consist primarily of amounts due for rent. The receivables are non-interest bearing. The carrying amount of receivables is reduced by an amount that reflects management’s best estimates of the amounts that will not be collected. As of September 30, 2017 and December 31, 2016, management determined no allowance was necessary for uncollectible receivables.
Financing and Lease Costs
Financing costs have been capitalized and are being amortized over the life of the financing (line of credit) using the effective interest method. Unamortized financing costs are written off when debt is retired before the maturity date and included in interest expense at that time.
Lease costs incurred in connection with new leases have been capitalized and are being amortized over the life of the lease using the straight-line method. We record the amortization of leasing costs in depreciation and amortization on the consolidated statements of operations and comprehensive income. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs to amortization expense.
Debt Issuance Costs
We amortize external debt issuance costs using the effective interest rate method, over the estimated life of the related debt. We record debt issuance costs related to notes and mortgage notes, net of amortization, on our consolidated balance sheets as an offset to their related debt. We record debt issuance costs related to revolving lines of credit on our consolidated balance sheets as financing fees, regardless of whether a balance on the line of credit is outstanding. We record the amortization of all debt issuance costs as interest expense.
Lease Intangible Assets
Lease intangibles are a purchase price allocation recorded on property acquisition. The lease intangibles represent the estimated value of in-place leases, tenant relationships and the value of leases with above or below market lease terms. Lease intangibles are amortized over the term of the related lease.
The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined no impairment charges were necessary at September 30, 2017 and December 31, 2016.
Noncontrolling Interest
A noncontrolling interest in a subsidiary (minority interest) is in most cases an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity. In addition, consolidated net income is required to be reported at amounts that include the amounts attributable to both the
14
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)
parent and the noncontrolling interest and the amount of consolidated net income attributable to the parent and the noncontrolling interest are required to be disclosed on the face of the consolidated statements of operations and comprehensive income.
Operating Partnership: Interests in the operating partnership held by limited partners are represented by operating partnership units. The operating partnership’s income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement.
Partially Owned Properties: The CompanyTrust reflects noncontrolling interests in partially owned properties on the balance sheet for the portion of properties consolidated by the CompanyTrust that are not wholly owned by the Company.Trust. The earnings or losses from those properties attributable to the noncontrolling interests are reflected as noncontrolling interests in partially owned properties in the consolidated statement of operations and comprehensive income.
Syndication Costs
Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. Syndication costs are recorded as a reduction to beneficial and noncontrolling interest.
Federal Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are generally taxed on REIT distributions of ordinary income in the same manner as they are taxed on other corporate distributions.
We intend to continue to qualify as a REIT and, provided we maintain such status, will not be taxed on the portion of the income that is distributed to shareholders. In addition, we intend to distribute all of our taxable income; therefore, no0 provisions or liabilities for income taxes have been recorded in the financial statements.
11
Sterling conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership – Sterling Properties, LLLP. The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partnersSTERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in accordance with the provisions of the Internal Revenue Code 704(b)thousands, except share and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The conversion of a partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.per share data)
We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of September 30, 2017March 31, 2021 and December 31, 20162020, we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2013.2017.
Revenue Recognition
The Trust is the lessor for its residential and commercial leases. Leases are analyzed on an individual basis to determine lease classification. As of March 31, 2021, all leases analyzed under the Trust’s lease classification process were determined to be operating partnership has elected to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and other comprehensive income.leases.
15
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)
Revenue Recognition
We deriverecognize variable income from pass-through expenses on an accrual basis over 95%the periods in which the expenses were incurred. Pass-through expenses are comprised of our revenues from tenant rentsreal estate taxes, operating expenses and other tenant-related activities. We lease multifamily units under operating leases with terms of one year or less. Rental income and other property revenues are recorded when due from tenants and recognized monthly as earned pursuant to the terms of the underlying leases. Other property revenues consist primarily of laundry, application and other fees charged to tenants.
We lease commercial space primarily under long-term lease agreements. Commercial tenant rents include base rents, expense reimbursements (such as common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements. When we pay pass-through expenses, subject to reimbursement by the tenant, they are included within operating expenses, excluding real estate taxes, and utilities), and a straight-linereimbursements are included within real estate rental income along with the associated base rent adjustment. in the accompanying consolidated financial statements.
We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $59 and $124$105 for the three months ended September 30, 2017March 31, 2021 and 2016, respectively. The straight-line rent adjustment increaseddecreased revenue by $186 and $391$65 for the ninethree months ended September 30, 2017 and 2016, respectively.March 31, 2020. The straight-line receivable balance included in receivablesother assets on the consolidated balance sheets as of September 30, 2017March 31, 2021 and December 31, 20162020 was $3,526$3,117 and $3,362,$3,012, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.
Commercial properties are leased to tenants under terms expiring at various dates through 2034. Lease terms often include renewal options. For the nine months ended September 30, 2017 and 2016, gross revenues from commercial property rentals, including CAM income (common area maintenance) of $4,592 and $4,547, respectively, totaled $20,619 and $20,632, respectively
Earnings per Common Share
Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Sterling had no0 dilutive potential common shares as of September 30, 2017March 31, 2021 and 2016,2020, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.
For the three months ended September 30, 2017March 31, 2021 and 2016,2020, Sterling’s denominators for the basic and diluted earnings per common share were approximately 8,356,0009,983,000 and 7,891,000, respectively. For the nine months ended September 30, 2017 and 2016, Sterling’s denominators for the basic and diluted earnings per common share were approximately 8,234,000 and 7,791,000,9,562,000, respectively.
Reclassifications
Certain reclassifications considered necessary for a fair presentation have been made to the prior period financial statements in order to conform to the current year presentation. These reclassifications have not changed the results of operations or equity.
Recent Accounting Pronouncements
In May 2014,March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The standard provides for optional expedients and International Accounting Standards Board issued their final standard on revenue fromexceptions for applying GAAP to contracts, with customers, which was issued by the FASB as Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. ASU 2014-09, which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, supersedes most current GAAP applicable to revenue recognitionhedging relationships, and converges U.S. and international accounting standards in this area. The core principle of the new guidance is that revenue shall only be recognized when an entity has transferred control of goods or services to a customer and for an amount reflecting the consideration to which the entity expects to be entitled for such exchange. Additionally, lease contracts are specifically excluded from ASU 2014-09. In July 2015, the FASB decided to defer the effective date for annual reporting periods beginning after December 15, 2017. Early adoption is permitted beginning on the original effective date of periods beginning after December 15, 2016. Upon adoption, ASU 2014-09 allows for full retrospectiveother transactions affected
1612
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2021 and 20162020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
adoption applied to all periods presented or modified retrospective adoptionby reference rate reform. On July 27, 2017, the Financial Conduct Authority (FCA), tasked with overseeing the cumulative effect of initially applyingLondon Interbank Offered Rate (LIBOR) announced the standard recognized at the date of initial application. We have performed a review of the requirements of the new guidance and have identified which of our revenue streamsbenchmark interest rate will be withinphased out by the scopeend of ASU 2014-09. 2023. As a result, existing and future contracts indexed to LIBOR will need to be renegotiated to reference another rate.
We are working through an adoption plan which includes a review of transactions supporting each revenue stream to determineadopted the impact of accounting treatment under ASU 2014-09, an evaluation of the method of adoption and assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting. We will adopt this standard effective as of January 1, 2018 and will utilize2020, using the cumulative effectoptional transition method to apply the standard as of adoption.the effective date. The adoptionTrust elected to apply the optional expedients for all of this guidancethe Trust’s hedging relationships. The Trust will disregard the potential change in the designated hedged risk that may occur due to reference rate reform when the Trust assesses whether the hedged forecasted transaction is probable in accordance with the requirements of Topic 815.
The Trust will continue current hedge accounting for our existing cash flow hedges when the hedged risk changes by assuming the reference rate will not have a material impact on our financial position or results of operations. We expect this standard will have an impact onbe replaced for the disclosure of certain lease and non-lease components of revenue from leases upon the adoptionremainder of the update ASU 2016-02, Leases, but will not have a material impact on “total revenues.”hedging relationships for our assessment of hedge effectiveness and all subsequent hedge effectiveness assessments.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842),which amends existing accounting standards for lease accounting, including by requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting. superseded FASB ASC Topic 840. The Trust adopted this standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with earlier application permitted. The Company is evaluating the impacteffective as of ASU No. 2016-02 on its financial position and results of operations.
January 1, 2019. In January 2017,April 2020, the FASB issued a new standardmet to discuss lease modifications guidance in Topic 842 as it relates to lease concessions amidst the Covid-19 pandemic. The FASB determined that requiring the analysis of all leases in which clarifiesconcessions are made would be costly and complex for both the definition of a business. The standard's objective isleases and lessors. As such, the FASB has made the decision to add additional guidance that assistsallow companies in determining whether transactions should be accounted for as an asset acquisition or a business combination. The new standard first requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentratedavoid lease modification accounting when lease concessions do not result in a single identifiable asset or a group of similar identifiable assets. If this threshold is met,significant change in cash flow. The Trust has elected to apply the set is not a business. If this threshold is not met,lease modification guidance in Topic 842 for concessions and deferrals made during the entity next evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contributeCovid-19 pandemic as it relates to the abilityTrust’s residential leases, as the cash flows related to create outputs. Among other differences, transaction costs associated with asset acquisitions are capitalized while those associated with business combinations are expensed as incurred. In addition, purchase price in an asset acquisition is allocated onthese concessions and deferrals do not cause a relative fair value basis while in a business combination it is generally measured at fair value. The Company early adopted the new standard as allowed effective July 1, 2017. The Company concluded that substantially all of its transactions will now be accounted for as asset acquisitions, which means transaction costs will largely be capitalized as noted above. The adoption of this pronouncement resultedsignificant change in the Company’s acquisition of investment property subsequent to July 1, 2017 to qualify as asset acquisition and as such,cash received from the related transaction costs of $158 were capitalized.leases.
In November 2016, the FASB issued ASU No. 2016-18 to require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The pronouncement requires a retrospective transition method of adoption. Upon adoption, the Company will include amounts generally described as restricted cash within the beginning-of-period, change and end-of-period total amounts on the statement of cash flows rather than within an activity on the statement of cash flows.
In August 2016, the FASB issued ASU No. 2016-15 to provide guidance for areas where there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not currently anticipate that the guidance will have a material impact on its consolidated financial statements.
17
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)
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying Consolidated Financial Statements.
Reclassifications
Certain amounts previously reported in our quarterly report ended September 30, 2016 have been reclassified to conform to the consolidated balance sheet, statement of operations and cash flows presentations in 2017.
NOTE 3 – segment reporting
We report our results in two2 reportable segments: residential and commercial properties. Our residential properties include multifamily properties. Our commercial properties include retail, office, industrial, restaurant and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and directproperty administrative costs)and management fees). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees and certain general and administrative expenses. The accounting policies of each segment are consistent with those described in Note 2 of this report.
13
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, 2017March 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.
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| Three months ended September 30, 2017 |
| Three months ended September 30, 2016 | ||||||||||||||
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| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||
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| (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 |
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| 4,690 |
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| 4,636 |
Depreciation and amortization |
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| 5,427 |
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| 5,471 |
Administration of REIT |
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| 885 |
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| 1,136 |
Loss on lease terminations |
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| — |
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| 25 |
Other (income)/expense |
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| (390) |
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| (370) |
Net income |
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| $ | 3,256 |
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| $ | 2,523 |
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2021 | | Three months ended March 31, 2020 | ||||||||||||||
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| 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 |
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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
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2021 and 20162020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 4 – restricted deposits and funded reserves
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| 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.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
19
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2021 and 20162020 (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 progressa 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 developmentMarch 31, 2021 and planning costs associated with phase III of a multifamily apartment community under construction in Bismarck, North Dakota. Phase III ofDecember 31, 2020, respectively. Current expectations are that the development is stillproject will be completed in the planning stagesfourth 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
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2021 and 20162020 (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 |
| | | | | | |
17
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) |
18
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, 2017March 31, 2021 was 6.07.2 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; and2021; 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 $3,000June 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 BellBremer Bank which expires December 2017. At September 30, 2017, there was no
21
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 linessecured 2 letters of credit totaling $746, leaving $37,015$27,469 available and unused under the agreements. Certain of the variableThese 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.
19
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’sTrust’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) |
| Includes |
As of September 30, 2017,March 31, 2021, we had 127107 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 116114 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’sTrust’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 dueWe 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.
22
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 |
20
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 variablemanage our exposure to interest rate costs associated with existing borrowings. To meet these objectives, we have entered intomovements 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 $2,450accompanying 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 valuesvalue 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
21
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)
forecasted under the swaps.swap. The interest rate swaps areswap is accounted for as an effective hedgeshedge in accordance with ASC 815-20 whereby they areit 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 DecemberMarch 31, 2016, we recorded2021, the termination value of derivatives in a liability and other accumulated comprehensive lossposition 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
22
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)
observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.
23
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 and 2016 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
These two types of inputs create the following fair value hierarchy:
| Level 1 – Quoted prices for identical instruments in active markets; |
| Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; |
| Level 3 – Instruments whose significant inputs are unobservable. |
The guidance requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following table presents the Company’s 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.
2423
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2021 and 20162020 (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, 2017March 31, 2021 and December 31, 2016,2020, respectively.
Notes receivable. The Trust estimates the fair value of the Company’s matured mortgageits notes payable were determined to be equalreceivable by discounting future cash flows of each instrument at rates currently offered to the carrying value of the properties because there is no marketTrust for similar debtnote 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 determinedfrom 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, 2017March 31, 2021 and December 31, 2016,2020, outstanding limited partnership units totaled 17,520,00018,246,000 and 16,688,00018,279,000, 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, 2017March 31, 2021 and 2016,2020, the operating partnershipOperating 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, 2017April 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 ninethree months ended September 30, 2017, Sterling exchanged 8,000 common shares for 8,000March 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 partnershipOperating Partnership redeem their limited partnership units. The operatingTrust 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 one1 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.
24
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 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 partnershipOperating 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.
25
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 ninethree 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 ninethree months ended September 30, 2017,March 31, 2021 and 2020, the CompanyTrust redeemed 58,00033,000 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, 2017March 31, 2021 and December 31, 2016,2020, there were 8,353,0009,968,000 and 8,001,0009,855,000 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 ninethree months ended September 30, 2017March 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, 2017March 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, 2017March 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 ninethree months ended September 30, 2017, 247,000March 31, 2021, 89,000 shares were issued pursuant to dividend reinvestments and 134,00065,000 shares were issued pursuant to additional optional cash purchases under the plan. plan, valued at $1,686 and $1,307 respectively.
2625
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2021 and 20162020 (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. |
26
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)
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, Feesa 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 ninethree months ended September 30, 2017March 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 ninethree months ended September 30, 2017March 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 ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, we paid repair and maintenance related payrollexpenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling $3,808$1,696 and $3,554,$1,627, respectively.
27
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 ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. As of September 30, 2017,March 31, 2021, and December 31, 20162020 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 amountsnumber 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 officersExecutive 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
27
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.
28
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)
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 FeesIf 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).
DuringThe below table summarizes the nine months ended September 30, 2017fees 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.
28
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 ninethree months ended September 30, 2017, we issued directly or indirectly 899,000 operating partnership units. During this period, 402,000 of theMarch 31, 2021, there were 0 operating partnership units issuedissued.
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 ninethree months ended September 30, 2017March 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 andMarch 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.
29
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2021 and 20162020 (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.
30
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 CompanyTrust 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 retailthree 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. ThisApple 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. Asas 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.
3031
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2021 and 20162020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The following table presentsshows 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 ninethree months ended September 30, 2017:March 31, 2020.
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|
|
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) |
(a) |
|
Total consideration given for acquisitions through September 30, 2017March 31, 2020 was completed through issuing approximately 603,000469,000 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
3132
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2021 and 20162020 (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:
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Date |
| Property Name |
| Location |
| Property Type |
|
| Units/ Square Footage/ Acres |
|
| Acquisition Price |
|
| Prorata Acquisition Price |
|
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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:
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|
|
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|
|
|
| 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 | |
| | | | | | | | |
32
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.
33
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 thatOn 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.
3433
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 operateOur 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 substantiallysolely on multifamily apartment properties. Substantially all of our assetsbusiness is conducted through our operating partnership. We controlOperating Partnership, of which we are the sole general partner. The Trust controls the operating partnership as the sole general partner and ownowns 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, ourthe proportionate shares of the assets and income of ourthe operating partnership are deemed to be the assets and income of the trust.
We use this UPREIT structureTrust. Subject to facilitate acquisitionscertain 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 propertiesadministrative services on our behalf. The operating partnership holds a diversified portfolioWe have no paid employees.
34
Critical Accounting Estimates
Below is accounting policies and commercial properties located principallyestimates that management believes are critical to the preparation of the unaudited consolidated financial statements included in this Report. Certain accounting policies used in the upperpreparation of these consolidated financial statements are particularly important for an understanding of the financial position and central Midwest United States.
Our real estate portfolio consistedresults 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.
35
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, mosthistorical 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 undersignificant accounting policies is also provided in the direction ofaforementioned 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 approvedunaudited 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 conflictsa degree of interest arising outuncertainty. 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. SomeReal 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 conflictscarrying 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 personnelExamples 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 timesituations considered to be spentimpairment indicators include, but are not limited to:
o | a substantial decline or continued low occupancy rate; |
o | continued difficulty in leasing space; |
o | significant financially troubled tenants; |
o | a change in plan to sell a property prior to the end of its useful life or holding period; |
o | a significant decrease in market price not in line with general market trends; and |
o | 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.
Onethe 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 relatingthe 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 andbe impaired when the estimated future undiscounted cash flows are less than its shareholders. Leadership’s Other Real Estate Related Activities could result in actionscurrent carrying value. When performing a test for recoverability or inactions detrimental to Sterling, which could harmestimating 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:
o | projected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period and property location; |
o | projected capital expenditures and lease origination costs; |
o | projected cash flows from the eventual disposition of an operating property using a property specific capitalization rate; |
o | comparable selling prices; and |
o | property specific discount rates for fair value estimates as necessary. |
36
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 andTrust 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 activitiesexcess 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.
37
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 ninethree months ended September 30, 2017March 31, 2021 included elsewhere in this report.
35
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 |
|
|
38
|
|
|
|
| Declared and paid dividends aggregating |
36
Results of Operations for the Three Months Ended September 30, 2017March 31, 2021 and 20162020
| | | | | | | | | | | | | | | | | | |
| | 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) |
| 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, 2017March 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:
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| |||||
|
| 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 | % |
37
Residential revenues for the three months ended September 30, 2017March 31, 2021 increased $1,782$1,964 in comparison to the same period for 2016.2020. Residential properties acquired since January 1, 20162020 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
39
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 comparedMarch 31, 2021. The remaining increase is due to 74.7% of total revenues forincreased 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 comparableMarch 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, 2017March 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 $22020. The decrease was primarily attributable to the decreasesale of three commercial real estate investments in total2020. These properties account for $324 of decreased commercial revenues inrent during the three months ended September 30, 2017. RentalMarch 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 $13located in comparison to the same period in 2016. The decrease in revenues was primarily attributed to decreases in straight-line rent adjustmentsFargo, 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 comparableMarch 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 $1,217March 31, 2021 decreased $65 or 10.5%0.5% in comparison to the same period in 2016. This increase2020. 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 numberreal estate taxes is related to residential property acquisitions during the year ended December 31, 2020, which accounts for $60 of residential properties ownedthe 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 $103March 31, 2021 decreased $283 or 5.4%15.8% in comparison to the same period in 2016.2020. The increase was primarilydecrease in overall expenses is attributed to increasesa decrease in real estate taxes for one Bloomington, Minnesota office propertyrepairs and North Dakota properties.
Interestmaintenance 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 $54March 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 due2020. 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 levelsthe same period in 2020, bringing mortgage interest expense as a percentage of debt outstanding (an aggregateincome 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 forMarch 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 decreaseproperty 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 $1,136amortized 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, 2016March 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 $885the 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 dueMarch 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.
38
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 primarilyConsolidated Financial Statements included herein, as a result of an increase in revenues. Commercialwell 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
40
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 attributedTrust continues to an increaseclosely monitor the impact of $447the 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 incomeCOVID-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 decreaseresults of $299 in acquisition fees. There were no acquisition fees expensed inoperations 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, 2017March 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 2017-01Trust received certain rent relief requests as of July 1, 2017.
Results of Operations for the Nine Months Ended September 30, 2017
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
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 | % |
41
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 decreaseCOVID-19. These requests were received principally from office tenants and most often in amortization relatedthe form of rent deferral requests. Few rental defaults have occurred to lease intangibles thatdate and the Trust is pursuing legal remedies as to these amounts which are fully amortized. Amortization expensenot material in the aggregate. The Trust will continue to decrease as lease intangibles become fully amortized. Depreciation and amortization expense asevaluate any further tenant rent relief requests on an individual basis, considering a percentagenumber 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 incurredfactors. 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.
42
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, 2017was $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 ninethree months ended September 30, 2017March 31, 2021
There were no acquisitions or dispositions during the three months ended March 31, 2021.
39
Property Acquisitions and Dispositions during the three months ended March 31, 2020
We acquired tensix properties for a total of $20,111$12,896 during the ninethree 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 19mortgage of the consolidated financial statements). $3,225.
We estimated the property had a fair valuedisposed 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 aone retail property located in Fargo, North DakotaApple 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 ninethree months ended September 30, 2017March 31, 2021 and 2016.2020.
Construction in Progress and Development Projects
43
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.
40
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.
44
The following tables include calculations of FFO and MFFO, and the reconciliations to net income, for the three and nine months ended September 30, 2017March 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) |
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
|
|
45
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.
41
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’stenants’ 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 significantGenerally our residential leases are scheduled to expirefor a term of one year or renew inless. 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
46
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 ninethree months ended September 30, 2017March 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.
42
Net cash used in investing activities was $10,650$4,116 and $13,129$1,613 for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the ninethree months ended September 30, 2017March 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 ninethree months ended September 30, 2017, proceeds of $4,442 were generatedMarch 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 ninethree months ended September 30, 2017, proceeds of $1,937 were received from involuntary conversions. The majority of the proceeds were related to one property thatMarch 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 ninethree months ended September 30, 2017March 31, 2021 and 2016, respectively.2020. During the ninethree 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 ninethree 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
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, 20172021 to September 30, 2017March 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 paidof 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, 20162020 to September 30, 2016March 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 paidof 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 ninethree months ended September 30, 2017,March 31, 2021, we declared quarterly distributions totalling $12,909totaling $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 ninethree months ended September 30, 2016,March 31, 2020, we declared quarterly distributions totalling $11,546totaling $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.
4844
Sources of Dividends and Distributions
For the ninethree 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 ninethree months ended September 30, 2017 was $28,540;March 31, 2021; therefore we believe our management believes ourdividend and distribution policy is sustainable over time. For the ninethree 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 ninethree 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 ninethree 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 ninethree months ended September 30, 2016, we issued 236,000 and 101,000March 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 ninethree 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 ninethree 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 SheetUnconsolidated Affiliate Arrangements
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, we had no off-balance sheet arrangements that have or are reasonably likelydebt obligations related to have a current or future effect on our financial condition, changesinvestments in financial condition, revenues or expenses, resultsunconsolidated 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
4945
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 QualitativeQualitative 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 allmuch 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/A10-K for the year ended December 31, 20162020 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 ourSterling Real Estate Trust’s Chief Executive Officer and Chief AccountingFinancial Officer hashave evaluated the effectiveness of ourSterling Real Estate Trust’s disclosure controls and procedures (as such term is defined in RuleRules 13a-15(e) underand 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 suchthat evaluation, ourthe Company’s Chief Executive Officer and Chief AccountingFinancial Officer have concluded that as of September 30, 2017, suchthe 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 requireda 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 usidentify the drafting error in the reports that we fileinternal 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 underannual consolidated financial statements.
As of March 31, 2021, the Exchange Act is recorded, processed, summarizedfollowing remediation measures have been implemented:
i. | 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 withinhave 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 thirdfirst 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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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 noMarch 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:
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| Average |
| Total Number of |
| Total Number of |
| Approximate Dollar Value of | ||
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| Total Number |
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| Total Number |
| Price |
| Shares Redeemed |
| Units Redeemed |
| Shares (or Units) that May | ||
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| of Common |
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| of Limited |
| Paid per |
| as Part of |
| as Part of |
| Yet Be Redeemed Under | ||
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| Shares |
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| Partner Units |
| Common |
| Publicly Announced |
| Publicly Announced |
| Publicly Announced | ||
Period |
| Redeemed |
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| Redeemed |
| Share/Unit |
| Plans or Programs |
| Plans or Programs |
| Plans or Programs | ||
July 1-31, 2017 |
| 3,000 |
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| 13,000 |
| $ | 15.50 |
| 1,072,000 |
| 676,000 |
| $ | 6,352 |
August 1-31, 2017 |
| 5,000 |
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| — |
| $ | 15.50 |
| 1,077,000 |
| 676,000 |
| $ | 6,274 |
September 1-30, 2017 |
| 2,000 |
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| 4,000 |
| $ | 15.50 |
| 1,079,000 |
| 680,000 |
| $ | 6,181 |
Total |
| 10,000 |
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| 17,000 |
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| | | | | | | 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 $15.50became 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.
5147
Item 6. Exhibits.